The Big Idea

These are complicated times for Mexico: new, leftist political leadership, an increasingly fraught relationship with the U.S., and inflation threatening to ignite. Will the country of 130 million people find an economic door to open? Or will it run into a wall, like the one the U.S. is threatening to build?

The Scenario

Mexico has struggled with a sluggish economy, inflation and a society that’s among the most unequal in the world. Although it’s one of the world’s largest and most populous economies, a disproportionate amount of Mexico’s wealth resides with a billionaire elite. In late 2017, inflation spiked to a 17-year high, and other clouds gathered. President Donald Trump threated to pull out of NAFTA, calling it the “worst trade deal ever made.” The U.S. market makes up 80 percent of Mexico’s exports; to lose trade deals with its northern neighbor could be economically devastating.

In addition to shakiness in its relationship with the U.S., Mexico experienced domestic upheaval. In July, former Mexico City mayor Andrés Manuel López Obrador (AMLO) won a landslide election victory for president, bringing a left-wing party to power for the first time in Mexico’s modern history. AMLO promised major anticorruption reforms, infrastructure investments and other capital-intensive efforts. Observers worried that his populist pledges would result in massive spending and turn off foreign investors who liked Mexico’s pro-business policies. Mexico has borrowed heavily in dollars, debts that would be difficult to repay if foreign investors fled. In late 2018, as AMLO took office, it looked as if the worst was coming true: production, consumer spending and growth all slowed.

The Resolution

Crisis averted — for now. In the initial months of AMLO’s presidency, inflation has come back within the historical range. Though the stock market is down, it’s in line with dips in emerging markets globally. AMLO has pursued anticorruption efforts, but global investors have stayed the course and have not pulled their money.

Nor has the worst come to pass in U.S.-Mexico trade relations. In November, negotiators from the U.S., Mexico and Canada renovated NAFTA into the United States-Mexico-Canada Agreement, a deal that gives some concessions to the U.S. but, for the most part, preserves the economic status quo. If it passes each country’s legislature, USMCA would take effect in 2020. No crisis, but no real safety either. Continuing tension with the Trump administration and underlying economic fragility (deep poverty, substantial liabilities, the potential for overspending) means the situation in Mexico remains precarious.

The Lesson

For real prosperity and stability, Mexico needs to do more than dodge the next crisis. It needs to find ways to propel itself out of the middle income trap, the economic plateau in which a country finds itself unable to compete with low-income competitors or advanced economies. By the time countries reach the middle income, the “easy wins” — such as adding roads or making electricity more reliable — are usually gone and true innovation is needed for further growth.

With AMLO starting a six-year term, the time is right for a new approach — to unlock some doors so that Mexico can be socially progressive and pro-business. Mexico needs growth, and not just for billionaires.

Kieran J. Walsh authored the case Mexico: Walls or Doors? (Darden Business Publishing).

 

Learn more about the Mexican Economy's challenges in this Darden Business Publishing case
About the Expert

Kieran J. Walsh

Assistant Professor of Business Administration

An expert in macroeconomics, international finance and applied econometrics, Walsh studies the link between macroeconomics and finance. His teaching materials examine emerging market growth, exchange rates and cross-border macroeconomic fragilities, and his research has been published in academic journals including the Journal of Economic Theory, the Journal of Applied Econometrics and the Journal of Political Economy.

Prior to receiving his Ph.D. from Yale, Walsh served as an assistant economist at the Federal Reserve Bank of New York.

B.A., Vassar College; Ph.D., Yale University

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