Mexico’s Bad Luck Gets Even Worse

If Trump pushes America’s neighbor into a slump, no wall will be high enough to keep the immigrants out.

By Ruchir Sharma

Mexico is the unlucky country. Time and again its economy has been poised to take off, only to stumble into crisis, sometimes of its own making but often a result of the forces unleashed by its gradual opening to the U.S. The latest shock arrived with Donald Trump and peaked last week when a spat over who will pay for “the wall” compelled Mexico’s president, Enrique Peña Nieto, to cancel his first meeting with the new White House. Economists are already rushing to downgrade Mexico’s growth prospects for 2017.

Mr. Trump’s worldview is built on a gut feeling that bad trade deals allow Mexico to profit at America’s expense. Atop his agenda is renegotiating the North American Free Trade Agreement, the 1994 deal that turned the continent into a free-trade zone. But it is difficult to argue that Nafta unfairly enriched Mexico.

The big mystery, actually, is why Mexico has not done better since Nafta launched. Opening to the U.S. did help to modernize the country, putting it on track to emerge as the most important manufacturing power in Latin America. But it hardly made Mexico rich.

Since 1994, Mexico’s economy has grown at an annual rate of about 2.5%—half the average for emerging countries over the same period. The average Mexican’s income is only a quarter the average American’s, no higher in relative terms than 20 or even 100 years ago.

Mexico’s string of unlucky stumbles dates to at least 1994. As Nafta went into effect, a sharp rise in U.S. interest rates prompted investors to pull money out of Mexico, leading to the peso crash that December. Because Mexico’s government had begun issuing bonds that it promised to pay in dollars, it needed a bailout when the peso collapsed. Bankruptcies spread, and the economy fell into a massive recession.

As often happens after a crisis, Mexico recovered sharply, and in the late 1990s its economy grew in close sync with America’s. But right as its luck started to turn, the next shocks hit. In 2001 the U.S. fell into recession, dragging Mexico along, and China entered the World Trade Organization. Manufacturers began moving to China at an accelerating pace to take advantage of wages that were a fraction of Mexico’s.

Over the next decade, many emerging economies were lifted by surging prices for oil and other commodities, as well as a tide of easy credit from Western banks. Mexico was not among the lucky, its growth stymied by the declining production of its state oil company, Pemex, and by a cultural fear of debt contracted during the peso crisis. While other emerging economies grew rapidly by exporting to booming China, Mexico grew moderately by exporting to the U.S. When the 2008 financial crisis began in America, Mexico became one of the first casualties in the emerging world.

Still, Mexico had not given up on closer ties to the U.S. Its elites remained believers in the Washington consensus of open borders, free markets and budget discipline. In 2012 Mexicans elected Mr. Peña Nieto, a growth-oriented reformer who promised to reduce the influence of monopolists, including Pemex.

By 2014 these reforms looked ready to generate the long-sought boom. The government expected huge revenues from an auction of oil drilling rights, including to big American firms. But later that year oil prices collapsed and dragged the growth rate down to 2%.

Mr. Peña Nieto persisted, and by the middle of last year, the oil shock had faded. Mexico was growing at a healthy 3%, and unemployment was falling sharply. Then came President Trump. Now businesses are putting investment on hold until they see what the White House will do. But shoving Mexico too hard on trade could backfire.

Economists already expect Mexico’s growth this year to dip below 2%, and unemployment could start rising again. This would send more Mexicans northward. The flow of immigrants had slowed significantly in recent years as job opportunities and wages rose in Mexico. More than the wall, the best way to keep immigrants from crossing the border is to give them reasons to stay home.

North American supply chains are so tightly interwoven that 80% of Mexican exports go to the U.S.—and 40% of the parts those exports contain are made in the U.S. Fourteen states now count Mexico as their main trading partner, including anchors of the angry middle class like Michigan, which catapulted Mr. Trump to victory.

Mexicans also have an intense streak of anti-gringo patriotism. This had waned in recent years as the two countries’ economies became intertwined. The feeling I got during a recent visit is that many Mexicans felt they had been moving toward becoming the honorary 51st state before Mr. Trump barged in vowing to expel them.

Delivering on Mr. Trump’s threats could revive latent Mexican nationalism and play into the hands of a populist politician like Andrés Manuel López Obrador, a firebrand who is gaining momentum as Mexico’s 2018 presidential elections approach. Mr. Peña Nieto’s approval rating has fallen to 12%, partly because many Mexicans fault him for failing to stand up to Mr. Trump. Still, nationalism can’t fill an empty stomach. If Washington pushes Mexico into a deeper slump, no wall could be high enough to prevent Mexican immigrants from trying to escape their unlucky land.

Mr. Sharma, the chief global strategist at Morgan Stanley Investment Management, is the author of “The Rise and Fall of Nations: Forces of Change in the Post-Crisis World” (Norton, 2016).

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