Remember the giant sucking sound? That was the catchy campaign slogan on which businessman H. Ross Perot ran as an independent in the 1992 presidential election. The sound was supposed to represent American jobs disappearing across the southern border as a result of the extension of the North American Free Trade Agreement between the United States and Canada to include Mexico.
Bill Clinton, who also campaigned on an anti-NAFTA platform to please his union backers, promptly turned around once elected and got the pact ratified. While some jobs did move south, it didn’t impact the overall U.S. employment picture. By the end of the decade, we were enjoying full employment with pockets of labor shortages. Even though leading Democratic candidates in the 2008 presidential primaries still threatened to ‘renegotiate’ NAFTA, it still stands and, by and large, is judged a success.
And nowhere is that more the case than in Mexico. The country that in the 1980s teetered on the brink of bankruptcy has completely turned around. Not all of its success can be attributed to free trade with the United States — financial deregulation and bank privatization, for instance, began in 1990 — but access to the giant U.S. market has been instrumental in transforming the country from a struggling oil exporter to an industrial power. Currently, the United States buys over 85 percent of Mexico’s exports and 90 percent of its manufactured goods. In 1980, only 55 percent of its exports went to El Norte.
A set of intelligent policies laid the foundations for a benign cycle. Economic growth averaged 5.5 percent in the second half of the 1990s, and slower but steady growth continued over the past decade. A close link to the U.S. economy sheltered Mexican financial markets from the worst of the financial turmoil that ripped through emerging economies in 1997-1998 and again in 2001. The currency held up its value well. In fact, the last peso devaluation dates back 15 years. All this helped government efforts to get fiscal policy under control, reducing international debt from a peak of nearly 70 percent of GDP in the second half of the 1980s to around 17 percent today. The debt-to-exports ratio went down from over 300 percent to close to 50 percent over the same time period.
Reforms continue, and now the government is pushing anti-monopoly measures to promote a more competitive environment.
Democracy followed in the footsteps of economic reforms. For over 80 years prior to 2000, Mexico was ruled by the Institutional Revolutionary Party (PRI), with each president after his six-year term hand-picking a successor from the ranks of loyal PRI functionaries. But over the past decade, there has been genuine political competition and generally free and fair elections.
The Mexico City stockmarket has bloomed in a climate of economic success and financial stability. Since 1995, the Bolsa’s IPC index has increased 17-fold. More recently, it regained all the ground lost in 2008 and early 2009 and rose to record territory once more. Over the same time period, the Dow Jones Industrial Average increased less than threefold. An unintended consequence of the run-up in Mexican stock prices has been the fact that local telecom tycoon Carlos Slim has leapfrogged Bill Gates and Warren Buffett to become the world’s richest man on this year’s Forbes list.
Even more to the point, Mexico’s example has been contagious, encouraging Brazil and, to some extent, Argentina, South America’s two biggest economies, to implement market reforms.
Yet, while Mexico should, by rights, enjoy the fruits of its newly found economic prosperity, many political observers worry that Mexico might spin out of control and even become a failed state along America’s 2,000 mile-long southern border. Drug violence that has been spreading at an alarming rate across Mexico’s northern states and into the capital, is now spilling over the border into the United States. Back in early 2009, the Pentagon and the CIA created a stir by naming Mexico and Pakistan two failing states that represent a key security concern for Washington. Under political pressure, discussions about a potential disintegration of Mexico’s central government have been toned down, but concern, along with violence, has not diminished.
Just as impetus for economic and financial reforms originated in Mexico, so corruption and incompetence in government, both local and central, as well as in Mexico’s armed forces and the police, are key reasons for the spreading chaos. But if Mexico becomes a failed state — or, worse, a narco-state — much blame will be laid at the door of its northern neighbor.