Mexico is Getting Hammered

by Karl Reiner

The lack of oversight tied with deregulation allowed the American financial industry to make a big change in how it operated. Over a short time, it switched from managing the allocation of capital to companies to an industry dedicated to making big commissions by flogging increasingly exotic and complex securities to investors around the world. 

Allowing the financial industry to transform itself into an unregulated, self-serving commissions creator has turned out to be bad policy. As the overheated U.S. housing market fell apart, it took the stock market and the rest of the economy down with it. 

In Washington, stunned leaders watched the shattering of the financial sector with dread. In attempting to halt the collapse, the government’s desperate intervention effort shoved the federal budget deficit into double digits. The Federal Reserve’s balance sheet bloated almost beyond recognition. 

Due to the amount of wreckage trailing in the wake of the financial fiasco, recovery in the U.S. will be slower than in other nations. Although the stock market hopefully hit bottom in March 2009, it may take several years to bring the economy back to any semblance of its former health. 

Because Mexico’s economy is closely tied to the United States, it has been clobbered by the effects of the downturn. Its economy will shrink nearly 7% this year. The country was especially hard hit because it has specialized in making products for export to the U.S. 

As worried American consumers slashed their purchasing, Mexico’s exports suffered. Through September 2009, U.S. imports from Mexico totaled $125 billion. That was 25% below last year’s January -September period.

As the economies tightened on both sides of the border, U.S. exports to Mexico declined by 19%. Mexico is a major market for local exporters. It was taking Arizona products valued at nearly $6 billion per year before the downturn. 

In the past, much of Mexico’s weak economic performance could be rightly blamed on a host of internal problems that successive governments seemed unwilling to address. This time, however, the country’s crop of troubles can be attributed directly to the events that unfolded in its neighbor to the north.

According to Mexico’s central bank, Mexicans working abroad (mostly in the U.S.), were sending home approximately $26 billion a year prior to the downturn. Due to the economic contraction, the construction workers, cab drivers, restaurant employees and nannies now have less to send back. The decline in remittances is adding an extra squeeze to the economy in many Mexican towns. 

Arizona is among the states worst hit by housing foreclosures and the slowing of construction. The job losses have been higher than in any other state except Michigan. As Arizona’s economy skids downward, the business school at Arizona State estimates that more than 200,000 Latinos have left the state during the past year. 

While many individuals think the reduction in the number of Mexican workers is a terrific trend, some economists are leery because of the role remittances play in recipient countries. Once it arrives in Mexico, the remittance money is spent on housing, consumer goods, education and health. It adds a degree of purchasing power to the local economy. 

Remittances are considered by many experts to be a good substitute for foreign aid. The money migrant workers send home is seen as an honest and efficient way to provide economic aid. The funds tend to go directly into the local economy, very little can be stolen or misused by corrupt officials. Along with cash, the workers are also sending home useful values and ideas. These intangible intellectual goods can change attitudes, help stimulate change and promote growth. As the distress induced by the U.S. financial collapse spread around the globe, many nations in Europe and Asia began to question America’s role in world financial affairs. In Mexico, some politicians have taken the view that the strategy of forging close links to the U.S. was unsound. They wishfully point to the success of Brazil, one of the world’s leading emerging economies. 

Not as dependent on the U.S. market, Brazil’s economy escaped the economic implosion with much less damage than Mexico. It is now rapidly recovering, benefitting from its extensive commodity exports to China. 

Not all of the trade goods moving from Mexico into the United States appear to be declining in volume. The illegal drug market in the U.S. is immense; Americans spend about $65 billion per year on illegal drugs. Estimates put the number of American drug users at 20 million. About 14 million people are believed to smoke marijuana. More than 10% of U.S. population is reported to smoke a little pot at least once a year. 

As the drug cartels fight each other over control of the distribution channels to the U.S. market, more than 13,500 people have been killed in Mexico. Supported by American aid, the Mexican government has deployed 45,000 soldiers and federal agents in its effort to combat the cartels. The ongoing violence has destabilized many parts of the border region, virtually destroying the tourist industry in many border towns. 

In the 20 years since the fall of the Berlin Wall, America’s reputation has tarnished. To much of the world we appear to be somewhat befuddled, having become mired in two wars. In addition, the U.S. is held responsible for starting the current global recession, one that was triggered by an American consumer spending spree based on nothing more than mounting debt. As a result, the dollar’s once unassailable position as the world’s reserve currency is being questioned by jittery foreign dollar holders. They don’t like the lack of savings culture and the unending series of spiraling federal deficits. 

The shock of the Great Depression reverberated around the globe, crumbling governments and unleashing the ugly political forces that led to World War II. The cost of the current slump to the world community will not be clear for some time. What is already apparent, however, is that Mexico is hurting. The crushing impact of the economic calamity combined with the bloody drug wars, is severely jarring the country’s political and social structure. 

The situation bears close watching because drug lords are not going to quietly abandon their lucrative U.S. market despite the increased law enforcement effort. In Mexico, the social safety net is much thinner than in the U.S. With unemployment rising and remittances falling, there is a possibility of unrest unhinging things in some of Mexico’s hardest hit states. It would be a real shame if the imported U.S. recession knocked the political and economic props out from under Mexico.