A Primer on Mexico’s Unconventional Economic Success Story (Which You’re Unlikely to Hear Much About in the MSM)

Mexico’s economy was one of the best performers of 2022, despite (or perhaps because of) a whole raft of worker-friendly policies from the AMLO government.

Amid all the economic fallout from the ever-escalating conflict in Ukraine and the West’s disastrously backfiring sanctions, compounded by the supply chain woes lingering from the still-ongoing virus crisis, 2022 was a dismal year for many of the world’s economies. But some fared better than others. They include Mexico, which began the year in technical recession but finished it on a bit of a high.

Just over a week ago, the London-based Center for Economic and Business Research (CEBR) forecast that by the end of 2022 Mexico will have dethroned Spain, its former colonial ruler, as the world’s 15th largest economy. In so doing, it will become the biggest economy in the Spanish speaking world, a mantle it is likely to hold onto for some time to come. Granted, this is just a forecast but given the wafer-thin difference between their respective GDPs and the size of the gap between Mexico’s growth rate for the first three quarters of 2022 (3.3%) and Spain’s (1.5%), it’s probably a sound bet.

A week or so later, Mexico placed sixth on The Economist‘s list of best performing economies out of a selection of 34 OECD members. From Mexico News Daily:

The magazine ranked countries according to five economic and financial indicators – Gross Domestic Product (GDP) growth, inflation, inflation breadth (the share of inflation basket items whose price has risen more than 2% in a year), stock market performance and government debt – and assigned each an overall score. Mexico was beaten only by Greece, Portugal, Ireland, Israel and Spain.

Mexico’s strong performance was due largely to its 3.3% GDP growth between Q4 2021 and Q3 2022 – the fourth highest on the list. Although inflation was high – at 6.8% consumer price growth and 82.4% breadth – it still compared favorably to many other countries analyzed. Mexico’s average share price dropped by 0.9%, while its share of debt to GDP fell by 0.7%.

Readers may recall that The Economist is no great admirer of Mexico’s left-leaning President Andrés Manuel López Obrador (aka AMLO). As I reported in The Empire Strikes Back Against Mexican President AMLO (June 1, 2021), AMLO was given pride of place on the cover of the May 29-June 4 edition of the magazine. Above his picture was the headline “Mexico’s False Messiah.”

An editorial inside the magazine called on Mexican voters to “curb Mexico’s power-hungry president” whom it compared  with “authoritarian populists” such as Viktor Orbán of Hungary, Narendra Modi of India and Jair Bolsonaro of Brazil.

Contrast The Economist‘s depiction of AMLO with Time magazine’s near-messianic treatment of his predecessor Enrique Peña Neta, whose PRI government would end up being one of the most corrupt of modern times.

Mexican Peso: Strongest Currency of 2022

Only four largish economy currencies managed to hold their own against the US dollar in 2022. They are (in descending order): the Mexican peso (+5.37%), the Brazilian real (5.09%), the Peruvian sol (4.96%) and the Russian rouble (3.32%). While the pound sterling, the euro and the Colombian and Chilean pesos all registered historic lows against the greenback last year and even the Swiss Franc tumbled slighty, Mexico’s currency had its best year since 2012, when the currency appreciated 7.9% against the USD.

Much of the credit belongs to the Bank of Mexico, which, like Brazil’s central bank, preempted the US Federal Reserve’s aggressive hiking of interest rates by raising its own benchmark rate no less than 10 times between April 2021 and December 2022. It also helped that Banco de Mexico (Banxico for short) didn’t cut rates quite as aggressively as most of its peers during the chaos of 2020.

As I’ve noted in previous articles, Latin American countries are justifiably terrified of interest rate hikes from the Fed. When the Fed begins tightening monetary policy, it can often create a perfect storm in the region. Rises interest rates in the US raises the costs of the dollar-denominated debt of LatAm companies and governments. It can also trigger an outflow of foreign capital, which in turn heaps yet more pressure on the region’s currencies, making it even harder for both governments and companies to service their debt denominated in dollars or other foreign currencies. Rinse and repeat.

So far, Mexico has avoided this fate, helped along, of course, by higher dollar flows from exports, remittances, and foreign direct investment. In other words, an important reason for Mexico’s economy success story of 2022 is its increasingly close relationship with/dependence on the US economy, which performed significantly better than many of its advanced economy peers, particularly those in Europe. Unfortunately, that is unlikely to last.

Falling Unemployment, Greater Worker Protections, Rising Minimum Wage

Another interesting part of Mexico’s economic success story is in the labor market. In November Mexico’s official unemployment fell to 2.8%, 1.1 percentage points lower than in the same month of 2021. It is the lowest reading since December 2005.

“The rate is at its lowest level in the past 16 years, which is undoubtedly one of the standout achievements of the year,” said Marcos Daniel Arias, an analyst at the Mexican financial institution Monex, before adding a caveat: “At the same time, it will represent an additional challenge when it comes to combating the high inflation we are experiencing.”

Interestingly, unemployment in Mexico has fallen despite (or perhaps because of) a number of unconventional worker-friendly policies from the AMLO government, including:

1. A 130% increase in the statutory minimum wage since 2018. Following successive annual hikes of around 20% per year, Mexico’s minimum wage has risen from a miserly 88.36 pesos ($4.60) a day to a much improved albeit still measly 207.4 pesos ($10.6). According to official data, just over 6.4 million workers have benefited from this sustained rise in purchasing power. The AMLO government has also doubled the amount of paid annual vacation time for all contracted workers, from 6 days a year to 12.

Mexico now boasts the seventh highest minimum wage in Latin America, climbing nine places from 2020 when it placed sixteenth. This trend has gone some way to reversing a decades-long trend of declining purchasing power among the poorest Mexicans. According to a 2014 study by economists at the National Autonomous University of Mexico, the real minimum wage in Mexico did not just stagnate from 1987 to 2014, as happened in many Western nations; it collapsed by 78%.

2. New labor reforms, including a 2019 law that opened the door to independent unionism after a century of suppression and so-called “protection contracts”, which lock in low wages as a precondition demanded by companies looking to set up shop in the country. As Kurt Hackbarth recently wrote in Jacobin, implementing the reforms will be difficult. But while progress has so far been frustratingly slow, “organized labor has chalked up a share of victories which, it is hoped, will serve as beacons for a wave of independent unionism to come.”

Just as important, new legislation was passed in 2021 that set much clearer parameters for the legal use of outsourcing and subcontracting. As I reported for WOLF STREET in late 2019, millions of jobs had been subcontracted in order to further depress labor costs, particularly in high-risk sectors such as mining:

According to a report by Ernst & Young, subcontracting structures are “commonly used in Mexico by both foreign and Mexican businesses and generally consist of a group of companies establishing one or more operating companies and one or more service companies to provide the labor component of the business activity.”

“Unfortunately”, the report adds (comments in brackets my own), “these structures have been abused” (as opposed to being used in the exact way they were designed to) in order to deprive “employees of their social security, union, and housing benefits, among others.”

In a 2019 communique, the Ministry of Labor reported that 83% of the companies that had been  subject to inspection had subcontracted their entire workforce while the remaining 17% had subcontracted over 90% of their workforce. Once the labor reforms came into effect, in April 2021, companies were given a four-month grace period to get their act together. In July 2021, Mexico’s largest lender, BBVA Mexico, migrated all 37,000 of its employees who had been hired under the aegis of its outsourcing scheme to the parent company.

As even the Spanish corporate law firm Garriges noted in October this year, the reforms have been largely beneficial and not nearly as financially painful as many companies had warned:

“[D]espite the challenges and costs involved in adapting to the new rules, this reform has demonstrated its effectiveness, since it has improved the base salary for average social security contributions by almost 15% and not as many formal jobs have been lost as initially thought.”

Even before his election in 2018, AMLO had pledged to bring Mexico’s wages and working conditions closer in line with those of Mexico’s NAFTA partners, the US and Canada — something the US government was also demanding in its negotiations for the USMCA trade agreement. “We need to strengthen the domestic market,” AMLO said at a meeting on the campaign trail with the American Chamber of Commerce in Mexico.

This is hardly complex economics. By facilitating better living standards for Mexicans lower down the income scale, the government would provide a much-needed fillip to internal demand. It would also help to relieve some of the social tensions in the country resulting from extreme income inequality. Yet none of AMLO’s predecessors of the NAFTA era had even thought to pursue such a goal, for the simple reason that it contravened some of the basic tenets of neoliberal economics.

By 2016 even Mexico’s wealthiest man, Carlos Slim, one of the biggest beneficiaries of the NAFTA era and with whom AMLO has had his share of differences, agreed that it made sense to bolster Mexico’s internal market. “We need to look again at the domestic economy, which for 50 years we prioritized, and it gave us average annual economic growth of 6%. In the last 30 years we have neglected that,” Slim said at a Bloomberg forum in late 2016.

Even The Economist article conceded that AMLO has done some good things along the way, “such as bumping up pensions and subsidizing apprenticeships for the young. Though a leftist, he has kept spending and debt under control, so Mexico’s credit rating remains tolerably firm.”

Winning “Rabid” Public Support

AMLO has already partially delivered on his pledge to bolster internal demand. In the last four years working conditions and pay have improved substantially for many Mexicans working in the formal economy.

As NC reader Anonymous pointed out in a comment yesterday, this has gained AMLO “rabid support from poor people which, in Mexico, is the great majority of people.” Now in his fifth year in office, he still enjoys majority public support. And rather than hitting a brick wall and then falling off a cliff, as many companies, banks and economists warned would happen, the economy actually appears to be in ruder health as a result.

But you are unlikely to hear much about Mexico’s unconventional economic success story in the mainstream media, whether in Mexico, the US, Europe or other parts of Latin America. After all, it might encourage others to follow suit.

Over the past four years, the mainstream media has consistently derided or attacked the AMLO government’s reform agenda, including its promotion of energy security, its rewriting of the rules for outsourcing and its nationalization of lithium. Even today, most MSM coverage attributes the lion’s share of Mexico’s economic success in 2022 to “external factors”, such as increased consumer demand and investment from the US.

Every time AMLO has tried to pursue policies that generally favor Mexico’s broader economy, dire warnings erupt that investors, both domestic and foreign, will stampede for the exits. A case in point: one of AMLO’s first acts in government was to cancel a $13-billion airport for the capital that was almost one-third finished, around $5 billion over budget, mired in allegations of corruption and posed serious environmental downsides. In effect, he took his presidential predecessor Enrique Peña Nieto’s legacy infrastructure project and ripped it up, for a slew of good reasons. And in doing so, he sent a clear signal to Mexico’s business elite that the time for “business as usual” was over.

But he also made sure that the investors holding the bonds that had financed the unfinished project were paid in due course. And contrary to what many economists, bankers and media pundits had warned, investors did not rush for the exits.

Nor was there a mad stampede when the AMLO government began strong-arming domestic and global corporations into finally settling their decades-long tax debts with the Mexican state. Until AMLO’s arrival, no government had even bothered to try. Coca-Cola bottler Femsa, and brewer Grupo Modelo, a division of the world’s largest brewer Anheuser-Busch InBev, paid hundreds of millions of dollars in current taxes and back taxes. So too did Walmart and a host of other companies.

As a result, the government was able to raise more tax funds in 2020 than in 2019, without raising taxes on the middle classes. Again, no rush to the exits, though some companies, such as Canadian mining giant First Majestic Silver Corp, are still refusing to pay up.

In fact, Mexico is fast becoming a magnet for foreign investment, as corporations, particularly from the US, shift their focus from China to a production base that is similarly cheap but closer to home. In the first three quarters of 2022 Mexico received record levels of foreign direct investment, much of it from the US. According to research by the McKinsey Global Institute, American investors poured more money into Mexico than into China last year. As the NYT kindly pointed out, for American companies moving business to Mexico location is the main driver:

Shipping a container full of goods to the United States from China generally requires a month — a time frame that doubled and tripled during the worst disruptions of the pandemic. Yet factories in Mexico and retailers in the United States can be bridged within two weeks.

A coterie of Mexican business lobbies have even suggested that Mexico could become a vast investment hub for the whole of the American continent. If this happens, the biggest beneficiaries, of course, will be transnational corporations, mainly from the US. For Mexico, it will mean even closer integration with the US economy, which already accounts for over 85% of Mexican exports.

Just how much economic policy independence future Mexican governments will have under such an arrangement remains to be seen, though the answer is likely to be “not much”. The US and Canada are already locked in a trade dispute with Mexico over AMLO’s energy reforms. It also means that wherever the US economy goes — and signs are that it is heading toward a recession — Mexico will quickly follow. And what was this year a blessing could quickly become a curse.