The Economist March 19th 2022 pp29-30 |The Americas|Mexico’s economy|”Can’t grow, won’t grow” “Red tape, taxes and gangsters keep small firms small”
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Summary by 2244
From the USMCA 2022 Report. Graph shows the dominance of East Asia versus Mexico.
The informal business sector in Mexico, the small businesses that stay under the radar and don’t pay into social systems etc., looms large and is a key driver in holding back Mexico’s economy. The motivation for the informal sector is highlighted by one businessman who “does not want to expand his business…’I don’t want to grow because I will be worse off’...not only will his tax rate jump from 2% of profits to 30%...he will [also] attract attention from both trade unions and organized crime, which will charge derecho de piso-extoration.”
Sadly, the current Mexican government is not helping as the President Andres Manuel Lopez Obrador “has portrayed the private sector as greedy” and has effectively repelled foreign investment by taking control of the electricity market and not investing in infrastructure with “canceling construction of an airport” as an example. Other factors limiting growth, that are in the control of Mexico, include the sheer difficulty in doing business-hard to get electricity, high social program taxes and the complexity of filing taxes.
As the data show, Mexico’s GDP per person as of 2019 trailed Argentina, Chile and Panama. Mexico though, having been more frugal with government spending, is better off in terms of having lower inflation and debt than other South American economies like Argentina and Brazil.” Although Mexico has been well positioned to leverage trade with America due to proximity and NAFTA, it was hurt badly when “When China joined the World Trade Organization in 2001…[causing]...Mexico’s share of American imports [to drop] while China’s soared” as China has a larger workforce at lower wages.” (See above manufacturing capacity)
With the challenges of the supply chain during the pandemic, Mexico could reverse some of that trend to China etc. by benefiting from American firms attempting now to move production closer to home. According to Santiago Levy (Formerly at Brookings Institute) “...the northern states, which are closely integrated with the United States, industries like aerospace manufacturing are booming, Mexico could enjoy annual growth of around 4%...if it became more business friendly and invested in infrastructure.”
Graph from USMCA 2022 report. As it turns out simply moving final production from Asia to Mexico is not sufficient as intermediate goods will still originate in Asia depicted here as Rest of the World.
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