mexico - iuj.ac.jpco-opted potential opponents and engaged in electoral fraud to ensure an absolute...

Country Profile 2005

MexicoThis Country Profile is a reference work, analysing thecountry�s history, politics, infrastructure and economy. It isrevised and updated annually. The Economist IntelligenceUnit�s Country Reports analyse current trends and provide atwo-year forecast.

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Country Profile 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005

Comparative economic indicators, 2004

Gross domestic product(US$ bn)

Sources: Economist Intelligence Unit estimates; national sources.

0 50 100 150 200

Paraguay

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Chile

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Mexico

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603.8

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Mexico 1

© The Economist Intelligence Unit Limited 2005 www.eiu.com Country Profile 2005

Contents

Mexico

3 Basic data

4 Politics4 Political background6 Recent political developments8 Constitution, institutions and administration9 Political forces12 International relations and defence

15 Resources and infrastructure15 Population16 Education16 Health19 Natural resources and the environment20 Transport, communications and the Internet24 Energy provision

25 The economy25 Economic structure27 Economic policy30 Economic performance31 Regional trends

32 Economic sectors32 Agriculture33 Mining and semi-processing35 Manufacturing37 Construction37 Financial services41 Other services

42 The external sector42 Trade in goods44 Invisibles and the current account45 Capital flows and foreign debt47 Foreign reserves and the exchange rate

48 Regional overview48 Membership of organisations

49 Appendices49 Sources of information50 Reference tables50 Population50 Labour force and employment50 Gross internal primary energy supply51 Non-financial public-sector finances

2 Mexico


51 Federal government budget revenue and expenditure52 Money supply52 Interest rates52 Gross domestic product53 Nominal gross domestic product by expenditure53 Real gross domestic product by expenditure54 Gross domestic product by sector54 Prices and earnings54 Production of principal crops55 Livestock production55 Minerals production55 Crude oil and gas production56 Manufacturing GDP56 Stockmarket indicators56 Real retail sales57 Main composition of trade57 Main trading partners57 Tourism58 Inward foreign direct investment58 Balance of payments59 External debt, World Bank series59 Foreign reserves59 Exchange rates

Mexico 3


Mexico

Basic data

1,964,375 sq km

105.4m (according to estimates from the Consejo Nacional de Población(Conapo, the National Population Council)

Population (m), 2000

Mexico City (capital) 17.8Guadalajara 3.7Monterrey 3.2

Tropical in the south, temperate in the highlands, dry in the north

Hottest month, May, 12-26°C (average daily minimum and maximum); coldestmonth, January, 6-19°C; driest month, February, 5 mm average rainfall; wettestmonth, July, 170 mm average rainfall

Spanish is the official language. Over 60 indigenous languages are also spoken,mainly Náhuatl (1.2m speakers), Maya (714,000), Mixtec (387,000) and Zapotec(403,000)

Metric system

Peso (Ps). Average exchange rate in 2004: Ps11.29:US$1; exchange rate on August8th 2005: Ps11.45:US$1

Six hours behind GMT in Mexico City

January 1st, February 5th, March 21st, Maundy Thursday, Good Friday, May 1stand 5th, September 16th, October 12th, All Souls� Day (partial), November 20th,December 12th (partial) and 25th

Main towns

Climate

Weather in Mexico City(altitude 2,309 metres)

Languages

Measures

Currency

Time

Public holidays

Land area

Population

4 Mexico


Politics

Mexico has moved from a system in which political power was highlyconcentrated in the presidency to one in which the legislature and the stategovernorships have been empowered and the executive weakened. Vicente FoxQuesada of the right-of-centre Partido Acción Nacional (PAN), was electedpresident in July 2000 for a single six-year term that began on December 1st2000, ending an uninterrupted 71 years in power for the Partido RevolucionarioInstitucional (PRI). Under Mr Fox, consensus-building between the executiveand Congress has been poor, and this has contributed to severely delaying thepassage of legislation. The Fox government will be in a minority position untilthe end of its mandate in December 2006. As the largest party, the PRIcontinues to wield significant political power in opposition. It increased itsparliamentary share of seats as a result of mid-term elections held in July 2003from 42.2% to its current 44.8%.

Political background

Chronic upheaval in the post-independence era gave way to a period of stabilityunder the authoritarian rule of Porfirio Díaz between the 1870s and 1911, beforelongstanding social tensions erupted into ten years of violent social revolution.The political system that emerged from the post-revolutionary settlementenabled a single party to retain power uninterruptedly for more than sevendecades, with much opposition successfully co-opted through a corporatistsystem of government. General Plutarco Elías Calles (president from 1924 to1928) had a major impact on political developments, particularly through thecreation of the Partido Nacional Revolucionario (PNR). He also sought tosuspend the practice of Catholicism as the Church was deemed to challenge thepower of the modern state that the authorities were trying to establish. Thissparked a rebellion by Catholic Mexico, known as the Cristero War (1926-29).The conflict was brought to an end not by victory by either side but throughnegotiation. An agreement was reached by church and state to co-exist and tokeep their respective realms separate.

Another important presidency was that of Lázaro Cárdenas (1934-40), whoredistributed land and expropriated foreign oil companies. In 1938 Mr Cárdenasre-named the party as the Partido de la Revolución Mexicana (PRM) andinstituted a corporatist structure made up of labour, peasant and "middle class"movements. In 1945 the PRM was renamed the Partido RevolucionarioInstitucional. For many years sustained economic growth ensured that itenjoyed a high degree of popular support; additionally the regime frequentlyco-opted potential opponents and engaged in electoral fraud to ensure anabsolute monopoly of power.

Political stability came under strain in the late 1960s when intellectuals andstudents sought greater political openness, but were repressed by the state. Adeterioration in economic policy in the 1970s precipitated an external debtcrisis in 1982 and the then president, Miguel de la Madrid (1982-88), was forced

Post-revolution settlementresults in foundation of PRI

PRI�s dominance is challengedby new generation

Mexico 5


to embark on politically costly structural reform. His choice of technocrat,Carlos Salinas de Gortari, as the PRI�s candidate in 1987 prompted a split in thePRI, led by a former minister and PRI president, Porfirio Muñoz Ledo, and aformer governor of Michoacán, Cuauhtémoc Cárdenas, son of LázaroCárdenas, who had aimed to democratise the presidential candidate selectionprocess. They went on to form the Frente Democrático Nacional (FDN) allianceto contest the 1988 election with Mr Cárdenas as their candidate. The allianceattracted the support of most of the left. The official results in July 1988, allegedto be fraudulent, gave Mr Salinas a victory with only 50.4% of the vote!thelowest in the PRI"s history until then.

During his presidency (1988-94) Mr Salinas began economic and politicalliberalisation, allowing opposition parties to win gubernatorial races. An up-rising in Chiapas in January 1994 by the Ejército Zapatista de LiberaciónNacional (EZLN) highlighted the fact that despite economic progress, socialtensions were mounting. Consequently, as well as negotiating with the EZLN,the government enacted electoral reform, granting autonomy to the InstitutoFederal Electoral (the Federal Electoral Institute, the electoral authority) and intro-ducing measures to reduce electoral fraud. Elections held in August 1994 wererecognised as transparent. Ernesto Zedillo of the PRI won the presidency with50.2% of the vote. In Congress the PRI held on to its majority, but lost seats to thePAN and the Partido de la Revolución Democrática (PRD, which was formed outof the FDN in 1989).

Mr Zedillo (1994-2000) continued the process of political reform, introducingchanges to the constitution to modernise the electoral rules. The PRI paid aheavy electoral toll throughout the Zedillo administration for the peso crisis of1994-95. For the first time in almost 70 years, the PRI lost its majority in theChamber of Deputies in the 1997 mid-term election, as well as a number ofgovernorships and the mayorship of the capital, Mexico City. By the beginningof 2000 the opposition held the governorships of ten states. Confidence in cleanelections had increased substantially and candidates and regional issues hadbecome more important. The presidential election of July 2000 broughtsweeping political change when Mr Fox, the candidate of the coalition formedby the PAN and the Partido Verde Ecologista de México (PVEM, the green party),defeated the PRI�s candidate, Francisco Labastida, ending the party�s 71-yearreign. Crucial to Mr Fox�s victory was his success in winning the support of bigbusiness, many of whose representatives lost faith in the PRI following the 1994-95 peso crisis. The vote for Mr Fox was concentrated in the most urbanised areasof the country, while the rural vote was overwhelmingly won by the PRI. In theFederal District, Mr Fox defeated Mr Labastida by almost two to one. AlthoughMr Fox�s overall share of the vote was the lowest ever obtained by a winningpresidential candidate (42.4%), this did not impair his legitimacy as the PRI wasdefeated by a substantial margin. The PRI won 36.1% of the vote.

Reforms accelerate in responseto unrest in 1994

A multiparty democracyemerges

6 Mexico


Recent political developments

Mr Fox�s election campaign created high expectations of a "government ofchange". In a country characterised by some of the most acute levels ofinequality in the world, he pledged to bring greater prosperity for all. Centralamong Mr Fox�s pledges was the passage of a series of important structuralreforms aimed at promoting long-term growth. Among them would be energyand labour market reforms and a comprehensive tax reform that would raisethe chronically low level of non-oil tax collection by broadening the base oftaxpayers and curbing evasion. However, progress on his legislative programmequickly stagnated, and popular disillusion with his administration quickly set in,compounded by sluggish GDP growth.

At the core of Mr Fox�s problems has been the difficulties entailed in managinga seismic political transition. Mexico has moved from a system characterised bysingle-party rule under the command of an all-powerful presidency, to apluralistic democracy. While Mexico retains a presidential regime, much powerhas shifted to the legislature (for most of the PRI era Congress was a rubberstamp for executive decisions), where Mr Fox�s government has been in aminority position since its outset. The PAN�s position in Congress wasweakened further in mid-term elections in 2003. Mr Fox�s difficulties werecompounded in the first four years of his term by a difficult external economicenvironment, which contributed to a poor growth performance. However, hisproblems were aggravated by his inability to build a cohesive cabinet, his poormanagement of relations with the PAN hierarchy; and divisions within thePAN"s prime negotiating partner, the PRI.

Disappointment with Mr Fox�s government has contributed to a wider populardisenchantment with the political class. The 2003 legislative election under-scored rising apathy among voters, with the level of abstention reaching almost60%, the highest ever recorded. Although Congress now asserts more power, itsmembers remain largely unaccountable to the electorate. As they cannot be re-elected to successive terms, legislators depend upon their parties to help to findthem jobs when their terms in Congress come to an end. Hence members tendto follow the party whip rather than pursue their constituents� interests.Growing political alienation has placed political reform high on the agenda.Reforms had been expected to make headway during the second half of MrFox�s term, but significant advances now appear unlikely. Discussions thus farhave centred on introducing re-election at the congressional and municipallevels, improving legislative efficiency and reducing the frequency of elections(at present, the staggering of state, local and national elections means thatpolitical campaigning is virtually continuous).

Mr Fox�s �government ofchange� has disappointed

Mexico 7


Composition of the Chamber of Deputies(% of seats unless otherwise indicated)

1991-94 1994-97 1997-2000 2000-03 2003-06Partido Acción Nacional (PAN) 17.8 23.8 24.2 41.2 30.2Partido Revolucionario Institucional

(PRI) 64.0 60.0 47.8 42.2 44.8Partido de la Revolución Democrática

(PRD) 8.2 14.2 25.0 10.0 19.4Other 10.0 2.0 3.0 6.6 5.6Total seats 500 500 500 500 500

Sources: Chamber of Deputies; Instituto Federal Electoral.

The Fox government�s early loss of momentum contributed to an exceptionallypremature start to informal campaigning for the 2006 presidential elections,with the election dominating the political environment from early 2004. Astring of victories for the PRI and (to a lesser extent) the PRD in stategovernorship and local mayoral elections reinforced the widespread sense thatthe PAN was continuing to lose ground, including in its traditional strongholdsin the northern border states. A figure from the PRD, Andrés Manuel LópezObrador, the hugely popular mayor of Mexico City, emerged as the favourite forthe 2006 presidential election.

Important recent events

July 2000

Election of Vicente Fox Quesada, the presidential candidate of the Partido AcciónNacional (PAN), ends 71 years of one-party rule by the Partido RevolucionarioInstitucional (PRI). Mr Fox�s campaign created unrealistically high expectations ofchange, which his government found difficult to advance from its minority positionin Congress. Meanwhile, unfavourable external conditions contributed to a sharpslowdown in economic growth. These factors contributed to an early loss ofmomentum and popular disenchantment.

July 2003

The Fox government performs badly in mid-term congressional elections, with theruling PAN�s share of seats falling from 41.2% to 30.2%, while the PRI�s rose from42.2% to 44.8% and that of the Partido de la Revolución Democrática (PRD) almostdoubled from 10% to 19.4%.

December 2003

Government�s tax reform proposals, centred on widening the value-added tax (VAT)base to include previously exempted items, rejected by Congress.

2004

Legislative gridlock deepens amid exceptionally early focus on 2006 presidentialelection. Attention dominated by an obscure property dispute involving AndrésManuel López Obrador, Mexico City�s leftist mayor and the favourite to win thepresidency. The case was widely seen as orchestrated by the PAN and the PRI tostymie his presidential prospects.

Campaigning for 2006 startsexceptionally early

8 Mexico


2005

Case against Andrés Manuel López Obrador climaxes in April in his impeachment inPAN-PRI dominated vote in Congress. Case collapses weeks later following a publicoutcry and personal intervention by Mr Fox. At mid-year, main parties formulateand launch their candidate selection procedures. Legislative activity remains largelystalled.

Constitution, institutions and administration

The constitution was enacted in 1917. It subordinated the rights of privateproperty to public interest and made specific provision for land reform, as wellas stressing the rights of labour and curtailing the power and influence of theclergy. The constitution also established the framework for a federal systementailing 31 states and the Distrito Federal (the Federal District, which includesMexico City) and provided for the separation of executive, legislative andjudicial powers. In practice, for more than seven decades under PRI rule (1929-2000) the executive was able to dominate the other branches of governmentthrough top-down control of the ruling party. Only since 2000 has theseparation of powers begun to become effective. The process of adapting to thisprofound shift is exposing institutional shortcomings, and governability hasweakened. The legislature is in a stronger position vis-à-vis the executive, but itis divided and lacks experience of representative politics. The judiciary remainspoliticised and inefficient. Reforms implemented in 1994-95 gave the SupremaCorte de Justicia de la Nación (SCJN, the Supreme Court) greater autonomy andCongress has also gained strength. Mr Fox has called several times for athorough revision of the constitution, but far-reaching reform is unlikely in thenear term.

Congress comprises the Senate (the upper house) and the Chamber of Deputies(the lower house). Senators serve for six years (with elections held concurrentlywith national presidential elections) and deputies for three. Individuals cannotbe re-elected for either position. In the Chamber of Deputies, 300 seats areallocated using the first-past-the-post system and 200 by proportional represent-ation. In 1993 the number of senators was doubled from 64 to 128 so that eachstate and the Federal District has three senators directly elected by relativemajority and one senator elected by the first minority principle (the candidatethat comes second in each state race). Of the directly elected seats in the Senate,64 are elected via the first-past-the-post system and 32 are elected usingproportional representation. Reforms approved by Congress in 1996 made iteasier for a single party to gain a working majority in Congress, but impossiblefor any one party to achieve the two-thirds majority necessary to change theconstitution. Despite these reforms, since 2000 no single party has enjoyed aworking majority in either house.

The organisation and oversight of elections has become much more transparentsince the mid-1990s. A series of reforms to the Instituto Federal Electoral (IFE),the Federal Electoral Authority, has significantly strengthened its autonomysince it was first established in 1990. Originally under the control of the interiorministry, it became autonomous in 1997 and played a crucial role in 2000 in

Separation of powers hasfinally become effective

Composition of Congress

Electoral authorities weretransformed in the 1990s

Mexico 9


assuring Mexico"s first-ever free and fair presidential election. However, somelocal elections in 2003-05 have been characterised by a questioning of IFEdecisions. The 2006 presidential election will be a major test of the authority�scredibility, particularly if the outcome is close.

The president is elected for a non-renewable six-year term and appoints thecabinet. The most important political post in the cabinet is that of minister ofthe interior, head of the ministry charged with preserving the country�s politicalstability. The Ministry of Finance and Public Credit is responsible for economicpolicymaking at the highest level, although the Ministry of the Economy(formerly the Ministry for Trade and Industry) also plays a major role. TheMinistry of Foreign Relations has acquired greater importance under the Foxadministration, because of the priority that the government has placed onstrengthening bilateral relations with the US and on achieving a more activerole for Mexico internationally.

Political forces

Three parties dominate Mexican politics: the PAN, the PRI and the PRD. Aftermore than 60 years in opposition, the PAN won the presidency in the July 2000election. The PAN was founded in 1939 and has built up a support base mainlyin northern and central states and among the urban middle classes. During the1990s, the PAN succeeded in widening its support slightly beyond these groups,but since 2003 disillusion with the Fox administration has contributed to theparty losing ground even in its traditional northern strongholds in localelections. PAN members have been divided in their support for Mr Fox as asignificant number consider that he hijacked the party to further his personalambition. Mr Fox largely shares the party�s policy orientation, notably in hisstrong support for free-market policies, but he is not seen as a loyal partyservant. He has been unable to count on the full support of his own party forhis legislative initiatives.

Although it has remained the largest party in both legislative houses since itsdefeat in the 2000 presidential election, the PRI has had to adapt to being inopposition for the first time since it was established in 1929. Detached frompresidential power, the PRI has struggled to reinvent itself. Having lacked anycoherent ideology for decades, the party became a means of winning andexercising power, and when in government largely followed the direction set bythe president. Since the 1980s the party has struggled to reconcile its morestatist �old guard�!mostly positioned in the legislature and local government!and more market-oriented technocrats, a minority who dominated the federalexecutive during the 1990s. In opposition, the PRI�s divisions have become lesseasy to categorise in ideological terms. The most important division has been astruggle for supremacy between the party�s two most powerful figures, RobertoMadrazo, the party president since 2002 and Elba Esther Gordillo, its secretary-general. Both have strong personal power bases: Mr Madrazo is a formerpresidential pre-candidate and governor of Tabasco state (see Main politicalfigures) and Ms Esther Gordillo is the de facto leader of the powerful Sindicato

Ranking of ministries

The PAN makes an uninspiringdebut in national government

The PRI struggles to adapt toits loss of power

10 Mexico


Nacional de Trabajadores de la Educación (SNTE, the National Union ofTeachers).

In the 2003 mid-term elections, the PRI was virtually wiped off the map in theFederal District. However, it made significant advances in the legislature, whereit increased its representation in the Chamber of Deputies. It also enjoyed awinning streak in state governorship elections. The most important of these in2003 was the PRI�s winning control of the northern state of Nuevo León,traditionally a PAN stronghold. In 2004 it won 11 out of 14 state elections. In2005, while losing control of Guerrero state for the first time in a surprisevictory for the PRD, the PRI retained control of the largest and richest state,Estado de México, and won control of the western state of Nayarit.

The PRD was formed in 1989 by supporters of Mr Cárdenas�s 1988 presidentialbid. It espouses a leftist, statist platform critical of the �neoliberal� economicpolicies implemented in the 1990s. Between 1996 and 1999, under theleadership of Andrés Manuel López Obrador, the party diversified its base byembracing disaffected PRI members, winning over states that had beenconsidered impregnable. However, in the 2000 presidential election,Mr Cárdenas managed only a distant third place as many of his supportersdefected to vote for Mr Fox. In the 2003 congressional elections, the PRDincreased its share of the vote from 13% to 18%. The PRD�s support is strongestin central and southern states. The party is also very strong in the FederalDistrict, which it has governed uninterruptedly since direct mayoral electionswere first held in 1997. Mr López Obrador has been Mexico City�s mayor since2000, stepping down on July 31st 2005 to formally launch his bid for thepresidency.

Although an essentially three-party system has evolved since 1997, five othersmall parties are represented in Congress. The most important among them isthe PVEM, which benefited from an alliance with the PAN in 2000 election.However, the alliance broke down a year into Mr Fox�s administration, with thePVEM breaking ranks after failing to receive any cabinet positions. Since then, ithas allied itself most frequently with the PRI in congressional, state and localelections. Its popular standing has dwindled amid allegations of corruption,nepotism and campaign finance irregularities.

A total of 11 political parties competed in the 2003 congressional election butfive of them failed to obtain the minimum share of 2% of the vote and lost theirregistration. These were: the Partido Alianza Social (PAS), the Partido de laSociedad Nacionalista (PSN), México Posible (MP), Fuerza Ciudadana (FC) andthe Partido Liberal Mexicano (PLM). The PVEM, with 17 deputies, reaffirmed itsstanding as the fourth-biggest party. The two other survivors were the Partidodel Trabajo (PT), which has six seats in the Chamber of Deputies, andConvergencia (a PRI splinter founded in 1999), with five seats.

A guerrilla group, the Ejército Zapatista de Liberación Nacional (EZLN, ZapatistaNational Liberation Army) rose to national and international prominence fromits base in Chiapas (one of the country�s poorest states) on January 2nd 1994!timed to coincide with the launch of NAFTA the previous day!when they

The PRD struggles to riseabove 20% of the vote

PVEM is most importantamong smaller parties

Forces outside parliament

Mexico 11


launched an uprising in protest against the neoliberal economic policiesimplemented by the government of Carlos Salinas de Gortari (1994-2000) andin defence of indigenous rights. The EZLN�s uprising was short-lived andconfined largely to jungle areas of Chiapas. Peace negotiations were launchedand continued under the government of Ernesto Zedillo before losingmomentum in the second half of his term. Mr Fox tried to re-start peacenegotiations, but the urgency ebbed as the ELZN receded in visibility andinfluence in the national arena. The deepening of democratic pluralism inMexico has contributed to a diffusion of support away from the EZLN, onceseen as a champion of resistance to one-party rule. Other relatively smallguerrilla movements have at times emerged, but have either fizzled out or beendeactivated by government forces.

Neither the church nor the military are major participants in politics. Sincegaining constitutional recognition (and the right to vote) in 1992, Roman CatholicChurch leaders have attempted to influence policy, particularly on education,but have been rebuffed by politicians, even by those from PAN (which hastraditionally strong church ties). The military has also become more prominent.The institutional loyalty of the armed forces was tested in the 2000 politicaltransition, but proved to be strong when Mr Fox appointed a minister of defenceof his choosing over several more senior generals.

Main political figures

Vicente Fox Quesada

President. After a successful career in business, Mr Fox joined the Partido AcciónNacional (PAN) in the late 1980s. Having been a congressman, he became governorof his home state of Guanajuato in 1995. Through vigorous high-profile campaigning,he rose to national prominence and became the PAN�s candidate for the 2000presidential election. Although not popular among party leaders, he was able tocircumvent their hostility by building a strong political support group. Despite aflawed campaign, his promise of �change� was a powerful message, luring manyvoters away from the Partido Revolucionario Institucional (PRI) and the Partido de laRevolución Democrática (PRD). However, his presidency quickly lost momentum,due in part to factors beyond his control but also to his ineffectual leadership style.

Andrés Manuel López Obrador

Mr López Obrador, who took office as Mexico City�s mayor in 2000, is one of thetwo leading figures in the PRD (the other is Cuauhtémoc Cárdenas Solórzano, thePRD�s main founder). During his tenure as mayor (he stepped down in July in orderto launch his presidential campaign), Mr López Obrador�s direct style of government(epitomised by daily early morning press conferences) and his emphasis on policiesto improve conditions for low-income groups made him extremely popular. He is thePRD�s best hope of winning the presidency in 2006. However, he will be able tocount on the support of only one-third of the electorate. To have a chance ofwinning, he would have to move further towards the political centre ground.Moreover, his campaign will be hampered by the weakness of the PRD�s partymachinery.

12 Mexico


Roberto Madrazo Pintado

PRI national leader since 2002. Mr Madrazo, a lawyer, rose to national prominence in1999, when he stood for the PRI presidential nomination against the eventualwinner, Francisco Labastida, in the party�s first ever primary election. Popular amongthe PRI�s grassroots, and with a long career as a party member, Mr Madrazo has apopulist touch, but he is also considered to be a pragmatist. Although he is close tothe PRI�s old guard, in March 2005 (with an eye to his presidential bid) hespearheaded the removal of the party�s ban on private sector involvement in the oilsector. Mr Madrazo was governor of Tabasco in 1995-2000 and has been acongressional deputy and senator at various points since the mid-1970s. He is thefavourite to become the PRI�s presidential candidate for the 2006 election but hisposition is not unassailable.

Santiago Creel Miranda

Mr Creel became a national figure in his role as adviser to the newly autonomousInstituto Federal Electoral (IFE), the federal electoral authority, in 1994-96; he wasinstrumental in bringing major improvements to the administration andtransparency of elections. Mr Creel was appointed minister of the interior at theoutset of Mr Fox�s term, stepping down in mid-2005 to launch his presidential bid.Although he is Mr Fox�s preferred candidate for the PAN nomination, his lacklustreperformance as interior minister and shortage of charisma will handicap hiscampaign.

Marta Sahagún de Fox

Ms Sahagún has been a high profile first lady with undisguised political ambitions.Her Vamos México (Let�s Go Mexico) foundation, focused on social projects for thepoor, has won her widespread popularity, but her charitable work has been cloudedby allegations of financial irregularities. In mid-2004 she was forced to publicly endspeculation that she was considering a presidential bid in 2006 after a damagingwave of criticism focusing on her excessive influence in government threatened todestabilise Mr Fox�s government. She is likely to seek another high-level electedoffice, with a view to a future presidential bid at a more propitious moment.

International relations and defence

The 3,118-km shared frontier has ensured that both the US and Mexico havelong accorded bilateral relations a high priority. Economic relations have beendeepened by the launch in 1994 of NAFTA. Mexico�s large emigrant community(an estimated 25m people of Mexican origin live in the US) has also contributedto the development of closer socio-cultural ties.

Although there have been tensions over the war in Iraq (which the Foxadministration criticised), foreign policy under Mr Fox has been largelysupportive of US initiatives. However, the Fox administration has beendisappointed by the slowness to improve conditions for the large population ofillegal Mexican migrants in the US. Little headway has been made on aproposed guest-worker scheme mooted by the administration of George WBush in early 2004.

Relations with the USdominate foreign policy

Mexico 13


Since the terrorist attacks on the US in 2001 the US has intensified its focus onstrategies to improve security along the bilateral border. This has been reflectedin the emphasis of the Security and Prosperity Partnership of North America(SPP) launched by NAFTA heads of state in March 2005. One of the SPP�s aimsis to promote greater economic dynamism within the trading bloc (Mexico�ssluggish growth record has been one of the chief criticisms of NAFTA) by takingsteps to improve the investment environment. However, the predominant focusthus far has been on improving co-operation on security. Three months after itslaunch, the SPP unveiled a detailed timetable for the implementation of a seriesof security initiatives, including harmonisation of inspection procedures forpassengers and cargo entering the US and for processing visa applications andplans for joint police initiatives. It envisages the establishment within threeyears of an integrated North American Trusted Traveler Programme aimed atspeeding up procedures for travellers enrolled in the scheme.

Armed forces, 2004/05

Active force

Active forces total 192,770.

Reserve force

The reserved force totals 300,000.

Army

There are 144,000 soldiers, of which 60,000 are conscripts, and 12 military regionswith garrisons in 44 zones. Each garrison comprises 81 infantry brigades, 19motorised cavalry brigades, three artillery regiments and one air-mobile unit. Thestrategic reserve includes four armoured brigades and one presidential guard brigade.

Navy

The navy comprises 37,000 seamen, including 8,700 marines and 1,100 naval airpersonnel. There are 17 naval regions, of which six are in the Gulf of Mexico and 11in the Pacific Ocean. The navy possesses three destroyers and eight frigates.

Air force

The air force comprises 11,770 airmen, including one squadron with ten fighter planesand 47 armed helicopters.

Source: International Institute for Strategic Studies, The Military Balance 2004/05.

Defence spending is low, amounting to just 0.3% of GDP in 2004. This is one ofthe lowest levels in the region and compares with 1.8% of GDP in Brazil (2003figures). Although the armed forces are ill-equipped to defend Mexico fromexternal aggression, their role in domestic affairs has increased in the past fewyears. In addition to waging a perennial war against drug-traffickers, they havebeen called on to contain guerrilla groups, notably the EZLN, and even to takeon policing duties. However, scandals related to corruption and human rightsabuses have tarnished the army�s image.

Defence spending is low

14 Mexico


Security risk in Mexico

Armed conflict/terrorism

The Ejército Zapatista de Liberación Nacional (EZLN) in Chiapas is located far frommajor urban areas and its activities are thus unlikely to affect business. The EZLN iswell contained by the Mexican military, and has shown no intention of carrying outurban terrorist acts. The movement has a strident but small political base, but isunlikely to threaten political stability.

Unrest/demonstrations

Demonstrations are frequent in major urban areas, especially Mexico City, althoughthey are rarely violent. The US embassy is often a focal point of anger during labourdemonstrations, but US businesses are not generally targeted. An increase in politicalrallies can be expected in the approach to the July 2006 presidential election.Mobilisations will be generally peaceful. However 2006 will be an important test forMexico�s still-young political transition. Following on from a hostile campaign, thereis a risk that a close result could precipitate an institutional crisis, which could beaccompanied by an increase in political unrest.

Violent crime

Mexico�s traditionally good security environment has deteriorated sharply since themid-1990s. Crime!including violent crime and kidnapping!escalated during thesecond half of the decade, catalysed by a traumatic economic crisis and exacerbatedby pervasive corruption and criminality in law-enforcement institutions. Theft ofmerchandise and assaults on staff are among the priority security concerns ofbusinesses operating in Mexico. The judiciary and municipal police are oftencorrupt, making arrest and prosecution of criminals more difficult. Large firmsallocate about 10% of their total expenses to security. A worrying trend has been asharp increase in drug abuse in recent years: the Ministry of Health in 2004estimated the number of addicts to illegal drugs at 1.3m.

Organised crime

According to the US State Department, as much as 90% of cocaine sold in the US issmuggled through Mexican territory from South America; Mexican drug cartelscontrol most drug distribution centres in the US. Rising drug addiction in Mexico hasalso prompted cartels to step up their presence in major Mexican cities. The Foxadministration has won praise from Washington for its close co-operation on anti-narcotics activities. However, drug cartels remain entrenched in Mexican states nearthe US border, where the assassination of public officials in these states is often drug-related. Southern states such as Guerrero and Michoacán are home to the cultivationof illegal crops like marijuana (Mexico is the major foreign supplier of marijuanaconsumed in the US) and opium (Mexico accounts for 5% of global production butby virtue of its geographical proximity is the second-largest supplier to the US).

Kidnapping

Although conventional kidnapping gangs do not generally target foreigners, the risingincidence of a type of mugging known as �express kidnapping� means that foreignexecutives are at growing risk of becoming the targets of violent crime. Along withBrazil, Mexico suffers one of the worst incidences of this type of crime, wherebyvictims are forced to withdraw cash from a succession of ATMs.

Mexico 15


Resources and infrastructure

Population

According to the Consejo Nacional de Población (Conapo, the NationalPopulation Council), the rate of population growth has slowed dramaticallyover the past three decades, falling from more than 3% per year in the early1970s to an estimated 1.1% in 2004. According to official data, the average age ofthe population is 27, the number of people under six years old has fallen since1990, and life expectancy is 75.2 years. The number of people aged 6-14 yearshas also been declining since 1999. Despite these changes, one-third of thepopulation is aged 14 years or under (one of the highest ratios in the world),which results in pressures on the education system and the labour market.

The deceleration in the rate of population growth reflects a declining fertilityrate (children/woman) and net emigration (around 400,000 emigrate a year,98% of them to the US). The fertility rate has fallen from 5.6/woman in 1976, to2.16/woman in 2004. The fall in the fertility rate has come about owing to arange of factors, including improved access to education for women, increaseduse of contraceptives and better healthcare, which has lowered infant mortality,thereby encouraging people to have fewer children.

According to the 2000 census, 65% of the population lives in urban areas, witharound 18m in the Metropolitan Area of Mexico City, one of the largestconurbations in the world. According to the government"s Programa Nacionalde Población (2001-06), the demographic and economic concentration in largemetropolitan areas did not change markedly in the 1980s and 1990s. Around24% of the population still lives in small rural communities with fewer than2,500 inhabitants, many of which are isolated and widely dispersed. Around12.7m Mexicans are indigenous and tend to suffer high poverty rates!theyrepresent 68% of the high or extremely high levels of marginalisation. There areover 60 recognised ethnic and language groups, and around 1% of the totalpopulation does not speak any Spanish. The most numerous indigenous groupsare the Náhuatl, the Maya, the Zapotec and the Mixtec.

Income distribution has deteriorated since 1990. The richest one-fifth of thepopulation (about 20m people) received 57.4% of the total household income in2002 (up from 55.3% in 1990), whereas the poorest one-fifth received just 3.5%(down from 4.1% in 1990).

The labour force is 34.5m strong and relatively young. The unskilled and semi-skilled labour pool remains large, but skilled workers remain in short supplyowing to deficiencies in the public education system. In theory, Mexico�slabour-protection standards exceed those in the US. In practice, however, labourstandards are far lower in Mexico. Safety standards are rarely enforced, childlabour remains a problem despite the law�s prohibition on allowing childrenyounger than age 14 to work, and many workers are unregistered and thus donot receive social insurance benefits. An estimated 40#65% of the workforce isin the informal sector, which mainly consists of ambulantes, roving vendors,who are not registered for tax and social security purposes.

Population is young andincome inequality is high

Skilled labour is in shortsupply

16 Mexico


In 2004 first-generation Mexican immigrants living in the US were estimated byConapo to number 10.3m. Around 60% are aged between 20 and 44 andaround two-thirds have settled in California and Texas, with Texas attractingthe strongest rise in immigration in recent years. By 2003, 39.3% of Mexicanimmigrants lived in California and 23% in Texas. The number of Mexican-bornimmigrants living in poverty has fallen steadily but remains high at 25.4% in2003 (down from 35.9% in 1994). The number of US residents of Mexican originwas estimated at 26.7m in 2003. Around 6m are resident illegally.

Education

There has been a marked increase in investment in education over the past 15years. Data from the Secretaría de Hacienda y Crédito Público (SHCP, thefinance ministry) show that public expenditure on education rose from 3.7% ofGDP in 1990 to 5.6% of GDP in 2004 and a budgeted 5.9% of GDP in 2005. Thiscompares to an OECD average of 5.6% of GDP. Private spending on educationhas also risen steadily in the past decade, from 0.2-0.3% of GDP in the first halfof the 1990s to 1.5% of GDP in 2004.

Despite improvements, education outcomes remain poor. The average numberof years of schooling for the population aged 15 and over was 7.9 in 2003, amarked improvement on a decade earlier (when the average was 6.8 years) butstill very low. According to UNESCO, literacy rates in 2003 (the latest availabledata) were 92% for males and 88.7% for females. This is better than in Brazil(88.3% and 88.6% respectively) but well below levels in Chile (95.8% and 95.6%).

Four major government initiatives are aimed at addressing the system�s maindeficiencies. The Fox government�s flagship Enciclomedia programme hasbegun to improve the availability of learning materials by providing access totextbooks on CD-ROMs. Another programme, Oportunidades (based on anearlier programme known as Progresa), provides cash grants to low-incomefamilies to ensure their children attend both school and health facilities. ThePrograma de Escuelas de Calidad, targets poorly performing public schools: inreturn for implementing an agreed reform, participating schools receiveadditional financing to upgrade their facilities. Finally, the Fox government hasintroduced the Programa Nacional de Becas para Estudios de Tipo Superior(Pronabes, which provides scholarships to poor students in higher education).Pronabes envisages dispensing 300,000 grants to poorer students by the end of2006. Of these, 122,000 had been granted in 2001-04.

Health

Health indicators have improved dramatically since the 1950s. They arerelatively good by the standards of many Latin American countries but remainbelow those of most OECD countries. Moreover, the authorities still faceformidable challenges in extending universal access to basic healthcareservices. The level of public spending, at 45% of total healthcare spending in2002, remains well below the OECD average of 72%. Only around half the

Over 10m Mexicans live inthe US

Education investment is beingstepped up from a low base

Despite improvements, healthservices remain inadequate

Mexico 17


population is covered by health insurance, and large disparities exist betweenthe richer northern states and the poorer southern states in terms of insurancecoverage, public health expenditure and standards of provision. At 2.8% of GDP(2002 figures) public spending on health is low by OECD standards, but thefailure to advance fiscal reform (see The economy: Economic policy) leaves littlescope for significant increases in the near term. Spending is also inefficient, inpart because of the fragmentation of the system. Responsibility for publichospitals and clinics was decentralised to state level in the 1980s and 1990s.Private health insurance covers just 3% of the population and most private careis funded by out-of-pocket expenditure. Indeed, out-of-pocket expenditureaccounts for around half of total spending on healthcare.

Comparative health indicators, 2003Mexico Brazil Chile US UK

Life expectancy (years) 74.7 71.1 76.2 77.1 78.2Infant mortality (per 1,000 live births) 22.5 31.7 9.3 6.8 5.3

Healthcare spending (% of GDP) 6.1 7.5 6.8 13.2 8.1Doctors (per 1,000 of population) 1.5 1.2 1.1 2.7 2.0

Source: Economist Intelligence Unit, Market Indicators and Forecasts.

Between 1970 and 2003 life expectancy at birth increased from 61 years to anestimated 74.9 years, while infant mortality fell from 69 per 1,000 live births to16 per 1,000 live births. The incidence of communicable diseases!such asdiarrhoea, influenza and pneumonia!has fallen and that of chronic andlifestyle-related diseases has risen. Cardiovascular diseases are now the majorsource of mortality, accounting for 16% of all deaths, and diabetes is the mostimportant single cause of death (12% of all deaths in 2002). Universalvaccination programmes have helped to reduce cases of whooping cough andtuberculosis, and poliomyelitis has been almost eradicated. Efforts continue tobe made to curb outbreaks of cholera and the spread of AIDS. The governmenthas tried to combat malnutrition by instituting several programmes of foodsupport, including the provision of subsidised milk to 2.93m families, freeschool breakfasts for about 4.7m children and 1 kg/day of free tortillas to140,000 families, according to 2003 estimates. Nevertheless malnutritionremains a serious problem, particularly in remote rural areas, wherecommunicable diseases also remain more prevalent.

Main healthcare providers and levels of coverage

The Instituto Mexicano del Seguro Social (IMSS, the social security institute), and theInstituto de Seguridad y Servicios Sociales de los Trabajadores del Estado (ISSSTE,the social security institute for public-sector workers) are the two main providers ofhealthcare. The IMSS is the largest institution and one of the biggest employers inMexico. Affiliation to the IMSS is compulsory for salaried workers in the formalprivate sector. However, with the shift in the structure of employment since the1980s towards greater informal sector working, the proportion of the populationuncovered by health insurance has risen. Over 45% of the population is now outsidethe existing social security network.

According to official figures, in 2003 an estimated 47m people were covered by theIMSS, with 15.9m affiliates paying contributions. The ISSSTE, with 2.4m affiliated

18 Mexico


state workers, offered services to a further 10.3m people. The two organisations arefunded by employer and employee contributions, returns on investments and, in thecase of the ISSSTE, increasing transfers from the federal government (to avoidinsolvency).

In addition to the IMSS and the ISSSTE, some healthcare services are provided bythe Ministry of National Defence, the Ministry for the Navy, Petróleos Mexicanos(Pemex, the state oil company) and by state organisations such as the InstitutoNacional Indigenista (INI, the Institute for Indigenous People) and Desarrollo Integralde la Familia (DIF, an agency promoting family development), as well as by privateinstitutions.

The Ministry of Health provides healthcare services to the uninsured. This group islargely made up of poor rural workers and the large number of informal workerswho pay no payroll taxes. In general, Ministry of Health services are subject to thepayment of means-tested user charges.

The private sector accounts for around one-third of all hospital beds. Most privateunits are small in scale (only 15% have more than 15 beds) and almost half of privatehospital facilities are in the capital, Mexico City. Two companies account for 50% ofthe small private health-insurance market (covering an estimated 3% of thepopulation).

Reforms since the 1990s have sought to widen access to care for the uninsuredpopulation. The Fox administration�s flagship initiative is the Sistema deProtección Social en Salud, which centres on a voluntary health insurance, theSeguro Popular, financed in the main through contributions from federal andstate governments, with means-tested contributions from participants. Withfunding tied to the number of affiliates, the scheme aims to channel moreresources to the poorer states. A fund has also been established in order tocushion basic health expenditure from potential fiscal austerity. By the end of2004, 1m families (approximately 4.5m Mexicans) had enrolled, according to thegovernment. The target is to achieve universal coverage by 2006. At the sametime, the Oportunidades scheme has since 1997 been paying cash incentives to4.5m extremely poor families to attend clinics, receive health education andkeep children in school.

The sustainability of these reforms will be dependent both on administrativeimprovements to raise efficiency of health spending and on trends in the publicfinances, including the government�s success in addressing unsustainablepensions liabilities that threaten the adequacy of funding for health services. Anecessary pensions reform for government workers and for affiliates to theIMSS has yet to be agreed.

Reforms centre on reducingpool of uninsured

Mexico 19


Natural resources and the environment

Covering an area of 1.96m sq km, Mexico is the 14th largest country in theworld. It is bounded by the US to the north along a 3,118-km frontier and to thesouth by Guatemala (943 km) and Belize (249 km). The country�s western limitis the Pacific coast (7,360 km) and its eastern limit the Gulf of Mexico and theCaribbean coast (2,780 km).

The country�s topography is complex, ranging from coastal plains to volcanoesstanding over 5,000 metres above sea level. More than one-half of the landarea is over 1,000 metres above sea level.

Climatic conditions vary considerably owing to the topography, but much ofthe country is dry and there are few large rivers. Water resources are unevenlydistributed. Both the Gulf coast to the east and the Baja California peninsula tothe west are vulnerable to tropical storms and hurricanes. The high season forstorms is July-September on the west coast and August-October in the Gulf. Thewest coast of southern Mexico, where the Cocos Plate dips beneath the NorthAmerican Plate, is an active seismic zone, and earthquakes are not uncommonin the central states and the capital, Mexico City. The area has seen 35earthquakes of magnitude greater than 7.0 on the Richter scale since thebeginning of the 20th century.

Climate(% of total area)

Hot & humid 4.8

Hot & dry 23Temperate 23.1Dry 28.3

Very dry 20.8

Source: Instituto Nacional de Estadística, Geografía e Informática.

Owing to the topography and climate, only about 21% of the country is suitablefor arable farming and a further 57% for pasture. Forests and woodland coveraround 17% of the land. There is great potential for fishing to be developed.

As a signatory to the North American Free-Trade Agreement (NAFTA), Mexico isunder pressure to raise its environmental standards. Mexico is the largest sourceof carbon dioxide emissions in Latin America, but accounts for less than 2% ofthe global total and remains well below the per head average of industrialisedcountries. In 1992 the Procuraduría Federal para la Protección del Ambiente(Profepa, the Federal Bureau for the Protection of the Environment) wasestablished. Since then, Mexico has developed a large body of legislation aimedat improving environmental standards; in 2000 it became the first large oil-exporting country to ratify the Kyoto Protocol. However, implementationcapacity remains weak. While real expenditure on environmental protectionhas increased in the past decade, it is still only around 0.7% of GDP, aroundone-fifth that of other OECD economies.

Climate

Land mass and topography

Weak enforcement ofenvironmental standards

Land use

20 Mexico


Air pollution remains a serious problem in Mexico�s largest cities, in particularMexico City, Guadalajara and Ciudad Juárez. Moves are being made to sub-stitute natural gas for diesel in power stations and industry, and environmentalpolicing is being stepped up generally, although enforcement remains lax.Mexico City remains one of the most polluted cities in the world, despiteimprovements since 1992 (when Mexico City�s air was considered the mostpolluted in the world by the UN). Its topography is a contributory factor: thecity is located in a basin surrounded by mountains and volcanoes that trappolluted air in the city. The main initiatives in place focus on providingincentives for using cleaner fuels and requiring private car drivers to installcatalytic converters or reduce circulation: owners of old cars are required toleave them at home on one day each week and on two days a week duringenvironmental emergencies.

According to estimates by the Pew Center on Global Climate Change,deforestation and land transformation has led to the elimination of 45% ofMexico�s original forests since the 1950s. Deforestation is estimated to havecontinued at a rate of 600,000-800,000 ha per year in the past decade, withthe expansion of intensive cattle ranching in the south-east of the countryidentified as a primary culprit.

Transport, communications and the Internet

Mexico�s road network extended to 349,037 km in 2003, according to theSecretaría de Transporte y Comunicaciones (SCT, the transport ministry), ofwhich just over one-third was paved. Private companies were offeredconcessions to build and to operate toll roads under the administration ofCarlos Salinas de Gortari (1988-94). At the end of the 30-year concession term,operation rights returned to the government. The authorities guaranteed a mini-mum usage level on the new highways. Traffic shortfalls, higher than expectedconstruction costs and the 1994 peso crisis combined to force the government tobail out 23 of the 53 concessionaires by 1997, at a cost of US$7.3bn. Theauthorities blamed excessively high toll charges as a contributory factor to lowtraffic volumes and tolls for newly state-owned highways were reducedsignificantly after 1997.

The Fox government launched a �re-privatisation� programme entailing theaward of 30-year concessions, although bidding rounds did not get underwayuntil 2004. According to the Secretaría de Comunicaciones y Transportes publicinvestment in highways averaged 0.2% of GDP in 2000-03, totalling Ps48bn(US$4.3bn) over the period as a whole. The vast majority was invested inupgrade of existing highways, rather than new build. This has resulted inimprovements in the quality of the road system, although much remains to bedone. The proportion of roads classed as in a �good or acceptable� state rosefrom 60% in 2000 to 72% in 2003.

Over one-half of cargo is transported via road. According to the SCT, of thealmost 761m tonnes transported in 2003, 54.7% was transported by highway,34.5% by boat and 10.7% by rail. Almost all passenger transport (98.4% in 2003)is by road. According to the World Bank�s World Development Indicators, the

Private road concessions backon agenda after 1995 rescue

Mexico 21


number of cars per 1,000 people rose from 119 in 1990 to 159 in 2002, still lessthan half the OECD average.

Mexico has 108 ports. The largest are Manzanillo, Lázaro Cárdenas and SalinaCruz (all on the Pacific coast) and the Gulf port of Veracruz. Investment in theport infrastructure has totalled an estimated Ps7.4bn (US$655m) since the startof the Fox administration in December 2000. Most of the investment has beenby private operators.

Integral port administrators were created in 1993 and privatisation launched in1995. The administration of each seaport was awarded by concession to anadministrator, which operates port terminals and facilities, providing relatedport services. Foreign investors may hold up to 49% equity in a portadministrator and up to 100% equity in ventures providing some port services.Concessions last for up to 50 years.

The Salinas government managed to cut the losses of the FerrocarrilesNacionales (Ferronales, the state-owned railway company); and the Zedilloadministration split the company into regional companies and in 1997-98transferred the management of most of these companies to the private sectorunder 50-year concessions. Small loss-making segments were excluded from thesale, along with the railway running through the Tehuantepec isthmus, owingto its political sensitivity. Three regional railway companies, Noreste, Pacífico-Norte and Sureste, as well as four short lines, are now privately managed. Onlyaround 10% of cargo is transported by rail and there are few passenger services.

Mexico�s aviation industry is the second largest in Latin America after Brazil,with an estimated 30m passengers on domestic flights in 2004. Over 25international carriers fly to Mexico. The two main domestic airlines areAeroméxico and Mexicana, which operate extensive domestic routes as well asflights to major cities in the US. Both are owned by Cintra, a holding companycreated by the government in 1995 to rescue the airlines from bankruptcy afterthe collapse of the peso. Since then, Aeroméxico and Mexicana have enjoyed anear-duopoly, keeping air travel prices relatively high and restricting access tothe market. Cintra also includes two regional carriers, AeroCaribe andAerolitoral. The privatisation of the airlines that compose the Cintra consortiumhas been repeatedly postponed owing to unfavourable market conditions butthey are expected finally to be auctioned off by the end of 2005. Their saleshould boost competition. Thus far there are no low-cost airlines operating inMexico but a number of companies have signalled their keenness to enter themarket and the aviation industry seems poised for transformation in 2005-06.

The 1995 Airports Act permits up to 49% of investment in enterprises to be fromexternal sources, although authorisation for a higher percentage may beobtained from the Comisión Nacional de Inversiones Extranjeras (CNIE,National Commission for Foreign Investment). Since 1998, 34 of the country�s 35airports have been successfully auctioned (the exception is the largest, MexicoCity�s Benito Juárez airport). Aeropuertos del Sureste, grouping nine airports insix states, of which Cancún is the jewel in the crown, was won by aconsortium with Mexican, Danish, French and Spanish capital in December

Private capital plays major rolein port facilities

Railways play a minor role

Air transportation and airportsremain underdeveloped

22 Mexico


1998. A consortium of Mexican and Spanish investors won the bidding tomanage Aeropuertos del Pacífico, a group of 12 airports, including Guadalajaraand Tijuana, in August 1999. Control of Aeropuertos del Centro-Norte, a groupof 13 airports, including those serving Acapulco and Monterrey, was won by aconsortium of Mexican and French investors in May 2000.

The privatisation of Mexico City airport has been delayed indefinitely untilongoing expansion works have been completed. The Fox government hoped toconstruct a new airport for Mexico City in Texcoco, about 14 miles east of thecity centre, to ease bottlenecks at the existing Benito Juárez airport. However,the project, which would have been the administration�s flagship public worksinitiative, was abandoned in 2002 following opposition from both environ-mental groups and (particularly) landowners affected by the project. Since 2003,work has been underway to upgrade the existing Benito Juárez airport.However, it cannot be expanded because of the huge costs involved so work isalso under way to expand airport facilities in nearby urban areas (such asToluca, Morelos, Querétaro and Puebla) as a means of easing the pressure onBenito Juárez. Efforts are also underway to expand the international facilities ofregional airports in order to help alleviate the pressure on Benito Juárez.

The national telephone company, Teléfonos de México (Telmex), was privatisedin 1990. Between 1990 and 2004 fixed line density rose from 6.4 lines per 100people to 17 lines per 100 people. The number of households with access totelephony services rose from 39% in 2000 to 49.2% in 2003. However, telephonydensity varies enormously by region. The highest density (39.9 per 100 in 2004)is in Mexico City, followed by the more developed northern border states,where density is typically over 20 per 100. The eight poorest southern stateshave densities of just 5 to 10 per 100, with Chiapas at the bottom with a fixedline density of 5.1 per 100 in 2004.

Although 19 companies won concessions to compete against Telmex in thelocal telephone service market by the end of 2000, Telmex continues to wieldconsiderable market power and has been accused frequently of abusing itsposition. The Comisión Federal de Telecomunicaciones (Cofetel, the telecomsindustry regulator) has tried many times to rein in the company, withoutsuccess as Telmex has won judicial injunctions against its rulings. The Office ofthe United States Trade Representative (USTR) has pressed more successfully,through requests to the World Trade Organisation (WTO) to set up arbitrationpanels and rule on the openness of the Mexican telecoms market. Since 2001 anew telecoms law has been on the legislative agenda. However, a consensushas not been reached, and it is not clear when a proposal will be officiallypresented to Congress, or whether it will have enough support to be enacted.

Telmex�s market power and the subsequent high cost of fixed-line services are amajor reason for the explosion in mobile phone services. According to Inegi,the number of mobile telephone accounts rose from 14m in 2000 to just over40m in the first half of 2005. This took the penetration rate from just over 14per 100 people to 37.7 per 100 in 2005, although this remains low by developedcountry standards (with mobile penetration rates typically between 80 and 100in OECD countries) and moderate by the standards of other major economies

Despite market liberalisation,Telmex continues to dominate

Mexico 23


in the region (Chile�s mobile penetration rate is above 60 and those ofArgentina and Brazil above 40). The dominant player is Telcel (part of AméricaMóvil, a Telmex spin-off). However, in contrast to the situation for fixed-linetelephony, Telmex faces increasingly powerful competition in the mobile field.Telefónica Móviles México (an affiliate of Spain�s Telefónica group) hasemerged as the second-largest operator in the country.

Mobile telephony subscribers(m unless otherwise indicated)

2000 2001 2002 2003 2004Mobile telephony users 14.07 21.75 25.92 30.09 38.45

% change, year on year 82.1 54.6 19.2 16.1 27.8

Sources: Secretaría de Comunicaciones y Transportes; Comisión Federal de Telecomunicaciones.

The number of households owning a personal computer (PC) has risenmarkedly in the past decade but remains very low by OECD standards.Pyramid Research, a consultancy, estimates the stock of computers wasequivalent in 2004 to 137 PCs per 1,000 population. Moreover, regionaldisparities are large. The capital, Mexico City, has the highest percentage, with21.5% of households owning a PC, followed by Baja California (15.1%) andNuevo León (14.5%). By end-2004 a total of 14.9m Mexicans were Internet users,up from 5m in 2000. Penetration of broadband remains very low. Accordingwith the OECD, there were only 0.8 broadband subscribers per 100 people in2004, compared to an OECD average of 10.2 per 100. With penetration rates ofPCs and credit cards still very low, e-commerce remains in its infancy. However,the Fox government has been proactive in attempting to widen Internet accessand promote e-business, not least through increasing the availability ofinformation made available online by government agencies.

Mexico has a large number of daily newspapers with national, state and localmunicipal circulation. All national daily newspapers are privately owned.Several newspapers survived for decades despite meagre circulation numbers(only around 20% of Mexicans regularly read newspapers) thanks toadvertising, government subsidies, and cash hand-outs, but since the Foxadministration ceased to prop up the newspapers, some have gone out ofbusiness. The daily Novedades (founded in 1936) and Mexico�s only English-language newspaper, The News (established in 1949), ceased publication at theend of 2002. Two other dailies, Excélsior (founded in 1917 and until the 1970sthe most important newspaper in the country) and Unomásuno (established in1977), are close to bankruptcy. Reforma (founded in 1993) is the best-sellingnewspaper but is closely followed in its importance by El Universal (founded in1916). There are also a great many weekly and monthly magazines. Amongother media there are a total of 40 AM and FM radio stations and ninetelevision stations that offer a wide range of programming in the capital. Manyof these media are also available nationwide. Terrestrial TV is dominated bytwo companies, TV Azteca and Televisa.

PCs and Internet penetrationremain relatively low

Media

24 Mexico


Energy provision

State control of energy has been entrenched since oil nationalisation in 1938,and remains politically sensitive. Total installed electric power generatingcapacity stood at 49.7 gw at the end of 2003. Under existing legislation,electricity provision is almost exclusively the preserve of the state, dominatedby two public entities, the Comisión Federal de Electricidad (CFE), whichdistributes electricity nationwide and Luz y Fuerza del Centro (LyFC, theelectricity distributor for Mexico City and surrounding areas). CFE and LyFChave monopolies for electricity transmission and distribution and accountedfor 76% of installed capacity in 2003. The limited opening of the generationmarket that in 1992 allowed independent power producers to enter the market.By 2003, they accounted for 14% of installed capacity.

Electricity consumption has been expanding more rapidly than GDP growth.Electricity demand grew at an annual average rate of 4.9% in 1993-2004,compared with annual average GDP growth of 2.7%. The energy ministryprojects demand growth of 5.7% a year to 2013, requiring installed capacity of65.4 gw. Taking into account the need to retire 4.2 gw of ageing capacity overthe period, a further 26 gw of installed capacity will be required over the nextdecade. The energy ministry estimates that this will require around US$51bn infresh investment. Construction of 7.2 gw is already under way, with two-thirdsfinanced by Proyectos de Infraestructura Diferidos en el Registro del Gasto(Pidiregas, public-private partnership projects) and the rest by the public sector.Attracting sufficient additional investment to secure future supply will thereforedepend on the advance of energy sector liberalisation.

Although the 1992 opening allowed private investment in generation, throughschemes such as co-generation and production for self-consumption, to dateonly a few private power stations have been built, essentially for the firms"own consumption. This caution on the part of investors reflects the persistenceof legal uncertainty with respect both to the likely scope of future energyliberalisation and concerning the 1992 opening itself, after the Suprema Cortede Justicia de la Nación (SCJN, the Supreme Court) in 2002 issued a ruling thatcalled into question the constitutionality of the 1992 legislation. Among thepolitically difficult issues that will need to be tackled is pricing, as power rateshave long been heavily subsidised and under current legislation remain subjectto Congressional approval. Even so, inefficiencies mean that power rates arerelatively high.

There has been a decreasing emphasis on thermal and hydro generation and anincreasing focus on combined-cycle plants. Whereas thermal and hydropoweraccounted for 70% of total generation in 1996, by 2003 their combined sharehad fallen to 49.7%. In contrast, combined cycle generation rose from 7% of thetotal in 1996 to 27% in 2003. The energy ministry projects that by 2013, 45% ofgeneration capacity will be combined cycle, 18% conventional thermoelectric,and 10.9% from renewables. The advantage of combined cycle generation is thatcapacity can be installed relatively quickly and inexpensively and electricitygeneration is relatively clean. The drawback is that the shift towards combined

Reform delays threatenelectricity supply bottlenecks

Increasing reliance on naturalgas is mixed blessing

Mexico 25


cycle increases the electricity system�s reliance on natural gas at a time whenPemex�s gas production is failing to keep pace with demand, as reflected in therising gas import bill (see Economic sectors: Mining and semi-processing). By2003, 37% of electricity depended on natural gas; by 2013 it is anticipated thatover 55% will rely on natural gas.

Electricity generation by type(m gwh)

1996 2001 2003Thermal 75.6 96.4 81.4Combined cycle 10.6 25.4 55.0

Hydraulic 31.4 28.4 19.7Coal 17.8 18.5 16.7

Dual 2.7 14.2 13.8Nuclear 7.9 8.7 10.6Eolic 5.8 5.5 6.3

Total 151.9 197.1 203.6

Source: Comisión Federal de Electricidad.

The economy

Economic structureMain economic indicators, 2004(Actual unless otherwise indicated)

Real GDP growth (%) 4.4Consumer price inflation (av; %) 4.7Current-account balance (US$ m) -7,394.1

Exchange rate (av; Ps:US$) 11.3Population (m) 105.4

External debt (year-end; US$ m) 143,441.3a

a Economist Intelligence Unit estimates.

Source: Economist Intelligence Unit, CountryData.

Measured in terms of GDP per head, Mexico is the second-poorest country inthe OECD (after Turkey). GDP per head (at purchasing power parity) is around aquarter that of the US, although it is relatively high by Latin Americanstandards, but behind Argentina, Trinidad, Chile and Panama. The Mexicaneconomy has undergone a transformation since the 1980s as a result ofeconomic liberalisation and joining the North American Free-Trade Agreement(NAFTA, a free-trade bloc with the US and Canada). The transformation hasbeen particularly notable in terms of export diversification (see The externalsector) but has also been reflected in changes in the structure of GDP. Foreigntrade (real exports of goods and services plus real imports of goods andservices) has more than doubled from around a third of GDP in the 1980s to anaverage of 59% in 2000-04. The investment/GDP ratio has risen in the past twodecades, but remains low for a developing economy, at around 20% of GDP.

Services predominate but oilremains important

26 Mexico


Agriculture�s share of GDP has shrunk from around 7% in the 1980s to around4% in the past decade, although it remains an important employer: around 20%of the workforce is involved in agricultural activities. The share of services inGDP has risen from around 65% to 69%. Mining has accounted for around 1.2%of GDP in the past decade (down from around 3% in the 1980s) but this heavilyunderstates the importance of oil production to the economy and, particularly,to the Treasury. Although exports have become more diversified, the publicfinances remain heavily dependent on oil, which accounts for between one-quarter and one-third of fiscal revenue.

Comparative economic indicators, 2004Mexico a Brazil a USa Canada a Chinab

GDP (US$ bn) 676.5 604.7 11,735.0 994.1 1,681.3

GDP per head (US$) 6,445 3,375 b 40,047b 31,113 1,293GDP per head (US$ at PPP) 9,711a 8,550 b 40,047b 33,218 b 5,811

Consumer price inflation (av; %) 4.7 6.6 2.7 1.8 3.9a

Current-account balance (US$ bn) -7.4 11.6 -668.1 25.9 68.7a

Current-account balance (% of GDP) -1.1 1.9 -5.7 2.6 4.1Exports of goods fob (US$ bn) 188.0 96.5 807.5 331.1 593.4a

Imports of goods fob (US$ bn) -196.8 -62.8 -1,472.9 -279.3 -534.4a

External debt (US$ bn) 143.4a 217.9 b � � 232.7Debt-service ratio, paid (%) 16.9a 51.0 b � � 6.3

a Actual. b Economist Intelligence Unit estimates.


Economic activity is concentrated in Mexico City (usually referred to as theDistrito Federal, or DF) which accounts for over 20% of GDP. Its neighbouringstate, the heavily industrialised Estado de México, accounts for a further 10% ofGDP. The six northern border states are home to much of the country�smanufacturing, and particularly maquiladoras (in-bond assembly for re-export),producing goods that are then sold to the US. Jalisco, Puebla and Guanajuatoare also among the more prosperous states and are home to significantmanufacturing bases. On the Gulf coast, Veracruz has benefited fromagriculture and oil production. The Gulf states, particularly Quintana Roo, haveexperienced strong growth since the 1970s as a result of the development oftourism. Quintana Roo�s contribution to GDP has risen from 0.18% in 1970 to1.58% in 2003. Neighbouring Campeche has seen its contribution rise from 0.44to 1.24% over the same period, owing to oil exploration. The south-east of thecountry, which is largely agricultural, remains extremely poor. The states ofChiapas and Oaxaca, along with some areas of Guerrero, all on the Pacific sideof the country, have high poverty rates. In 2003 the three states combinedaccounted for just 4.9% of GDP.

Activity concentrated in thecapital and northern states

Mexico 27


GDP by federal district, 2003: the ten largest(% of total)

Federal district 22.8Estado de México 9.5

Nuevo León 7.3Jalisco 6.3Chihuahua 4.3

Veracruz 4.1Puebla 3.7

Guanajuato 3.5Baja California 3.4Coahuila 3.3


Economic policy

The trade and investment environment has been transformed over the past twodecades, owing to the 1994 launch of NAFTA, with the US and Canada, and,more recently, trade deals with the EU, Japan and other Latin Americancountries, including Brazil. The deregulation that began in the mid-1980s isbeing deepened, although competition policy is inconsistent and there isentrenched opposition to private involvement in some areas of the economy(especially energy). Fiscal discipline has brought a reduction in net externalliabilities, diminishing the economy�s vulnerability to the political cycle.However, policies have failed to stimulate dynamic broad-based growth.Attempts to tackle the structural problems of an extremely low tax take andunderinvestment in the energy sector have foundered on political resistance.

Since 2001, the Banco de México (Banxico, the central bank) has maintained afree-floating peso, which has increased transparency and helped to stabilise thecurrency in nominal terms. Banxico�s principal monetary policy target is theinflation rate, which was set in 2003 at 3% (plus or minus a percentage point)and its principal tool is the corto, the amount by which the central bank leavesthe banking system short of its daily demand for money. A rise in the cortodrains liquidity from the money market, applying upwards pressure on marketinterest rates. Eventually, Banxico is expected to abandon the corto in favour ofa more transparent system, such as a reference rate. However, no major changesare expected before the next government takes office in December 2006.

Greater stability of macroeconomic variables and the reduction in externalvulnerabilities have been reflected in a general narrowing of spreads betweenMexican and US rates. The spread between 91-day Certificados de Tesorería(Cetes, treasury bonds) and US 3-month Treasury bills averaged over 1,600 basispoints in the second half of the 1990s but trended down steadily in 2000-04,averaging 552 basis points in 2004. However, Banxico�s determination tocontain inflation has led to a moderate reversal of this narrowing trend sincemid-2004 as Banxico has tightened policy at a more robust pace than the USFederal Reserve. By mid-2005 Banxico�s tightening cycle was largely completedwhile that of the Federal Reserve had some way to run.

Greater policy credibilitybrings lower interest rates

Stability is prioritised overgrowth

28 Mexico


The government"s close adherence to its fiscal targets and an active debtmanagement policy has also been central factors in reducing macroeconomicvulnerabilities. Tight control of expenditure has kept the federal governmentfinances close to balance or in only moderate deficit (less than 2% of GDP)throughout the past decade. Total public sector debt has been broadly stable ataround 40% of GDP since 1994. Just over half (53%) is accounted for by thefederal government, and a further 20% is constituted by the liabilities of theInstituto para la Protección al Ahorro Bancario (IPAB, the deposit guaranteeagency) associated with the bank bail-out of the mid-1990s. The authoritieshave, however, made some headway in recent years in reducing IPAB�sliabilities, which were as high as 11.7% of GDP as recently as 2001. This hasbeen achieved through a combination of sale of physical assets belonging tointervened banks, and transfers from the federal government (reflecting fiscalsavings). Public debt management has focused on reducing reliance on foreignborrowing, reducing financing costs and extending the maturity of domesticdebt. The average maturity of domestic public debt has risen from 538 days atthe end of 2000 to 1,111 days at the end of March 2005.

Public-sector debt, Mar 2005(% of GDP)

Domestic debt 25.6 Federal government 11.9 FARACa 2.0 IPABb 8.5 Pidiregasc 1.2External debt 15.6 Federal government 9.9 Pidiregas 5.0Total public-sector debt 41.1

a Fideicomiso de Apoyo para el Rescate de las Autopistas Concesionadas (toll roads' rescue fund).b Instituto para la Protección al Ahorro Bancario (deposit guarantee agency). c Proyectos deInfraestructura Diferidos en el Registro del Gasto (Pidiregas, deferred financing projects).

Source: Secretaría de Hacienda y Crédito Público.

However, major weaknesses in the public finances persist, most importantly aweak tax base and a heavy dependence on oil revenue..[between 25% and 35%?What is the subject of the sentence. The federal government raises a mere 12%of GDP in non-oil taxes, one of the lowest levels in the world. Oil revenuetypically accounts for between one-quarter and one-third of total fiscal revenue.Political resistance to reforms aimed at raising the tax take has remainedentrenched. The most recent attempt was in December 2003, when thegovernment submitted to Congress a proposal to extend value-added tax (VAT)to previously exempted items, such as food and medicine. Although the PartidoAcción Nacional (PAN) supported the initiative, the Partido de la RevoluciónDemocráta (PRD) was firmly against and the Partido RevolucionaroInstitucional (PRI) deeply divided. The result was that the bill was rejected. Theweak tax take severely constrains the government�s ability to make theinvestments in health, education and physical infrastructure that are needed inorder to improve living standards and competitiveness and promote moredynamic GDP growth. While historically high oil prices have helped mask the

Good fiscal results belieunderlying weaknesses

Mexico 29


urgency of the situation in recent years, the underlying position has worsenedowing to the deteriorating financial situation of Pemex, the state oil monopoly.Fiscal demands on Pemex will need to be eased in order to free up investmentresources to sustain oil production. Without reform, Mexico�s public financesface a crisis over the next decade.

A sweeping privatisation programme was launched in the mid-1980s, entailingthe sale of state banks, airlines, telecommunications and broadcasting com-panies. The number of state-owned enterprises fell from 1,155 in 1982 to 215 in1994. The state reassumed control of many companies, particularly banks andthe airlines, in the aftermath of the 1994 peso crisis, which precipitated wide-spread bankruptcies. However, most banks have since been resold and themain airlines are expected finally to be tendered before the end of 2005.However, the energy and electricity industries remain under state control andpolitical resistance to private involvement remains staunch.

As part of a strategy to boost domestic savings and contribute to fiscal sustain-ability, the authorities began a radical transformation of the pensions system inthe mid-1990s, moving from a pay-as-you-go system!with all funds managedcollectively by the Instituto Mexicano del Seguro Social (IMSS, the socialsecurity institute)!to one where workers have individual pension contributionshandled by private pension managers, the Administradoras de Fondos para elRetiro (Afores). The system began to receive contributors� savings in September1997. By October 2004, Afores were managing pensions for 32.9m people. Ofthese, over 70% were concentrated in the five largest Afores. To begin with,Afores were open only to IMSS affiliates but since 2002 Afores have also beenable to offer services to self-employed workers, who account for around halfthe workforce. Government workers remain members of a separate public-sector plan. Afores have been instrumental in aiding the treasury to extendaverage debt maturities, providing a market for long-term peso-denominatedbonds with maturities of up to 20 years.

Mexico boasts Latin America�s most extensive network of free-trade agreements(FTAs). The most important is NAFTA, which joins Mexico�s market with thoseof the United States and Canada. However, with an FTA with the EU in effectsince 2001 and one with Japan launched in April 2005, Mexico now has freetrade pacts with all the world�s richest markets. Once Mexico�s other free tradepartners are factored in, the total represents two-thirds of global GDP. Mexicohas in recent years signed bilateral FTAs with Argentina, Bolivia, Brazil, Chile,Colombia, Costa Rica, El Salvador, the European Free-Trade Association,Guatemala, Honduras, Israel, Nicaragua, Uruguay and Venezuela. The Foxgovernment is also working on FTAs with India, Panama, and Trinidad andTobago and talks with China have been launched, with the aim of trade andinvestment and reaching a pact to avoid double tax payments. A central aim ofthe proliferation of FTAs is to reduce the country�s dependence on trade withthe US.

Private pension funds are partof strategy to boost savings

Continued focus on wideningextensive network of FTAs

Sweeping privatisationexcludes energy

30 Mexico


A criticism of NAFTA has been its failure to stimulate development of linkagesbetween export-oriented sectors and the domestic economy. The Foxadministration has sought to implement a more active industrial policy aimedat spreading the benefits of increased market access more widely throughoutthe Mexican economy. The economy ministry is responsible for implementingthis policy using micro-credits and incentives for the establishment ofproduction chains and certain preferences in public procurement. Eventually,such policies should help boost the growth of small and medium-sizedenterprises, although significant results have yet to materialise, not least due tobudgetary constraints.

Economic performance

Mexico has suffered from a volatile growth pattern. In the 1980s and early1990s a weak policy environment contributed to oil-related boom and bust andexcessive external indebtedness. Economic reforms have since helped reduceexternal vulnerabilities, bringing greater stability to macroeconomic variables.However, an export-led boom in the second half of the 1990s, stimulated bythe launch of NAFTA, gave way to sluggish growth rates. This is largely becausepolicymakers have failed to secure support for structural reforms needed toboost competitiveness and raise investment levels.

The external sector is a prime driver of growth. While exports have diversifiedaway from oil, they have become heavily dependent on a single market: theUS. The 2001 recession in the US prompted Mexico�s GDP to contract by 0.2%and Mexican output was slow to respond to the recovery of US demand in2002-03. Only in the second half of 2003 did Mexican GDP begin to strengthenmarkedly. Part of the explanation lies in the profile of Mexican exports to theUS, which are dominated by investment goods. The US recovery was led byconsumption, but by the second half of 2003 investment was playing a greaterrole. Mexico�s economy continued to strengthen throughout 2004, expandingby 4.4% for the year as a whole. This compares with average annual GDPgrowth of just 0.7% in 2001-03. Growth began to slow in the first half of 2005,but, in common with growth in the US, remained relatively robust. Full-yeargrowth in 2005 is expected to be around 3-3.3%.

Although the external sector has continued to be the principal driver of growthsince the recovery began in late 2003, there are signs that demand is becomingmore broad-based, with private consumption playing a growing role. Lowinflation has been bringing greater stability to real incomes and consumercredit has been expanding from a low base. Remittances from migrant workersoverseas (mainly in the US) have also become a major support to privateconsumption in recent years. Inward remittances totalled US$13.4bn (2.1% ofGDP) in 2003 and US$16.6bn (2.5% of GDP) in 2004. They continued to growstrongly in the first half of 2005, when they totalled US$9.3bn. The governmentis working on plans to encourage recipients to invest a portion in the localeconomy, although thus far their main function has been in support ofconsumption.

Fox government seeks toencourage backward linkages

Three-year stagnation endsin 2004

Mexico 31


One of the chief gains of the past decade has been the attainment of broadprice stability, in a country with a history of high and volatile inflation. Averageannual consumer price inflation has fallen from 35% in 1995-6 to 5% in 2002. In2003 Banxico introduced a long-term inflation target of 3%, with a toleranceband of plus or minus 1 percentage point. Although the target was missed in2003, Banxico maintained it in 2004, only to miss it again this time becausehigh commodity prices and the recovery of domestic demand contributed to anincrease in price pressures, with robust private consumption enabling producersto pass on part of their rising costs to consumers. As a result of these trends,year-end inflation rose to 5.2% in 2004, from 4% in 2003. However, the 2004performance must be seen in the context of rising inflationary pressuresglobally. Inflationary pressures showed signs of abating during the first half of2005, supported by Banxico�s tight monetary stance. Annual inflation wasrunning at 4.3% in June.

Although Mexican inflation is at historically low levels, several structuralproblems in non-tradeables sectors have yet to be addressed to bring about alasting reduction of inflationary expectations. In particular, failure to liberalisethe energy sector maintains upwards pressure on electricity costs, which feedsthrough to final prices.

Inflation2004 2000-04

% change, year on year Annual averageConsumer prices (year-end) 5.2 6.0

Sources: Banco de México; Instituto Nacional de Estadística Geografía e Informática.

Regional trends

Since the 1980s government policy has been geared towards reducing theinequalities between regions (see Economic structure) but resources havetended to be misallocated as politics has influenced spending decisions. Effortshave been made to devolve more power to the federal states by increasingtransfers and the number of policy areas under state control in a bid to boostlocal democracy and improve service delivery. Responsibility for primary andsecondary education was devolved from federal to state governments in 1993and responsibility for health services was devolved in subsequent years.However, the funding for these services continues to come overwhelminglyfrom federal government resources.

One of the Fox government�s flagship promises is an ambitious plan, the PlanPuebla-Panamá (PPP), to develop the south of the country and integrate it morewith the markets of Central America. The PPP envisages a major push todevelop infrastructure in nine southern states as well as in Central America. Butfinancing constraints have made for limited progress to date. The PPP wastransferred from the Presidencia de la República (Office of the President) inJanuary 2003 to the Secretaría de Relaciones Exteriores (SRE, Ministry ofForeign Relations), under the Vice-Ministry for Economic Relations andInternational Co-operation.

Inflation at historical low butconvergence with US elusive

Decentralisation remainsuneven; flagship plan is stalled

32 Mexico


The states� ability to extract more concessions has been increasing since theestablishment in July 2002 of the Conferencia Nacional de Gobernadores(Conago, National Governors� Conference). Conago aims to provide thegovernors with a forum to reach a common negotiating position in theirdiscussions with the federal government. At the outset, Conago comprised onlyopposition governors. However, since 2003, all governors have participated andPAN governors have been among the most active. Conago meetings havealready become a regular feature of the political process, taking place severaltimes a year. A recurrent theme has been a discussion of how excess petroleumrevenues should be shared with state administrations.

Conago�s most important initiative to date has been the creation in September2003 of the Convención Nacional Hacendaria (CNH, the National Conventionof Public Finance). The CNH held its first convention in February-August 2004with the aim of agreeing proposals for an overhaul of the tax and spendingresponsibilities of federal, state and municipal governments in order to stream-line and improve the efficiency of the tax system. One of the two most import-ant proposals to have emerged concerns VAT. Building on an earlier proposal,Conago recommended that levying of VAT (which is charged at a rate of 15%)be split between the federal and state governments, with 12 percentage pointsraised by the federal government and three by state administrations. However,the finance ministry is insistent that, in return, the VAT base be widened toinclude foodstuffs and medicines. Widening the VAT base continues to facefierce political resistance, following its rejection by Congress in December 2003.The other key proposal to have emerged from the CNH is the creation of an oilstabilisation fund. The fund would be capitalised by above-budget oil revenue,in order to cushion fiscal revenue from fluctuations in international oil prices.As of August 2005, this proposal had yet to be fleshed out.

In the longer term, the CNH has the potential to forge wider consensus on amore ambitious fiscal reform. Above all, it offers an opportunity to implementa reform entailing effective cross-agency and inter-governmental co-ordination.

Economic sectors

Agriculture

The agricultural sector�s share of GDP has fallen from an average of 6.9% in the1980s to 4% in the past five years. Although employment in agriculture has alsodeclined, it remains a major source of jobs. According to the Secretaría delTrabajo y Previsión Social!STPS, the employment and social welfare ministry)agriculture accounted for 6.7m jobs or around 16.4% of national employment in2004, compared with 7.5m jobs (19.5% of the total) in 1998. Since the NorthAmerican Free-Trade Agreement (NAFTA) came into force in 1994, theagricultural sector has been undergoing a period of adjustment. Production hasdiversified and agricultural exports have increased, but the sector has largelygrown at lower rates than the rest of the economy. Although producers for theexport market (mainly fruit and vegetables) have benefited from NAFTA, the

State governors become amore effective pressure group

Small producers struggle to becompetitive

Mexico 33


rest of the sector has had difficulty in shifting production to more competitivecommodities. This appears to be because, despite direct transfers under thePrograma de Apoyos Directos al Campo (Procampo, a programme providingyearly cash payments to producers of cotton, rice, sunflower, barley, beans,maize, sorghum, soybeans and wheat) to cushion the impact on small andsubsistence crop producers from liberalisation, other forms of support!notablytraining and credit!have been lacking. As liberalisation under NAFTAcontinues, a range of support for the rural sector will continue to be needed toboost productivity, rural employment and incomes.

Currently the government has a number of programmes to assist rural prod-ucers to adjust to the new competitive environment. One of the most impor-tant, the Programa de Certificación de Derechos Ejidales y Titulación de Solares(Procede, the land rights programme for ejidos), provides titles to ejidatarios(farmers of ejido land, community lands over which farmers have usufructrights). The aim of this is to enable farmers to use their land as collateral forloans, which in turn should allow them to invest and improve their prod-uctivity. Ejido land accounts for around 63% of Mexico"s farmland. By March2005 the Ministry for Agrarian Reform and agrarian tribunals had providedtitles to about 3.8m ejidatarios, covering 75m ha and accounting for 95% of thetotal. The official target is to give title to all ejidatarios by 2006.

In line with NAFTA, Mexico has shifted from guaranteed price support to directpayments to enable producers of basic crops to adjust to increased competition.Under Procampo, cash transfers are provided with the aim of encouragingproducers to cultivate more productive crops. Under the Fox government,around 2.8m rural producers benefit from Procampo. However, it has yet toencourage much crop diversification and in many cases continues to supportunprofitable subsistence production.

An important challenge in the future will be to improve the ejidatarios� accessto credit. Following the failure of public agricultural development banks to actas efficient intermediaries, they were closed and a new institution, FinancieraRural (Rural Finance), was created in 2002. It will focus on giving credit topoorer farmers, who are currently excluded from private-sector lending, for thepurchase of machinery and equipment to increase productivity.

Mining and semi-processing

Mexico has abundant mineral resources. The sector was liberalised in the early1990s, and the largest mines privatised. Limits on concessionable land wereeliminated and the duration of exploration concessions was increased fromthree years to six years, while exploitation concessions increased from 25 yearsto 50 years, with the possibility of an additional 50-year term. Mexico is theworld�s largest producer of silver, with mines in the states of Chihuahua andZacatecas. Mexico also leads the world in fluorite, celestite and sodiumsulphate, and is one of the biggest producers of bismuth, graphite, antimony,arsenic, barite, sulphur and copper.

Support programmes to helpwith adjustment

Abundant minerals resources

34 Mexico


Mexico is the world"s fifth-largest oil producer, averaging output of 3.4mbarrels/day (b/d) of crude oil in 2004. Just over half (1.8m b/d) is exported,mostly to the US. This makes Mexico the third largest supplier of oil imports tothe US, after Canada and Saudi Arabia. Although it is not a member, it has attimes co-operated with the Organisation of Petroleum Exporting Countries(OPEC) to adjust global crude oil supplies. Over 70% of Mexican crudeproduction is extra-heavy Maya at 22.3° American Petroleum Institute (API).Over three quarters comes from just one field, Cantarell in the Gulf of Mexico.

The oil and gas sectors are controlled by the state-owned oil and gas monopoly,Petróleos Mexicanos (Pemex). Although Pemex has a refining joint-venture withRoyal Dutch/Shell in Texas, Mexico does not allow production joint-ventures.Outside companies have been brought in to undertake drilling operations,although to date they have been doing so under limited service and perform-ance contracts. The constitution allows Pemex to enter into contracts involvingworks and delivery of services. However, it also states that any remunerationshould be made in cash, and under no circumstances will a percentage of thegoods or participation in the results of the exploitation be granted.

Despite high oil prices in most of the period, Pemex has posted an operatingloss every year since 1998. Pemex�s weak finances are primarily the result of theheavy fiscal demands of the federal government (see The economy: Economicpolicy). Calculations of fiscal transfers are based on Pemex�s revenue, ratherthan its profits. In 2004, having earned a record US$69.1bn in revenue, Pemex�spre-tax profits were US$40.7bn, and transfers to the federal government in theform of taxes, fees and royalties were US$41.9bn. Consequently, in contrast tomost major oil companies!which posted record profits in 2004!Pemex madean operating loss of US$1.25bn. Pemex�s bloated bureaucracy also contributes toits financial problems by perpetuating high operating costs.

Consequently, Pemex has been left short of resources for investment in explor-ation to maintain reserves levels, which have been declining steadily over thepast two decades. According to Pemex, total reserves (which include bothproven and probable) stood at 46.9bn barrels at the start of 2005, down from56.2bn barrels in 2000. Proven reserves were just 17.6 bn barrels at the end of2004, down from 23.5bn barrels in 2000. This is equivalent to just over 14 years�production at current rates. Unless proven reserves are increased, Mexico willbecome a net oil importer within the next decade. A long-awaited reform toPemex�s fiscal regime passed in June 2005 will, if effectively implemented,increase Pemex�s financial autonomy and its ability to investment. But imple-mentation will require advances by the federal government on politicallydifficult tax reforms, in order to compensate for lower transfers from Pemex.

The Fox administration has succeeded in increasing Pemex�s investment budget,to around US$10bn a year in 2004 (from around half that level in the precedingdecade). However, according to official estimates, US$15bn per year in capitalinvestment is required just to maintain oil production levels in the face ofdeclining output from Cantarell, where production is expected to start fallingfrom 2006. Pemex�s ageing infrastructure (around half its pipelines are over 30years old) and maintenance backlog also constitutes serious environmental and

A major producer, but infinancial difficulties

Mexico 35


safety concerns, that have been highlighted by a series of spills and accidents inrecent years.

There has been a steady reduction in Pemex�s monopoly over petrochemicalsproduction. Modifications to the constitution in November 1996 restricted thestate�s exclusive production rights to only eight basic petrochemicals. Otherthan in those products, the private sector may now participate in theproduction of petrochemicals and may own 100% of the equity of a producingcompany, but only 49% of the equity in plants owned by Pemex. Thisrestriction has deterred investors and an attempt to part-privatise somecomplexes foundered in 1999. Apparently the Fox administration has opted toleave the status quo unchanged, and has concentrated its political efforts onattempting to liberalise the electricity sector.

Mexico has proven natural-gas reserves of 13.5trn cu ft, according to Pemex. Thisplaces its gas reserves sixth in the hemisphere (after the US, Venezuela, Canada,Argentina and Bolivia) and 34th in the world. The US�s natural-gas reserves are187trn cu ft, whereas Venezuela has 147trn cu ft. Since 1989, Mexican demandfor natural gas has outpaced production. According to BP�s statistical review ofworld energy, in 2004 Mexico produced 37bn cu metres of natural gas butconsumed 48.2bn cu metres. This has been reflected in a rising import bill fornatural gas. Spending on imports of natural gas rose from US$366m in 2000 toUS$1.7bn in 2004.

Despite stiff political opposition, in August 2003 Pemex began to seek privateinvolvement in the exploration and production of non-associated natural gas(gas which exists without the presence of oil) through multiple service contracts(MSCs). The auctions of the MSCs were delayed several times owing to theneed to redraft the texts of the contracts to avoid any constitutional challengeby the opposition, but they finally went ahead in late 2003. The first contractswere to produce gas in the Burgos Basin, which lies across the border fromTexas"s most productive gas fields. A total of US$8bn in investment is expected,which is estimated to double the production of gas in the area to 2bn cu ft/dayby 2006.

Manufacturing

In the second half of the 1990s the manufacturing sector was galvanised by thelaunch of NAFTA, which provides privileged access to the US market.Maquiladora (in-bond assembly for re-export) activities focused on supplyingthe US market proliferated. The maquiladora sector produces a variety of goods,including vehicles, electrical goods, textiles and furniture. The majority of themaquiladoras are based along the US-Mexico border. In recent years centres ofspecialisation have emerged: electronics production is based in Guadalajara,auto-parts manufacture is based in the Saltillo-Monterrey industrial corridor,television production is based in the Tijuana-Mexicali area, and plants in thestates of Puebla and Tlaxcala concentrate on textiles.

Gradual entry of private sectorin gas and petrochemicals

Manufacturing is heavilyoriented towards US market

36 Mexico


Three subsectors account for almost 75% of manufacturing production. Food,beverages and tobacco accounts for 30% of manufacturing output, machineryand equipment accounts for another 29% and petrochemicals, rubber andplastics a further 15%. Clothing and footwear�s share in total manufacturing hasbeen declining: it accounted for just 6.3% of the total in 2004, down from 7% asrecently as 2002. However, it accounts for a larger share of manufacturing jobs(nearly 12%).

The automotive sector is one of the most dynamic and important branches ofmanufacturing in terms of production, employment, investment and exports. Itemploys around 500,000 workers and accounts for around 2.6% of GDP, about14% of manufacturing output and almost 6% of foreign direct investment (FDI)inflows. The industry is concentrated in the northern states, because of theirvicinity to the US market, and in the central states around Mexico City. WithinNAFTA, Mexico has become an important export hub for vehicles to the USand Canada.

Mexican producers of labour-intensive manufactures face growing competitionfrom Asia, particularly China. Textiles and apparel, and computers andelectronic products are the product categories in which Mexico"s share of theUS market has suffered the most from competition from China since the latterentered the WTO in 2001. The expiry in January 2005 of the Multi-FibreAgreement, whereby textile imports to developed markets are subject to quotas,has deepened China�s penetration of world markets, intensifying thecompetitive threat facing Mexico�s apparel industry.

However, Mexico�s geographical location is allowing it to graduate from being asupplier of cheap manufacturing labour to becoming more closely integrated inthe production and distribution systems of US industry. In sectors where the�just-in-time logistics� and transportation costs are crucial to competitiveness(such as vehicle and other heavy manufacturing), Mexico�s locationaladvantages more than compensate for its higher labour costs. Even so, Mexicowill continue to lose competitiveness in the long term if the reform agenda isnot fully implemented.

Rising competitive pressures have contributed to a decline in manufacturing�sshare in overall GDP and employment over the past five years. Havingaveraged around 20% of GDP in the 1990s, manufacturing had fallen to 16.6% ofGDP by 2004. Its share in overall employment fell from 12% in 2000 to 10.9% in2004. The US recession in 2001 was a major factor behind a decline inmanufacturing output in 2001-03, when the sector contracted by an average of1.9% per year. Similarly, the strengthening of US demand was the major factorbehind the recovery of manufacturing activity in 2004, when output expandedby 3.8%. However, in 2004 signs emerged of a strengthening domestic market,supported by strong inflows of worker remittances and growth of credit from alow base.

Mexico 37


Construction

As in other economies, construction activity is cyclical and growth ratesfluctuate. The sector typically accounts for around 4% of GDP and 5-6% ofemployment. Construction contracted during the 2001 recession but since thenit has benefited from a series of factors, the most important of which are adecline in interest rates; the increasing availability of mortgage finance; and theFox government�s house-building and infrastructure programmes, which havebeen supported by windfall oil revenue. Growth of construction acceleratedfrom 2.1% in 2002 to 3.3% in 2003 and 5.3% in 2004.

The Fox government�s National Housing Plan, which was unveiled inNovember 2001, aims to: co-ordinate all public bodies involved in the sector;encourage primary and secondary markets for mortgages; deregulate the sector;and promote a greater supply of land for housing. The government increasedthe financing for the Fondo de la Vivienda del Instituto de Seguridad yServicios Sociales de los Trabajadores del Estado (Fovisste, the public body thatfinances the construction of housing for public workers), allowing it to provide100,000 extra mortgages. Fovissste grants an average of 18,000 mortgages ayear. The Instituto del Fondo Nacional de Vivienda para los trabajadores(Infonavit, the public body that receives contributions for housing from allprivate-sector workers) also moved to speed up its concession of mortgages. It isestimated that the country has 22m homes, and a shortage of about 3.8m, withdemand adding 800,000 units per year to that figure. During 2003 an estimated500,000 new homes were built.

Financial services

The banking sector has strengthened markedly since the mid-1990s nearcollapse of the system and subsequent re-capitalisation of many of the banksby the Treasury through the deposit guarantee agency, now called the Institutopara la Protección del Ahorro Bancario (IPAB, the bank savings protectioninstitute; see The economy: Economic policy). The lifting of restrictions onforeign ownership in 1998 has led to a major increase in foreign participation inthe banking sector. Foreign capital now controls all of Mexico�s majorcommercial banks with the exception of Mercantil del Norte (Banorte). Theshift in ownership combined with an overhaul of financial and bankingregulations have led to improved capitalisation and a consolidation of thesector. However, with total (bank and non-bank) domestic credit to the private-sector credit equivalent to just 16.8% of GDP, much remains to be done toextend the availability of credit.

Construction boosted bylower rates, public investment

A stronger banking sector butprivate credit remains scarce

38 Mexico


Major developments in financial sector framework

1999

Limited deposit insurance scheme introduced for all deposits, under the Institutopara la Protección del Ahorro Bancario (IPAB, the bank savings protection institute).

2000

New bankruptcy and secured lending legislation was approved. New law onforeclosure and guarantees clarified the legal procedures for the recovery of badloans and provided lenders with tighter loan guarantees.New capital adequacy requirements are being phased in. Full implementation wasscheduled for 2003, but by the end of 2001 the majority of banks already compliedwith the new requirements. New portfolio rating and provisioning requirementshave also been introduced.

2001

Congress granted powers to the Comisión Nacional Bancaria y de Valores (CNBV,National Bank and Securities Commission) to determine early corrective measures(such as limiting dividend pay-outs) for banks with a deteriorating capital base, aswell as to disclose all relevant information so that depositors are able to ascertain thefinancial strength of each bank. Tighter rules on related lending were introduced,limiting the amount and providing a more precise definition of related parties.

2004

The ceiling on deposit insurance provided by IPAB scheme provides been reducedfrom 10m unidades de inversion (UDIs, a unit indexed to inflation) to 400,000 UDIs(about US$110,000) by the beginning of 2005. This amount is in line withinternational standards (in the US the limit is US$100,000).

Public banks (�development banks�) have traditionally played a significant rolein the financial system. Also badly hit by the 1995 crisis, the sector wasrecapitalised through the Fideicomiso Liquidador de Instituciones yOrganizaciones Auxiliares de Crédito (Fideliq, a trust for the liquidation offinancial institutions) but still requires a degree of consolidation as there isconsiderable overlap between the institutions. The most important develop-ment banks are Nacional Financiera (Nafinsa, mainly for small and medium-sized businesses), the Banco Nacional de Comercio Exterior (Bancomext, forforeign trade) and the Banco Nacional de Obras y Servicios Públicos (Banobras,for public works and services). A new bank, Financiera Rural, was set up inDecember 2002 to replace the troubled Banco Nacional de Crédito Rural(Banrural, for agriculture). Another agricultural development institution, theFinanciera Nacional Azucarera (Fina, for the sugar industry) is being liquidated.In 2001 the Fox administration founded two banks: the Sociedad HipotecariaFederal (SHF, Federal Mortgage Bank), modelled loosely on the US Fannie-Mae,was established to increase the availability of mortgages for low-incomeearners. The Banco del Ahorro Nacional y Servicios Financieros (BANSF,National Savings and Financial Services Bank) was established to boostdomestic savings.

Public banks remainsignificant players

Mexico 39


The decline in lending by commercial banks witnessed since the 1995 bankingcrisis has been partly offset by increased lending from other sources. In the pastfew years, total financing of the non-financial sector has been broadly stable ataround 24% of GDP. However, this represents a marked reduction incomparison with the 1990s, reflecting the overall shrinkage of domestic sourcesof finance. In 1996 overall domestic credit to the non-financial private sectorstood at 37.4% of GDP, of which 80% was supplied by commercial bank lending.By 2004, total domestic credit to the non-financial private sector had fallen tojust 16.8% of GDP, with 56% supplied by commercial bank lending. Banksremained cautious about extending credit to the productive sector in theaftermath of the mid-1990s banking crisis. However, in recent years many havebeen improving their credit skills as a prelude to increasing their exposure. Withthe public sector�s borrowing requirement having been scaled back, lending tothe private sector will become an increasingly important part of banks�businesses. The has already been reflected in the growth from a low base in thepast two years of mortgage and consumer finance.

Outstanding credit of the private banking system(Ps bn unless otherwise indicated; end-Dec)

2003 2004 % changeTotal credit portfolio 987.4 1,076.8 9.0Active 956.3 1,049.7 9.8 Commercial 300.0 369.4 23.1 Consumer credit 111.2 165.3 48.7 Housing 105.5 116.5 10.5 To government agencies 207.4 165.6 -20.2 To IPABa 206.9 190.1 -8.1

a Instituto para la Protección al Ahorro Bancario (deposit guarantee agency).

Source: Comisión Nacional Bancaria y de Valores.

Despite growth since 2000, the corporate bond market remains tiny, accountingfor just over 2% of GDP in 2003-04. Only large blue-chip companies with a highcredit rating have been able to obtain financing through issuing debt.Regulatory changes in 2000-02 widened the range of assets in which theprivatised pension funds are permitted to invest, lifting restrictions on pesodebt holdings and allowing them to invest in corporate bonds. However, thelatter must have at least an A-grade rating, which is the case for few Mexicanfirms. At end-2004, almost 89% of the US$40bn in funds managed by privatelymanaged pension funds was still invested in government debt. External formsof financing raised by Mexico�s non-financial private sector have remainedaround 8-9% of GDP.

Overall credit to private sectorremains small

40 Mexico


Sources of finance of non-financial private sector(% of GDP)

2000 2001 2002 2003 2004External 9.4 8.9 9.0 8.4 7.3 Direct 5.8 5.7 5.9 5.4 4.6 Bonded 3.6 3.2 3.2 3.1 2.7Domestic 18.5 17.0 17.0 16.5 16.9 Commercial banks 12.7 10.7 10.0 9.2 9.5 Development banks 1.2 1.3 1.3 1.2 0.6 Non bank institutions 1.7 2.0 2.4 2.6 3.0 Bonds 1.5 1.5 1.7 2.1 2.1 Suppliers 1.5 1.5 1.5 1.4 1.6Total 28.0 25.9 26.1 24.9 24.2

Source: Banco de México

Mexico has a single stock exchange, the Bolsa Mexicana de Valores (BMV). Themarket has performed well, with its main indices increasing by nearly 150% in2003-04. It is Latin America"s second largest exchange, after Brazil"s, and in 2004recorded one of the strongest performances of any exchange in the world.However, the stock exchange remains small by international standards, withmarket capitalisation of just 25% of GDP in 2004 (compared with over 100% ofGDP in Chile). Four stocks dominate the Indice de Precios y Cotizaciones (IPC,the general equities index), accounting for almost 50% of the index. These arethe telecommunications companies Teléfonos de México (Telmex) and AMX,the supermarket chain Walmex (owned by Wal-Mart of the US) and a cementcompany, Cemex. Foreign investment is an important source of capital. Totalforeign investment in the Bolsa Mexicana de Valores (BMV, the Mexican StockExchange) at the end of 2004 stood at just over US$80bn, which was equivalentto 48% of the IPC"s total market capitalisation.

Since 2001 a new debt instrument has been available for private firms andpublic issuers: the certificado bursátil (stockmarket certificate). This certificatecombines an easy issuing process with flexible characteristics, but has specialrestrictions to guarantee the return of the bondholders� initial investment. SinceDecember 2001 state and municipal governments, along with state-ownedcompanies such as Pemex, have issued Certificados Bursátiles.

A new securities market law was approved by Congress in 2001. It seeks toprotect the rights of minority shareholders, establish clear rules on corporategovernance priorities and reduce the issuance of shares with limited votingrights. It has established a new framework to regulate and sanction incorrectmarket behaviour to make it easier to combat practices such as insider tradingand market manipulation. The CNBV is for the first time allowed to shareinformation with foreign financial authorities.

Stock exchange remains smalland illiquid

Mexico 41


The Bolsa, end-2004% change in index % of market capitalisation

IPCa 46.9 100.0Communications & transport 53.4 38.6

Commerce 30.8 15.4Transformation industry 41.1 14.7

Construction industry 45.9 12.6Services 68.4 7.5Others 37.6 7.4

Extractive industry 60.6 3.8

a Equities index.

Source: Bolsa Mexicana de Valores.

Other services

Since trade liberalisation in the 1980s and the launch of NAFTA in 1994, theretail sector has become more diversified and the quality of goods hasimproved. Foreign companies have entered the market, setting up price clubs,discount stores and hyper-market chains, sometimes merging with or evenbuying major Mexican retailers. That foreign competition is epitomised by US-based giant Wal-Mart, which opened in Mexico as Walmex in 1991. With morethan 700 units (including over 411 retailers and 285 restaurants) and 112,000employees in mid-2005, Walmex is the country"s largest private employer andaccounted for around 25% of retail sales in 2004. Competition from foreignfirms has pushed leading Mexican companies to modernise, and as the mainurban centres have come to be increasingly well-served, they have widenedtheir areas of operation to the smaller provincial cities. Walmex�s biggestcompetitors are Gigante, Soriana and Comercial Mexicana. In October 2003,they created a joint purchasing and distribution alliance with the aim ofdeveloping comparable market power to that of Walmex. This has enabledthem to bring prices to broadly the same levels as those of Walmex on manyranges. They are also seeking to win customers through improved service andprovision of higher-end goods.

Mexico�s natural attractions and abundant cultural heritage, including pre-Columbian and Spanish colonial sites, make it a major tourism destination. Thecountry is the eighth most popular destination in the world in terms of visitorsand 11th in terms of revenue earned. It is also the most popular touristdestination in Latin America, with nearly four times as many visitors as Brazil.Since the 1990s the government has taken an active role in tourism promotionand seeks to foster the growth of high-end niche markets, such as cultural andecological tourism. More recently, it has adopted a high-profile campaign toattract more tourists from the EU. However, Mexico remains heavily dependenton the US market, which accounts for 80-85% of visitors. The sector typicallygenerates about 8% of GDP and about 9% of all jobs are related to tourism,directly or indirectly. Mexico�s tourism sector was hit hard following theSeptember 11th 2001 terrorist attacks on the US, not only because of a fall invisitor arrivals but also because of tightened security at the US-Mexico border.In 2004 the number of overseas visitors to Mexico rose by 11.6% to a record

Tourism suffers from 2001attacks but rebounds in 2004

Retail sector becomes moredeveloped and competitive

42 Mexico


11.6m, finally completing Mexico�s recovery from the fall in arrivals in 2001.However, the number of day trippers was still 11% below its 2000 peak. Thetourism industry should benefit from the expected launch of several low-costairlines in 2005-06 (see Resources and infrastructure: Transport,communications and the Internet).

The external sector

Trade in goods

The years approaching the launch of the North American Free-Trade Agreement(NAFTA) in 1994 were characterised by a rapid expansion of manufacturingexports. Whereas oil accounted for over 60% of export earnings in the 1970sand early 1980s, by the early 1990s manufacturing accounted for over 70% ofthe total. Growth of manufacturing exports intensified following NAFTA�simplementation, as maquiladora (in-bond assembly for re-export) operationsalong the US border flourished. As maquiladora exports entail a large importcomponent, the maquiladora trade balance (as a proxy for value-added)provides a more accurate measurement of the industry�s contribution to theexternal accounts. In 1998 oil earnings plummeted owing to a collapse in worldprices and maquiladora value-added overtook oil earnings as the most import-ant source of foreign exchange. In 1999-2002 oil export revenue recoveredstrongly, in line with world prices, but they continued to be outpaced bygrowth of maquiladora value added. In 2003, and despite flat export volumesof crude, oil once again overtook net maquiladora earnings by a significantmargin. This trend intensified in the first half of 2005. With oil export prices atUS$37.91/barrel, oil earnings in the first six months of the year totalledUS$14.2bn, while maquiladora net exports totalled US$10.2bn (itself still agrowth rate of 9.3%).

Oil earnings and maquiladora value added(US$ bn)

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004Oil earnings 7.6 8.7 11.8 11.5 7.3 10.0 16.1 13.2 14.8 18.6 23.7Maquiladora trade balance 5.8 4.9 6.4 8.8 10.5 13.4 17.8 19.3 18.8 18.4 19.2

Source: Banco de México.

Foreign trade regulations

Overview

Mexico belongs to the World Trade Organisation and has thus eliminated mostexport permits, substantially reduced export taxes and direct export subsidies, andeliminated fiscal incentives for exports. A variety of export-incentive programmes!including special temporary-import programmes!serve to boost exports sales. Thelegislation governing maquiladoras in Mexico makes the country an attractive placeto manufacture for export to the US.

Diversification of earningsaway from oil

Mexico 43


In 1993 Congress approved changes to Mexico�s custom law that eased manyadministrative burdens associated with foreign trade. Further changes to the law in1998 include tougher penalties for under-invoicing and shortened periods thatmaquiladora merchandise and equipment may remain in Mexico under in-bondstatus. Since January 1999 inventory may be stored for 18 months. Fixed assets(machinery, tools and spare parts) may remain in Mexico for five years, or thedepreciation period specified in the income tax law, if the latter is longer.

Export incentives

The Programa de Importación Temporal para Producir Artículos de Exportación(Pitex) allows duty-free entry on temporary imports of raw materials, parts,machinery and equipment used to manufacture exports. The Programa de EmpresasAltamente Exportadoras (Altex) reimburses value-added tax (VAT) and import tariffsfor customs clearance. The Banco Nacional de Comercio Exterior (Bancomext, thedevelopment bank for foreign trade) provides credit for exporters below commercialbank rates. Maquiladoras do not pay import duties as their products are destined forre-export. However, if those products come from countries that enjoy no preferentialtrade arrangements with Mexico the exporter has to seek the granting of low or zerotariffs through a Programa de Promoción Sectorial (Prosec, sectoral promotionprogramme) or through the granting of a special permission from the Secretariat ofthe Economy. Under a scheme announced in October 1999, maquiladoras have theoption to declare a minimum taxable profit equivalent to 6.9% of the total value oftheir assets or to 6.5% of their total operating costs and expenditure, with tax beingbe paid on which-ever sum is greater, or to request agreement with the internalrevenue service on transfer prices in order to determine taxable profits.

Exchange controls

There are no foreign-exchange controls.

Import tariffs

Import tariffs range from 0% to 35%, with the trade-weighted average tariff about 2.9%(using a formula from the Secretariat of the Economy that weights products with zerotariffs). Besides duties, the 15% VAT rate applies to all imports except those to theborder region, where a 10% rate applies.

Import licences

Import licence requirements have been phased out gradually and few are still inforce.

Import quotas

Because of Mexico�s vast array of free-trade agreements, most import quotas havebeen transformed into tariff-rate quotas (TRQs, volume quotas). Imports up to aspecific volume limit enter the country at a favourable tariff. After that volume limitis reached, a higher tariff is imposed. However, some quotas persist for sensitiveproducts, such as maize, and for countries that do not enjoy preferential trade accessto Mexico.

44 Mexico


Despite efforts to diversify, including the development of an unrivalled networkof free-trade agreements (see The economy: Economic policy), Mexico�s relianceon the US market has increased rather than diminished in recent years. The USaccounted for 88% of export sales in 1998-2004, up from 83% in 1991-97. Many ofthese trade agreements are still relatively young and exploiting them to the fullwill require significant logistical support and investment in research of the newmarkets. Over the longer term, trade links with other markets should graduallydevelop as investment links deepen.

Mexico�s trade surplus with the US has risen substantially in recent years,totalling US$53.7bn in 2004. However, Mexico�s deficits with other tradingpartners have been widening more rapidly, leading to a significant widening ofthe merchandise trade deficit in 2004, to 1.3% of GDP (from 0.9% of GDP in2003). This trend continued in the first five months of 2005, according to thelatest available data. The surplus with the US rose by 24.9% year on year toUS$24.6bn, but was outweighed by the widening of Mexico�s deficits with theEU and Asia (mainly China). The overall deficit more than doubled fromUS$1.1bn in January-May 2004 to US$2.6bn in the same period of 2005. Onefactor has been the relative strength of the Mexican peso throughout thisperiod. This, combined with strong growth of domestic demand, hascontributed to especially strong growth of consumer and intermediate goodsimports, many of them sourced from Asian producers.

Merchandise trade balances by major partner(US$ m)

2000 2001 2002 2003 2004US 19,865 26,798 35,341 38,933 53,695EU -9,586 -11,423 -11,506 -12,428 -14,968

China -2,676 -3,745 -5,620 -8,426 -13,388Overall trade balance -8,337 -9,617 -7,633 -5,779 -8,811


Invisibles and the current account

Since 2001, the overall services account has been running a deficit of around0.6-0.7% of GDP. The tourism account generally runs a surplus of 0.6 0.7% ofGDP. The Mexican tourism sector had a bumper year in 2004, prompting thesurplus to rise to US$5.2bn (0.76% of GDP). This surplus is partly offset by adeficit on the balance for crossborder visits (mainly day trippers). Since the late1990s, this deficit has typically been around 0.2% of GDP. Outgoings on theinsurance, transport and freight account typically constitute a further 1% of GDP.

The structural deficit on the income account has fallen in the past two decades,from an average of more than 4.7% of GDP in the 1980s to 3.2% of GDP in the1990s and under 2% of GDP in the past few years. The major factor behind thistrend has been the decline in interest payments on the external debt. This inturn reflects a reduction of Mexico�s external debt stock, as well as easier accessto more favourable borrowing terms as the policy environment has improved.Since 2000, the burden of interest payments has been further reduced as aresult of the marked decline in OECD interest rates. Having averaged over 6% of

Export earnings still heavilydependent on US market

Tourism, interest paymentsand transfers are key drivers

Mexico 45


GDP in the mid-1980s, interest outgoings fell steadily to around 2.6% of GDP bythe end of the decade. In 2002-04 they averaged just 1.8% of GDP.

Interest income typically accounts for 0.7-1% of GDP. It is earned partly ondeposits of foreign reserves abroad and partly on investments made overseasby Mexican companies. Other factor service receipts are made up of royalties,technical assistance payments and earnings from Mexicans living in thenorthern border region but who work in the US.

The surplus on the current transfers balance has become a crucial support toMexico�s external accounts. Transfers are made up largely of remittances frommigrant workers, mostly based in the US. Having averaged 1.3% of GDP in thesecond half of the 1990s, the current transfers surplus has been rising steadilysince 2001, reaching 2.5% of GDP by 2004. Although some of the increase is aresult of better registration of the remittances, easier and cheaper paymentoptions and a rise in the number of migrant workers have also contributed.

For decades the current account was the Achilles� heel of the Mexican economy.Until the mid-1990s it seemed impossible that the economy would grow at thehigh rates needed to create enough jobs and reduce poverty without causing alarge imbalance in the current account. But higher rates of domestic savings anda floating peso have reduced the need for external resources, while providing acorrection mechanism that has kept the current-account deficit at sustainablelevels (generally below 3% of GDP since the mid-1990s). Particularly stronggrowth of worker remittances and a decline in income outgoings thanks to lowinterest rates resulted in the current-account deficit narrowing to 1.1% of GDP in2004, its lowest level in seven years.

Capital flows and foreign debt

Although it has fallen as net external indebtedness has been scaled back,Mexico�s financing requirement (current-account deficit plus amortisations ofexternal debt) remains significant. It peaked at US$63bn (10.9% of GDP) in 2000,declining steadily thereafter, to US$35bn (5.2% of GDP) in 2004. Since 2001, thecurrent-account deficit has been comfortably outweighed by inflows of long-term capital in the form of foreign direct investment. Net flows of foreign directinvestment averaged 2.4% of GDP in 2001-04, compared with an averagecurrent-account deficit of 1.8% of GDP. Virtually all of the remainder of thefinancing requirement has been covered by inflows of medium and long-termdebt for most of the past decade. In recent years, Mexico has recorded healthycapital-account surpluses, supporting a strong accumulation of reserves.

FDI inflows rose sharply from the mid-1990s as NAFTA opened up previouslyprotected Mexican industries to foreign investment, and trade liberalisationencouraged companies from developed countries to take advantage of Mexico�sstrategic advantages. Annual average inflows rose from US$2.6bn in 1980-93 toUS$14.2bn in 1994-2004. After Brazil, Mexico is the second largest host of foreigndirect investment in Latin America. Between them, the two countries accountfor around 65% of inflows. However, inflows into Mexico have remained short

The current account hasstabilised at below 3% of GDP

Capital account position hasbeen strengthened

The region�s second-largest FDIinflows but below potential

46 Mexico


of potential. Inflows as a percentage of GDP averaged 2.6% in 1994-2004. This ishigher than Brazil (2.3%) but well below China (4% of GDP) and Chile (5.3% ofGDP). The Fox government�s aim to boost annual FDI inflows to aroundUS$20bn has been thwarted by a lack of structural reform, its inability toliberalise foreign investment legislation further, and the legal uncertaintysurrounding foreign investment in the energy sector. Although FDI inflows rosemarkedly in 2004, to US$16.6bn (from US$11.4bn in 2003), the increase wasalmost entirely the result of a single transaction, the US$4.2bn purchase ofMexico�s Bancomer during the first quarter by Spain�s Banco Bilbao VizcayaArgentaria (BBVA).

In 1994-2004 the country attracted a cumulative US$148bn, with half absorbedby manufacturing (mainly maquila) and a further quarter by the financialservices sector (with foreign capital now controlling all but one of Mexico�smajor banks). In terms of country of origin, 65% of these FDI inflows havecome from the US and Canada and about 20% from the EU. US investors aredominant in the maquiladora field, while EU investors, particularly Spanishfirms, have made some of the largest investments in financial services andtelecommunications.

Net portfolio investment flows have fluctuated in the past decade but havebeen following a strong upwards trend since 2002 as falling US rates have madeMexico an increasingly attractive option for investors in search of yield. Anotable feature of trends in this period has been a strong increase in foreignholdings of peso-denominated federal government paper, the stock of whichrose from US$1.4bn at the end of 2001 to US$8.9bn at the end of March 2005.

Having been the first of several Latin American countries to default on externaldebt obligations in the early 1980s, the first to secure a Brady Plan debt-restructuring deal in 1991, and having required a US$50bn emergency loanpackage to avert default in December 1994, policy improvements since thenhave markedly strengthened Mexico�s external solvency position. In 2002 thesovereign was awarded investment-grade status by Fitch, Moody�s and Standard& Poor�s, the three major ratings agencies.

According to the latest data from the World Bank, total external debt at end-2003 was US$140bn (21.9% of GDP, one of the lowest ratios in the region) downfrom a peak of US$166.5bn (34.6% of GDP) in 1999. This is, however, a narrowdefinition of Mexico�s external liabilities. The World Bank�s Global DevelopmentFinance statistics, which is the source for our back series, is close to Banxico�s�gross external debt before adjustments� series. According to Banxico, grossexternal debt before adjustments totalled US$130.5bn (19.3% of GDP) at end-2004, a slight (1.1%) decrease on the end-2003 stock. Adjustments took the totalstock to US$165.9bn (24.5% of GDP), a 2.4% increase on the end-2003 stock. Themost important adjustments are those associated with Proyectos deInfraestructura Diferidos en el Registro del Gasto (Pidiregas); public-privatepartnership projects, mostly involving Petróleos Mexicanos (Pemex), the stateoil monopoly. This �total adjusted� external debt series is available only from2002. According to Banxico, Pidiregas liabilities are included in the debt figuresupon completion of the projects and two years before they fall due.

Foreign debt has been scaledback

Mexico 47


Although the public external debt has been progressively reduced, private-sector debt has risen strongly since 1995, as improved macroeconomic stabilityhas enabled large companies to tap the international capital markets. Privatedebtors now account for over 40% of total external borrowings.

Foreign reserves and the exchange rate

Despite the free-floating currency, international reserves have accumulatedmarkedly over the past four years. Reserves rose from US$17bn (5.9% of GDP) in1995 to US$64.2bn (9.5% of GDP) in 2004, with growth especially strong since2001. To slow this accumulation, Banxico introduced a rules-based mechanismin May 2003, selling dollars directly in the foreign-exchange market in order topreserve its current position of reserves, but at the same time reducing the rateof reserve accumulation. Each quarter Banxico announces the total amount ofdollars it will supply to the currency market in the following quarter. Thismakes financial sense as the interest rate that Banxico has to pay on domesticnotes issued to sterilise the reserves is higher than the yield it receives frominvesting the reserves in liquid instruments.

Banxico has established a reputation for being committed to a floating peso,resisting pressures to intervene. Although the peso depreciated in real (trade-weighted) terms for three consecutive years in 2002-04, it has remainedrelatively strong, reflecting firm export earnings and inflows of portfolioinvestment, in the context of low OECD rates. The general trend during the firstseven months of 2005 has been for the Mexican peso to appreciate mildlyagainst the US dollar. From January to August 4th the accumulated nominalappreciation of the peso against the dollar was 5.2%, taking the bilateralexchange rate to Ps10.58:US$1.

Rule-based mechanism slowsreserves accumulation

48 Mexico


Regional overview

Membership of organisations

The North American Free-Trade Agreement (NAFTA), which came into force onJanuary 1st 1994, is the world�s largest free-trade association (FTA). Betweenthem, its members!the US, Canada and Mexico!accounted for 35% of globalGDP and 8.8% of the world�s population in 2004. Tariffs between the US andCanada were fully eliminated by 1998. In recognition of imbalances indevelopment, the timetable for Mexico to dismantle its trade barriers is moregradual. The phase-out of tariffs between the US and Mexico is due to becompleted by 2008, although there have been a number of agreements foraccelerated implementation and only a small number of tariffs remain.However, a number of barriers to intra-NAFTA trade will persist. In particular,special rules apply to trade in textiles, vehicles and parts, and agriculturalproducts. In addition, the Mexican state has retained exclusive rights toownership, production and investment in oil, gas, refining, petrochemicals,nuclear energy and electricity. The treaty also covers trade in services, includingoverland transport, ports, telecommunications, financial services andgovernment procurement. Since NAFTA came into force, around two-thirds offoreign direct investment inflows into Mexico have come from the US andCanada and close to 90% of its export sales have been to its NAFTA partners.

Mexico was admitted as a full member of the Asia-Pacific Economic Co-operation (APEC) forum in 1993 and to the OECD in 1994, having joined what isnow known as the World Trade Organisation (WTO) in 1986. It has developedan extensive network of free trade agreements, that embrace many countries inthe hemisphere as well as the EU, Japan, Israel and the European Free-TradeAssociation (EFTA; see The economy: Economic policy).

NAFTA

Other internationalorganisations

Mexico 49


Appendices

Sources of information

Banco de México (the central bank), www.banxico.org.mx

Instituto Nacional de Estadística, Geografía e Informática (INEGI, the NationalInstitute of Statistics, Geography and Informatics), www.inegi.gob.mx

Presidencia de la República, Informe de Gobierno (annual)

Secretaría de Hacienda y Crédito Público (SHCP, Ministry for Credit and PublicFinance), www.shcp.gob.mx

IMF, International Financial Statistics (monthly)

Inter-American Development Bank, Economic and Social Progress in LatinAmerica (annual)

OECD, Economic Survey of Mexico, 2002

UN, Monthly Bulletin of Statistics

UN Economic Commission for Latin America and the Caribbean, EconomicSurvey of Latin America and the Caribbean (annual)

UN Food and Agriculture Organisation, Production Yearbook

World Bank, Global Development Finance (annual)

World Bank, World Development Report (annual)

Héctor Aguilar Camín and Lorenzo Meyer, In the Shadow of the MexicanRevolution: Contemporary Mexican History, 1910-1989, University of Texas Press,1993

Enrique Krauze, La Presidencia Imperial, Tusquets Editores, 1997

Julia Preston and Samuel Dillon, Opening Mexico: The Making of a Democracy,Farrar, Straus and Giroux, 2004

Alan Riding, Mexico: Inside the Volcano, I B Tauris, London, 1987

Main government portal, www.gob.mx

Secretaría de Energía (SE, Ministry of Energy), www.energia.gob.mx

Secretaría de Gobernación (SG, Ministry of Interior), www.gobernacion.gob.mx

Secretaría del Trabajo y Previsión Social (STPS, Ministry of Labour and SocialWelfare), www.stps.gob.mx

Secretaría de Turismo (Sectur, Ministry of Tourism), http://www.mexico-travel.com or www.sectur.gob.mx

Instituto Federal Electoral (IFE, Federal Electoral Institute), www.ife.org.mx

Petróleos Mexicanos (Pemex), www.pemex.com

International statistical sources

Select bibliography andwebsites

National statistical sources


Bolsa Mexicana de Valores (BMV, Mexican Stock Exchange), www.bmv.com.mx

Comisión Nacional Bancaria y de Valores (CNBV, banking and securitiescommission), www.cnbv.gob.mx/

Reference tablesPopulation(�000 unless otherwise indicated; mid-year)

2000 2001 2002 2003 2004Total 100,569 101,826 103,040 104,214 105,350 % change 1.3 1.2 1.2 1.1 1.1 Male 50,070 50,683 51,274 51,845 52,396 Female 50,500 51,143 51,766 52,369 52,954

Source: Consejo Nacional de Población

Labour force and employment2000 2001 2002 2003 2004

Labour force (m)Male 26.4 26.4 26.9 27.3 28.0Female 13.7 13.7 14.2 14.2 15.4Total 40.2 40.1 41.1 41.5 43.4Participation rate (%)Male 76.8 75.6 75.1 74.6 75.5Female 36.4 35.3 35.9 35.3 37.5Overall 55.7 54.5 54.5 54.0 55.6Employment by activity (% of total)Agriculture 18.0 17.9 17.9 16.8 16.4Retail trade 14.8 15.2 15.7 16.2 16.5Manufacturing 12.0 11.8 11.0 10.9 10.9Construction 6.5 6.2 6.3 6.8 6.5

Sources: Instituto Nacional de Estadística, Geografía e Informática; Secretaría del Trabajo y Previsión Social.

Gross internal primary energy supply(petajoules)

1998 1999 2000 2001 2002Coal 246 250 258 294 316

Hydrocarbons 4,597 4,670 4,572 4,607 4,566 Crude 2,853 2,864 2,829 2,870 2,843 Condensates 146 125 131 138 121 Non-associated gas 363 422 435 431 446 Associated gas 1,235 1,259 1,177 1,169 1,156

Electricity 412 502 494 446 422 Hydroelectricity 253 336 342 292 259 Geothermal 58 58 61 57 56 Nuclear 100 108 90 97 107 Wind 0 0 0 0 0

Mexico 51


Gross internal primary energy supply(petajoules)

1998 1999 2000 2001 2002Biomass 346 343 341 345 343 Bagasse 98 91 87 92 88 Wood 248 252 254 253 255Total 5,600 5,766 5,664 5,692 5,647

Source: Secretaría de Energía, Balance Nacional de Energía.

Non-financial public-sector finances(Ps bn unless otherwise indicated)

2000 2001 2002 2003 2004Revenue 1,188 1,271 1,387 1,600 1,774Expenditure 1,248 1,312 1,460 1,648 1,797

Balance -60.5 -40.3 -72.7 -48.0 -23.3 % of GDP -1.1 -0.7 -1.2 -0.7 -0.3

Sources: Banco de México; Secretaría de Hacienda y Crédito Público.

Federal government budget revenue and expenditure(Ps bn unless otherwise indicated; cash basis)

2000 2001 2002 2003 2004Revenue 868.3 939.1 989.4 1,133.0 1,270.2 Taxes 581.7 654.9 728.3 766.6 770.1 Income tax 258.8 285.5 318.4 337.0 345.2 VAT 189.6 208.4 218.4 254.4 285.0 Non tax 286.6 284.2 261.1 366.4 500.1 Oil duties 196.1 187.6 140.5 252.2 353.6

Expenditure 953.6 1,002.4 1,133.7 1,236.9 1,373.7 Wages & salaries 86.5 93.1 101.7 120.3 108.1 Interest payments 176.5 166.8 158.5 159.7 174.8 Transfers to local governments 439.1 492.4 593.6 638.6 740.9 Capital expenditure 19.4 16.3 15.2 29.4 35.9Balance -85.3 -63.3 -144.3 -103.9 -103.5Primary balance 91.1 103.5 14.2 55.8 71.3% of GDPRevenue 15.8 16.2 15.8 16.4 16.6Expenditure 17.3 17.2 18.1 17.9 18.0Balance -1.6 -1.1 -2.3 -1.5 -1.4Primary balance 1.7 1.8 0.2 0.8 0.9



Money supply(Ps bn unless otherwise indicated; end-period)

2000 2001 2002 2003 2004Money (M1) incl others 465.5 527.5 596.7 679.3 736.4 % change, year on year 14.2 13.3 13.1 13.8 8.4

Quasi-money 1,033.1 1,157.9 1,227.8 1,274.4 1,426.2Money (M2) 1,498.6 1,685.4 1,824.5 1,953.7 2,162.5 % change, year on year -4.5 12.5 8.3 7.1 10.7

Source: IMF, International Financial Statistics.

Interest rates(%; period averages unless otherwise indicated)

2000 2001 2002 2003 2004Lending interest rate 16.9 12.8 8.2 6.9 7.2

Deposit interest rate 8.3 6.2 3.8 3.1 2.7Money market interest rate 17.0 12.9 8.2 6.8 7.1Long-term bond yield 16.9 13.8 8.5 7.4 7.7


Gross domestic product(market prices)

2000 2001 2002 2003 2004Total (US$ bn)At current prices 581.4 622.1 649.1 639.1 676.5Total (Ps bn)At current prices 5,497.7 5,811.8 6,267.5 6,895.0 7,634.9At constant (1993) prices 1,604.8 1,602.3 1,615.3 1,638.1 1,709.6 % change, year on year 6.6 -0.2 0.8 1.4 4.4Per head (Ps)At current prices 55,018 57,402 61,158 66,478 72,742At constant (1993) prices 16,060 15,825 15,762 15,794 16,288 % change, year on year 5.2 -1.5 -0.4 0.2 3.1

Sources: Banco de Mexico, Instituto Nacional de Estadística, Geografía e Informática; US Census Bureau.

Mexico 53


Nominal gross domestic product by expenditure(Ps bn at current prices; % of total in brackets)

2000 2001 2002 2003 2004Private consumption 3,682.5 4,044.9 4,326.5 4,731.2 5,227.0

(67.0) (69.6) (69.0) (68.6) (68.5)

Government consumption 612.6 683.4 759.9 855.7 890.5(11.1) (11.8) (12.1) (12.4) (11.7)

Gross fixed investment 1,174.3 1,162.0 1,205.9 1,304.9 1,541.0(21.4) (20.0) (19.2) (18.9) (20.2)

Stockbuilding 134.8 53.4 91.7 114.9 119.6(2.5) (0.9) (1.5) (1.7) (1.6)

Exports of goods & services 1,704.1 1,598.5 1,678.4 1,919.4 2,295.7(31.0) (27.5) (26.8) (27.8) (30.1)

Imports of goods & services 1,810.6 1,730.4 1,794.9 2,031.2 2,438.8(32.9) (29.8) (28.6) (29.5) (31.9)

GDP 5,497.7 5,811.8 6,267.5 6,895.0 7,634.9


Real gross domestic product by expenditure(Ps bn at constant 1993 prices; % change year on year in brackets)

2000 2001 2002 2003 2004Private consumption 1,106.1 1,133.9 1,151.3 1,177.4 1,242.3

(8.2) (2.5) (1.5) (2.3) (5.5)Government consumption 157.6 153.9 153.6 155.2 153.3

(2.6) (-2.4) (-0.1) (1.0) (-1.2)

Gross fixed investment 334.5 315.7 313.5 314.7 338.2(11.4) (-5.6) (-0.7) (0.4) (7.5)

Stockbuilding 46.5 51.0 48.9 32.1 13.9(0.3)a (0.3)a (-0.1)a (-1.0)a (-1.1)a

Exports of goods & services 563.5 542.5 550.7 565.9 631.0(16.5) (-3.7) (1.5) (2.8) (11.5)

Imports of goods & services 603.4 594.7 602.8 607.2 669.1(21.6) (-1.5) (1.4) (0.7) (10.2)

GDP 1,604.8 1,602.3 1,615.3 1,638.1 1,709.6(6.6) (-0.2) (0.8) (1.4) (4.4)

a Change as a percentage of GDP in the previous year.



Gross domestic product by sector(% real change; constant 1993 prices)

2000 2001 2002 2003 2004Agriculture, livestock, forestry & fishing 0.6 3.5 0.1 3.5 4.0Mining 3.8 1.5 0.4 3.7 2.5

Manufacturing 6.9 -3.8 -0.7 -1.3 3.8Construction 4.2 -5.7 2.1 3.3 5.3

Electricity, gas & water 3.0 2.3 1.0 1.6 2.3Commerce, restaurants & hotels 12.2 -1.2 0.0 1.6 4.9

Transport & communications 9.1 3.8 1.8 5.0 9.7Community & social services 5.5 4.5 4.2 3.9 4.6Financial services & real estate 2.9 -0.3 0.9 -0.6 1.7

Imputed bank services 6.8 6.5 7.6 7.1 7.5GDP 6.6 -0.2 0.8 1.4 4.4


Prices and earnings(% change, year on year)

2000 2001 2002 2003 2004Consumer prices (av) 9.5 6.4 5.0 4.5 4.7Average nominal wages 23.5 12.5 5.4 8.6 6.0

Average real wages 12.8 5.8 0.4 3.9 1.3Unit labour costs 7.7 6.8 0.6 -7.5 -1.8

Sources: Banco de Mexico; International Labour Organisation; OECD.

Production of principal crops('000 tonnes)

1999 2000 2001 2002 2003a

Sugarcane 45,106 42,867 45,501 45,800 44,944Maize 17,706 17,557 20,134 19,210 19,300

Sorghum 5,720 5,842 6,517 5,203 5,213Wheat 3,021 3,493 3,276 3,232 3,275Beans 1,059 888 1,063 1,546 1,612

Barley 454 713 762 737 791Rice 327 351 227 227 231

Soybeans 133 102 122 84 84

a Estimates.

Source: Presidencia de la República, Tercer Informe de Gobierno.

Mexico 55


Livestock production('000 tonnes unless otherwise indicated)

1999 2000 2001 2002 2003b

Beef 1,400 1,409 1,445 1,451 1,470Pork 994 1,030 1,058 1,086 1,119

Lamb 31 33 36 37 40Goat meat 37 39 39 42 42

Poultrya 1,754 1,849 1,952 2,037 2,161Milk (m litres) 9,008 9,443 9,612 9,745 10,022

Eggs 1,635 1,788 1,892 1,896 1,925Honey 55 59 59 55 62

a Includes turkey. b Estimates.

Source: Presidencia de la República, Tercer Informe de Gobierno.

Minerals production('000 tonnes unless otherwise indicated)

2000 2001 2002 2003 2004Gold (tonnes) 25.8 25.7 23.6 22.2 24.5Silver (tonnes) 2,746.9 3,030.4 3,146.3 2,945.7 3,093.4

Lead 160.6 148.6 138.7 144.3 141.6Copper 339.0 349.4 314.8 303.8 352.3

Zinc 358.6 427.3 431.7 412.3 384.3Antimony 0.1 0.1 0.2 0.4 0.5

Arsenic 2.5 2.4 1.9 1.7 1.8Bismuth 1.1 1.4 1.1 1.1 1.0Iron 6,795.4 5,269.8 5,965.4 6,759.2 6,889.5

Manganese 156.1 99.8 88.4 114.6 135.9Sulphur 851.4 878.2 887.0 1,052.0 1,121.5

Graphite 30.3 21.4 13.9 8.7 14.8Barite 127.7 142.0 163.6 287.5 306.7Flourite 635.2 619.5 622.5 756.3 842.7

Celestite 157.4 145.8 94.0 130.3 87.6Sodium sulphate 0.0 507.0 551.5 586.1 608.0


Crude oil and gas production2000 2001 2002 2003 2004

Crude oil production (m barrels/day) 3.01 3.13 3.18 3.37 3.38 % change, year on year 3.6 3.8 1.6 6.1 0.4 Oil reserves (proven & probable;

bn barrels) 56.2 53.0 50.0 48.0 46.9Proven oil reserves (bn barrels) 23.5 21.9 20.1 18.9 17.6Gas production (m cu ft/day) 4.679 4.511 4.423 4.498 4.573 % change, year on year -2.3 -3.6 -2.0 1.7 1.7Gas reserves (m barrels equivalent) 11.994 13.528 14.056 13.422 13.48

Sources: Petróleos Mexicanos.


Manufacturing GDP(% real change, year on year)

2000 2001 2002 2003 2004Food, beverages & tobacco 3.9 2.3 1.9 1.7 2.7Textiles, apparel & leather 5.4 -8.6 -5.9 -6.7 1.6

Wood & products 3.9 -6.7 -4.9 -2.2 0.6Paper & products 2.7 -4.3 -1.8 -1.0 1.9Chemicals, petrochemicals, rubber &

plastics 3.3 -3.8 -0.4 1.5 3.8Non-metallic minerals, excl

petroleum 4.1 -1.7 3.8 0.1 5.2Basic metals 3.0 -7.1 1.3 4.1 6.0

Metals, machinery & equipment 13.6 -6.9 -2.0 -4.9 5.1Other 8.2 -2.1 -3.6 -1.4 2.6Total 6.9 -3.8 -0.7 -1.3 3.8


Stockmarket indicators1999 2000 2001 2002 2003 2004

Share price index (year-end) 7,129.9 5,652.2 6,372.3 6,127.1 8,795.3 12,917.9 % change 87.8 -20.7 12.7 -3.8 43.5 46.9

Market capitalisation (US$ bn) 154.0 125.7 126.6 104.7 122.5 170.1

Sources: Bolsa Mexicana de Valores.

Real retail sales(% change, year on year)

2000 2001 2002 2003 2004Grocery shops 6.49 -5.43 -4.15 3.35 -4.25

Record, toy & gift shops 3.27 9.38 -0.94 3.21 -0.57Clothing & shoe shops -0.72 -1.31 -4.56 0.15 5.05

Furniture & household goods 15.80 5.38 3.30 9.12 11.25Ironmongers 7.55 -7.38 -3.99 -0.71 1.94Vehicle sales 25.17 3.82 -0.61 -3.71 5.75

Vehicle parts 1.06 0.23 1.31 4.61 2.76Pharmacies 6.12 4.13 5.64 18.05 5.18

Bookshops & stationers 59.84 23.95 10.03 7.98 13.90Petrol stations -0.17 -1.64 -5.60 -6.05 -2.92

Department stores & others 13.65 22.36 4.57 5.10 9.54Supermarkets & self-service 8.12 3.87 3.26 5.65 8.99Total 9.99 2.70 0.00 3.34 4.90


Mexico 57


Main composition of trade(US$ m; fob-cif)

2000 2001 2002 2003 2004Exports fobManufactured goods 146,497 141,288 141,961 140,983 157,973Oil 16,135 13,200 14,830 18,602 23,667Agricultural products 4,217 3,903 3,866 4,664 5,421Mining products 521 389 389 517 939Total exports incl others 166,121 158,780 161,046 164,766 187,999Imports cifIntermediate goods 133,638 126,149 126,508 128,831 149,289Capital goods 24,130 22,496 20,992 20,205 22,599Consumer goods 16,691 19,752 21,178 21,509 25,359Total imports incl others 174,458 168,396 168,679 170,546 196,810


Main trading partners(% of total)

2000 2001 2002 2003 2004Exports fob to:US 88.7 88.5 88.1 87.6 87.5Canada 2.0 1.9 1.9 1.8 1.8Japan 0.6 0.4 0.3 0.7 1.1Spain 0.9 0.8 0.9 0.9 1.0Imports cif from:US 73.1 67.6 63.2 61.8 56.3China 1.8 2.6 4.1 6.1 3.8Germany 3.6 4.0 4.0 4.0 3.6South Korea 2.4 2.4 2.6 2.7 3.0

Source: IMF, Direction of Trade Statistics.

Tourism2000 2001 2002 2003 2004

Foreign tourist arrivals excl frontier travelArrivals ('000) 9,674 10,153 9,885 10,353 11,533Revenue (US$ m) 5,816 5,942 6,084 6,680 6,680

Frontier travelDay trippers ('000) 81,565 77,103 75,352 68,690 72,139Revenue (US$ m) 2,277 2,244 2,492 2,393 2,591

Sources: Instituto Nacional de Estadística, Geografía e Informática; Presidencia de la República, Tercer Informe de Gobierno.


Inward foreign direct investment(% of total unless otherwise indicated)

2000 2001 2002 2003 2004Total (US$ m) 16,910 27,721 15,325 11,664 16,115Leading countries of originUS 71.6 76.9 63.2 55.0 42.9Spain 11.7 3.0 4.2 14.6 39.4Switzerland 0.9 0.5 2.8 2.7 7.1Canada 4.0 3.5 1.2 1.6 2.2Netherlands 15.3 9.3 7.8 5.0 1.8

Leading sectors (% of total inflows)Manufacturing 56.4 22.0 42.6 44.6 52.2Financial services & real estate 28.2 52.0 29.2 16.9 29.5Transport & communications -13.4 10.6 5.3 14.5 7.7Commerce 14.1 8.0 10.5 10.1 5.9Services incl tourism 11.4 5.6 7.0 10.0 2.6


Balance of payments(US$ m)

2000 2001 2002 2003 2004Goods: exports fob 166,121 158,780 161,046 164,766 187,999Goods: imports fob -174,458 -168,396 -168,679 -170,546 -196,810

Trade balance -8,337 -9,617 -7,633 -5,780 -8,811Services: credit 13,712 12,660 12,692 12,533 13,913

Services: debit -16,036 -16,218 -16,740 -17,134 -18,562Income: credit 6,019.5 5,366.5 4,098.5 3,941.9 5,140.8Income: debit -20,948.9 -19,109.1 -16,032.5 -15,872.9 -16,118.1

Current transfers: credit 7,023.2 9,359.9 10,303.7 13,895.3 17,123.6Current transfers: debit -29.5 -21.9 -35.2 -37.2 -80.1

Current-account balance -18,596.0 -17,578.8 -13,346.6 -8,453.1 -7,394.1Direct investment in Mexico 16,782.0 27,636.0 15,129.0 11,372.0 16,602.0Direct investment abroad 0.0 -4,404.0 -929.0 -1,784.0 -2,239.0

Inward portfolio investment(incl bonds) 9,046.0 15,172.0 6,239.0 14,045.0 14,815.0

Outward portfolio investment 1,290.0 3,857.0 1,134.0 90.0 1,718.0

Other investment assets 5,809.0 -3,287.0 11,601.0 8,627.0 -4,066.0Other investment liabilities 198.0 -1,214.0 -3,378.0 -4,126.0 -5,888.0Financial balance 33,125.0 37,760.0 29,796.0 28,224.0 20,942.0Net errors & omissions 2,729.0 -1,549.0 -2,493.0 -1,613.0 -1,775.0Overall balance 7,127.0 7,314.0 7,358.0 9,817.0 4,104.0Financing (� indicates inflow)Movement of reserves -3,752.2 -9,225.1 -5,860.2 -8,354.0 -5,180.2Use of IMF credit & loans 1,193.9 0.0 0.0 0.0 0.0

Sources: Banco de Mexico; IMF, International Financial Statistics.

Mexico 59


External debt, World Bank series(US$ m unless otherwise indicated; debt stocks as at year-end)

1999 2000 2001 2002 2003Public medium- & long-term 87,900 81,500 77,000 76,300 77,500Private medium- & long-term 50,000 49,900 54,100 53,900 53,400

Total medium- & long-term debt 137,900 131,400 131,100 130,200 130,900 Official creditors 21,800 20,800 19,900 20,500 20,600 Bilateral 5,150 3,600 3,100 3,020 2,700 Multilateral 16,700 17,200 16,800 17,500 17,900 Private creditors 116,150 110,440 111,270 109,810 110,210

Short-term debt 24,100 18,900 14,600 9,900 9,180 Interest arrears 0 0 0 0 0Use of IMF credit 4,470 0 0 0 0

Total external debt 166,470 150,300 145,700 140,100 140,080Principal repayments 23,296 44,493 34,700 31,500 30,000

Interest payments 11,976 14,043 12,637 11,100 10,640 Short-term debt 1,920 1,890 837 500 340Total debt service 35,272 58,536 47,337 42,600 40,640

Ratios (%)Total external debt/GDP 34.6 25.9 23.4 21.6 21.9Debt-service ratio, paida 22.3 30.4 25.5 22.7 20.9

Note. Long-term debt is defined as having original maturity of more than one year.

a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

Foreign reserves(US$ m; end-period)

2000 2001 2002 2003 2004Total reserves incl gold 35,579 44,804 50,664 59,018 64,198Total international reserves excl gold 35,509 44,741 50,594 58,956 64,141

Gold, national valuation 69.5 62.6 69.8 61.8 56.9


Exchange rates(Ps per unit of currency unless otherwise indicated; annual averages)

2000 2001 2002 2003 2004US$ 9.5 9.3 7.9 10.8 11.3£ 14.3 13.4 11.9 17.6 20.7� 8.7 8.4 7.5 12.2 14.0

C$ 6.37 6.03 5.05 7.70 8.67Rmb 1.14 1.13 0.96 1.30 1.36

¥ 0.088 0.077 0.063 0.093 0.104


Editors: Justine Thody (editor); Fiona Mackie (consulting editor)Editorial closing date: August 8th 2005

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]

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