The economy of Mexico is 10th to 12th largest in the world.

Since the 1994 crisis,

administrations have improved the country's macroeconomic fundamentals. Mexico was
not significantly influenced by the recent 2002 South American crisis, and has maintained
positive, although low, rates of growth after a brief period of stagnation in 2001. Moody's
(in March 2000) and Fitch IBCA (in January 2002) issued investment-grade ratings for
Mexico's sovereign debt. In spite of its unprecedented macroeconomic stability, which
has reduced inflation and interest rates to record lows and has increased per capita
income, enormous gaps remain between the urban and the rural population, the northern
and southern states, and the rich and the poor.[2] Some of the government's challenges
include the upgrade of infrastructure, the modernization of the tax system and labor laws,
and the reduction of income inequality.

The economy contains a mixture of modern and outmoded industry and agriculture, both
of which are increasingly dominated by the private sector. Recent administrations have
expanded competition in ports, railroads, telecommunications, electricity generation,
natural gas distribution and airports, with the aim of upgrading infrastructure. As an
export-oriented economy, more than 90% of Mexican trade is under free trade
agreements (FTAs) with more than 40 countries, including the European Union, Japan,
Israel, and much of Central and South America. The most influential FTA is the North
American Free Trade Agreement (NAFTA), which came into effect in 1994, and was
signed in 1992 by the governments of the United States, Canada and Mexico. In 2006,
trade with Mexico's two northern partners accounted for almost 90% of its exports and
55% of its imports.[3] Recently, the Congress of the Union approved important tax,
pension and judicial reforms, and reform to the oil industry is currently being debated.
According to the Forbes Global 2000 list of the world's largest companies in 2008,
Mexico had 16 companies in the list.[4]

Contents
[hide]

• 1 History
• 2 Macroeconomic, financial and welfare indicators
o 2.1 Main indicators
o 2.2 Poverty
o 2.3 Remittances
o 2.4 Regional economies
• 3 Components of the economy
o 3.1 Agriculture and food production
 3.1.1 History
 3.1.2 Importance of agriculture to Mexico's economy
 3.1.3 Crops
o 3.2 Industry
o 3.3 Energy and mineral resources
o 3.4 Services
 3.4.1 Overview
3.4.2 Tourism
3.4.3 Financial sector
 3.4.3.1 Banking system
 3.4.3.2 Securities market
• 4 Government policies and the Central Bank
o 4.1 Currency policy
o 4.2 Monetary system
• 5 Trade
o 5.1 Free trade agreements
 5.1.1 NAFTA
o 5.2 Mexican Trade Facilitation & Competitiveness
• 6 See also
• 7 References

• 8 External links

[edit] History
Main article: Economic history of Mexico

Following five decades of political turbulence following the independence of Mexico, the
four consecutive administrations of president Porfirio Díaz (during the last quarter of the
nineteenth century) brought unprecedented economic growth. This growth was
accompanied by foreign investment and European immigration, the development of an
efficient railroad network and the exploitation of the country's natural resources. GDP per
capita levels circa 1900 were on par with Argentina and Uruguay, almost three times that
of Brazilhi and Venezuela.[5] Annual economic growth between 1876 and 1910 averaged
3.3%.[6] Political repression and fraud, as well as huge income inequalities exacerbated by
the land distribution system based on latifundios, in which large haciendas were owned
by a few but worked by millions of underpaid peasants living in precarious conditions,
led to the Mexican Revolution (1910–1917), an armed conflict that drastically
transformed Mexico's political, social, cultural, and economical structure during the
twentieth century under a premise of social democracy. The war itself, however, left a
harsh toll in the economy and population, which decreased over the 11-year period
between 1910 and 1921. The reconstruction of the country was to take place in the
following decades.

The period from 1930 to 1970 was dubbed by economic historians as the "Mexican
Miracle", a period of economic growth spurred by a model of import substitution
industrialization (ISI) which protected and promoted the development of national
industries. Through the ISI model, the country experienced an economic boom through
which industries rapidly expanded their production.[7] Important changes in the economic
structure included free land distribution to peasants under the concept of ejido, the
nationalization of the oil and railroad companies, the introduction of social rights into the
constitution, the birth of large and influential labor unions, and the upgrading of
infrastructure. While population doubled from 1940 to 1970, GDP increased sixfold.[8]

The ISI model had reached its peaked in the late 1960s. During the 1970s, the
administrations of Echeverría and López Portillo, tried to include social development in
their policies, an effort that entailed more public spending. With the discovery of vast oil
fields in a time in which oil prices were surging and international interest rates were low
-and even negative- the government decided to borrow from international capital markets
to invest in the state-owned oil company, which in turn seemed to provide a long-run
income source to promote social welfare. In fact, this method produced a remarkable
growth in public expenditure,[7] and president López Portillo announced that the time had
come to learn to "manage prosperity"[9] as Mexico multiplied its oil production to become
the world's fourth largest exporter.[10]

Average annual GDP growth by period

President Cárdenas

1900–1929 3.4%

1929–1945 4.2%

1945–1972 6.5%

1972–1981 5.5%

1981–1996 1.5%

1995–2000 5.1%

Sources:[11] and[7]

In the period of 1981–1982 the international panorama changed abruptly: oil prices
plunged and interest rates rose. In 1982, president López Portillo, just before ending his
administration, suspended payments of foreign debt, devalued the peso and nationalized
the banking system, along with many other industries that were severely affected by the
crisis, among them the steel industry. While import substitution had produced an era of
industrialization in previous decades, by the 1980s it was evident that that protracted
protection had produced an uncompetitive industrial sector with low productivity gains.[7]
President de la Madrid was the first of a series of presidents that began to implement
neoliberal reforms. After the crisis of 1982, lenders were unwilling to return to Mexico
and, in order to keep the current account in balance, the government resorted to currency
devaluations, which in turn sparked unprecedented inflation,[7] which reached a historic
high in 1987 at 159.7%.[12]

The first step toward the liberalization of trade was Mexico's signature of the General
Agreement on Tariffs and Trade (GATT) in 1986. During the Salinas administration many
state-owned companies were privatized. In 1992, the North American Free Trade
Agreement was signed between the United States, Canada and Mexico, and after the
signature of two additional supplements on environments and labor standards, it came
into effect on January 1, 1994. Salinas also introduced strict price controls and negotiated
smaller minimum wage increments with labor unions with the aim of curbing inflation.
While his strategy was successful in reducing inflation, growth averaged only 2.8 percent
a year.[7] Moreover, by fixing the exchange rate, the peso became rapidly overvalued
while consumer spending increased, causing the current account deficit to reach 7% of
GDP in 1994. The deficit was financed through tesobonos a type of public debt
instrument that reassured payment in dollars.[13] The Chiapas uprising, and the
assassinations of the ruling party's presidential candidate, Luis Donaldo Colosio and the
Secretary-General of the party and brother of the Assistant-Attorney General José
Francisco Ruiz Massieu in 1994, sent a disquieting message to investors. Public debt
holders rapidly sold their tesobonos, depleting the Central Bank's reserves,[13] while
portfolio investments, which had made up 90% of total investment flows, left the country
as fast as they had come in.[7] This unsustainable situation eventually forced the entrant
Zedillo administration to abandon the fixed exchange rate. The peso sharply devalued and
the country entered into an economic crisis in December 1994. The boom in exports, as
well as an international rescue package crafted by American president Bill Clinton,
helped cushion the crisis. In less than 18 months, the economy was growing again, and
annual rate growth averaged 5.1 percent between 1995 and 2000.[7]

President Zedillo and president Fox continued with trade liberalization and during his
administrations several FTAs were signed with Latin American and European countries,
Japan and Israel, and both strove to maintain macroeconomic stability. Thus, Mexico
became one of the most open countries in the world to trade, and the economy base
shifted accordingly. Total trade with the United States and Canada tripled, and total
exports and imports almost quadrupled between 1991 and 2003.[14] The nature of foreign
investment also changed from portfolio to foreign-direct investment (FDI).

[edit] Macroeconomic, financial and welfare indicators

Macroeconomic indicators
 Mexican notes and coins

GDP (PPP) US $1.134 trillion (2006)

GDP growth 4.8% (2006)

GDP per capita PPP US $12,500 (2007)

GNI per capita PPP US $11,990 (2006)

Inflation (CPI) 3% (2007)

Gini index 44.5

Unemployment 3.7% (2007)

HDI ▲ 0.829

Labor force 45.38 million (2007)

Pop. in poverty 13.8%

[edit] Main indicators

Mexico's Gross Domestic Product (GDP) in purchasing power parity (PPP) was
estimated at US $1.353 trillion in 2006, and $886.4 billion in nominal exchange rates.[3]
As such, its standard of living, as measured in GDP in PPP per capita was US $12,500.
The World Bank reported in 2007 that the country's Gross National Income in market
exchange rates was the second highest in Latin America, after Brazil at US $820.319
billion,[15] which lead to the highest income per capita in the region at $7,830.[16] As such,
Mexico is now firmly established as an upper middle-income country. After the
slowdown of 2001 the country has recovered and has grown 4.2, 3.0 and 4.8 percent in
2004, 2005 and 2006,[17] even though it is considered to be well below Mexico's potential
growth.[13]

The Mexican currency is the peso (ISO 4217: MXN; symbol: $). One peso is divided into
100 centavos (cents). MXN replaced MXP in 1993 at a rate of 1000 MXP per 1 MXN.
The exchanged rate has remained stable since 1998, oscillating between 9.20 and 11.50
MXN per USD. Interest rates in 2007 were situated at around 7 percent,[18] having
reached a historic low in 2002 below 5 percent. Inflation rates are also at historic lows;
the inflation rate in Mexico in 2006 was 4.1 percent, and 3 percent by the end of 2007.
Unemployment rates are the lowest of all OECD member countries at 3.2 percent.
However, underemployment is estimated at 25 percent.[3] Mexico's Human development
index was reported at 0.829,[19] (comprising a life expectancy index of 0.84, an education
index of 0.86 and a GDP index of 0.77), ranking 52 in the world within the group of high-
development.

[edit] Poverty

After the 1994–1995 economic crisis, probably the most severe in the country's history,
50% of the population fell into poverty. A rapid growth in exports propitiated by NAFTA
and other trade agreements, and the restructuring of the macroeconomic finances initiated
during Zedillo's and continued during Fox's administration had significant results in the
reduction of the poverty rate: according to the World Bank, poverty was reduced to
17.6% in 2004.[20] Most of this reduction was achieved in rural communities whose rate
of poverty declined from 42% to 27.9% in the 2000–2004 period, although urban poverty
stagnated at 12%.[20] According to the World Bank, in 2004, 17.6% of Mexico's
population lived in extreme poverty, while 21% lived in moderated poverty.[21] The CIA
Factbook, on the other hand, reported that 13.8% of the population was under the poverty
line, as measured in food-based poverty.[22]

[edit] Remittances

Remittances, or contributions sent by Mexicans living abroad, mostly in the United

States, to their families at home in Mexico, are a substantial and growing part of the
Mexican economy; they comprised $18 billion in 2005.[23] In 2004, they became the
second largest source of foreign income after crude oil exports, roughly equivalent to
foreign direct investment (FDI) and larger than tourism expenditures; and represented 2.5
percent of the nation's Gross Domestic Product.[24] The growth of remittances has been
remarkable: they have more than doubled since 1997. Recorded remittance transactions
exceeded 41 million in 2003, of which 86 percent were made by electronic transfer.[25]

It is estimated that half or more of Mexican immigrants to the United States are legal, and
have access to formal transfer channels usually blocked to illegals simply due to the lack
of accepted identification documents. The Mexican government, cognizant of the
economic viability of immigrant workers, began issuing an upgraded version of the
Matrícula Consular de Alta Seguridad (MACS, High Security Consular Identification),
an identity document issued at Mexican consulates abroad. This document is now
accepted as a valid identity card in 32 US states, as well as thousands of police agencies,
hundreds of cities and counties, as well as banking institutions.[25]

The main receptors of remittances in 2004 were the states of Michoacán, Guanajuato,
Jalisco, Mexico and Puebla, which jointly captured 45% of total remittances in that
year.[24] Several state governments, with the support of the federal government, have
implemented programs to use part of the remittances to finance public works. This
program, called Dos por Uno (Two for every one) is designed in a way that for each peso
contributed by migrants from their remittances, the state and the federal governments will
invest two pesos in building infrastructure at their home communities.[26]

[edit] Regional economies

Map of Mexican states indicating HDI (2004) 0.80 and higher 0.750–0.799 0.70–
0.749

Regional disparities and income inequality continue to be a problem in Mexico. While all
constituent states of the federation have a Human Development Index (HDI) superior to
0.70 (medium to high development), northern and central states have higher levels of
HDI than the southern states. Nuevo León and the Federal District have HDI levels
similar to European countries, whereas that of Oaxaca and Chiapas is similar to that of
Syria or Egypt.[27] At the municipal level, disparities are even greater: San Pedro Garza
García in Nuevo León has an HDI similar to that of Italy, whereas, Metlatonoc in
Guerrero, would have an HDI similar to that of Malawi. The majority of the federal
entities with high development (superior to 0.80) are located in the northern region (with
the exception of Colima, Jalisco, Aguascalientes, the Federal District, Querétaro, as well
as the southeastern states of Quintana Roo and Campeche). The less developed states
(with medium development in terms of HDI, superior to 0.70) are located at the southern
Pacific coast (with the exception of Veracruz).

In terms of share in GDP per sector (in 2004), the largest contributors in agriculture are
Jalisco (9.7%), Sinaloa (7.7%) and Veracruz (7.6%); the greatest contributors in industrial
production are the Federal District (15.8%), State of México (11.8%) and Nuevo León
(7.9%); the greatest contributors in the service sector are also the Federal District
(25.3%), State of México (8.9%) and Nuevo León (7.5%).[28]

Since the 1980s, the economy has slowly become less centralized; the annual rate of GDP
growth of the Federal District from 2003–2004 was the smallest of all federal entities at a
mere 0.23%, with drastic drops in the agriculture and industrial sectors. Nonetheless, it
still accounts for 21.8% of the nation's GDP. The states with the highest GDP growth
rates are Quintana Roo (9.04%), Baja California (8.89%), and San Luis Potosí
(8.18%).[29] In 2000, the federal entities with the highest GDP per capita in Mexico were
the Federal District (US $17,696), Campeche (US $13,153) and Nuevo León (US
$13,033); the states with the lowest GDP per capita were Chiapas (US $3,302), Oaxaca
(US $3,489) and Guerrero (US $4,112).[30]

[edit] Components of the economy

Gross Domestic Product (GDP) in purchasing power parity (PPP) in 2006 was estimated
at US $1.134 trillion, and GDP per capita in PPP at US $10,600.[3] The service sector is
the largest component of GDP at 70.5%, followed by the industrial sector at 25.7% (2006
est.). Agriculture represents only 3.9% of GDP (2006 est.). Mexican labor force is
estimated at 38 million of which 18% is occupied in agriculture, 24% in the industry
sector and 58% in the service sector (2003 est.).

[edit] Agriculture and food production

[edit] History

Food and agriculture

Farmers in Puebla

Product Quantity (Tm) World Rank1

Avocados 1,040,390 1

Onions and chayote 1,130,660 1

Limes and lemons 1,824,890 1

Sunflower seed 212,765 1

Dry fruits 95,150 2

Papaya 955,694 2

Chillies and peppers 1,853,610 2

 Whole beans 93 000 3

Oranges 3,969,810 3

Anise, badian, fennel 32 500 3

Chicken meat 2,245,000 3

Asparagus 67,247 4

Mangoes 1.503.010 4

Corn 20,000,000 4

1
Source:FAO[31]

After the Mexican Revolution Mexico began an agrarian reform, based on the 27th article
of the Mexican Constitution than included transfer of land and/or free land distribution to
peasants and small farmers under the concept of the ejido.[32] This program was further
extended during president Cárdenas administration during the 1930s[33] and continued
into the 1960s at varying rates.[34] The cooperative agrarian reform, which guaranteed
small farmers a means of subsistence livelihood, also caused land fragmentation and lack
of capital investment, since commonly held land could not be used as collateral. In an
effort to raise rural productivity and living standards, this constitutional article was
amended in 1992 to allow for the transfer of property rights of the communal lands to
farmers cultivating it.[35] With the ability to rent or sell it, a way was open for the creation
of larger farms and the advantages of economies of scale. Large mechanized farms are
now operating in some northeastern states (mainly in Sinaloa). However, privatization of
ejidos continues to be very slow in the central and southern states where the great
majority of peasants produce only for subsistence.

Up until the 1990s, the government encouraged the production of basic crops (mainly
corn and beans) by maintaining support prices and controlling imports through the
National Company for Popular Subsistence (CONASUPO). With trade liberalization,
however, CONASUPO was to be gradually dismantled and two new mechanisms were
implemented: Alianza and Procampo. Alianza provides income payments and incentives
for mechanization and advanced irrigation systems. Procampo is an income transfer
subsidy to farmers. This support program provides 3.5 million farmers who produce basic
commodities (mostly corn), and which represent 64% of all farmers, with a fixed income
transfer payment per unit of area of cropland. This subsidy increased substantially during
president Fox's administration, mainly to white corn producers in order to reduce the
amount of imports from the United States. This program has been successful, and in
2004, roughly only 15% of corn imports are white corn –the one used for human
consumption and the type that is mostly grown in Mexico– as opposed to 85% of yellow
and crashed corn –the one use for feeding livestock, and which is barely produced in
Mexico.[36]

[edit] Importance of agriculture to Mexico's economy

Agriculture, as a percentage of GDP, has been steadily declining, and now resembles that
of developed nations, in that it plays a smaller role in the economy. In 2006, agriculture
accounted for only 3.9% of GDP,[3] down from 7% in 1980,[37] and 25% in 1970.[38]
Nonetheless, given the historic structure of ejidos, it still employs a considerably high
percentage of the work force: 18% in 2003,[3] mostly of which grows basic crops for
subsistence, compared to 2–5% in developed nations in which production is highly
mechanized.

[edit] Crops

In spite of being a staple in Mexican diet, Mexico's comparative advantage in agriculture

is not in corn, but in horticulture, tropical fruits, and vegetables. Negotiators of NAFTA
expected that through liberalization and mechanization of agriculture two-thirds of
Mexican corn-producers would naturally shift from corn production to horticultural and
other labor-intensive crops such as fruits, nuts, vegetables, coffee and sugar cane.[39]
While horticultural trade has drastically increased due to NAFTA, it has not absorbed
displaced workers from corn production (estimated at around 600,000).[36] Moreover, corn
production has remained stable (at 20 million metric tons), arguably, as a result of income
support to farmers, or a reticence to abandon a millenarian tradition in Mexico: not only
have peasants grown corn for millennia, corn originated in Mexico. Even today, Mexico
is still the fourth largest corn producer in the world.[31]

The area dedicated to potatoes has changed little since 1980 and average yields have
almost tripled since 1961. Production has reached a record 1.7 million tonnes in 2003.
Per capita consumption of potato in Mexico stands at 17 kg a year, very low compared to
its maize intake of 400 kg[40]. On average, potato farms in Mexico are larger than those
devoted to more basic food crops. Potato production in Mexico is mostly for commercial
purposes; the production for household consumption is very small.[41]

Approximately 160,000 small- and medium-sized farmers grow sugar cane in 15

Mexican states, currently there are 57 sugar mills around the country. Mexico's sugar
industry is characterized by high production costs and lack of investment. Mexico
produces more sugar than it consumes.[42]

[edit] Industry

Industrial production
 Mercedes-Benz factory in Santiago Tianguitenco

Main Aircraft, automobile industry, petrochemicals,

industries cement and construction, textiles, food and
beverages, mining, consumer durables,
tourism

Industrial 3.6% (2006)

growth rate

Labor force 24% of total labor force

GDP of 25.7% of total GDP

sector

The industrial sector as a whole has benefited from trade liberalization; in 2000 it
accounted for almost 90% of all export earnings.[14] Among the most important industrial
manufacturers in Mexico is the automotive industry, whose standards of quality are
internationally recognized. The automobile sector in Mexico differs from that in other
Latin American countries and developing nations in that it does not function as a mere
assembly manufacturer. The industry produces technologically complex components and
engages in some research and development activities.[14] The "Big Three" (General
Motors, Ford and Chrysler) have been operating in Mexico since the 1930s, while
Volkswagen and Nissan built their plants in the 1960s.[43] Later, Toyota, Honda, BMW,
and Mercedes-Benz joined in. Given the high requirements of North American
components in the industry, many European and Asian parts suppliers have also moved to
Mexico: in Puebla alone, 70 industrial part-makers cluster around Volkswagen.[14] The
relatively small domestic car industry still is represented by DINA Camiones S.A. de C.V.,
that has built buses and trucks for almost half a century and the new car company
Mastrettadesign that builds the race car Mastretta MXT.

Some large industries of Mexico include Cemex, the third largest cement conglomerate in
the world;[44] the alcohol beverage industries, including world-renowned players like
Grupo Modelo; conglomerates like FEMSA, which apart from owning breweries and the
OXXO convenience store chain, is also the second-largest Coca-Cola bottler in the world;
Gruma, the largest producer of corn flour and tortillas in the world; and Grupo Bimbo,
Telmex, Televisa, among many others. In 2005, according to the World Bank, high-tech
industrial production represented 19.6% of total exports.[45]

Maquiladoras (Mexican factories which take in imported raw materials and produce
goods for export) have become the landmark of trade in Mexico. This sector has
benefited from NAFTA, in that real income in the maquiladora sector has increased
15.5% since 1994, though from the non-maquiladora sector has grown much faster.[13]
Contrary to popular belief, this should be no surprise since maquiladora's products could
enter the US duty free since the 1960s industry agreement. Other sectors now benefit
from the free trade agreement, and the share of exports from non-border states has
increased in the last 5 years while the share of exports from maquiladora-border states
has decreased.

Currently Mexico is focusing in developing an aerospace industry and the assembly of

helicopter and regional jet aircraft fuselages is taking place. Foreign firms such as MD
Helicopters and Bombardier build helicopter and regional jets fuselages respectively in
Mexico. Although the Mexican aircraft industry is mostly foreign, as is its car industry,
Mexican firms have been founded such as Aeromarmi, which builds light propeller
airplanes, and Hydra Technologies, which builds Unmanned Aerial Vehicles such as the
S4 Ehécatl.

[edit] Energy and mineral resources

Mineral resources are the "nation's property" (i.e. public property) by constitution. As
such, the energy sector is administered by the government with varying degrees of private
investment. Mexico is the sixth-largest oil producer in the world, with 3.7 million barrels
per day.[46] Pemex, the public company in charge of administering research, exploitation
and sales of oil, is the largest company (oil or otherwise) in Latin America, making US
$86 billion in sales a year,[47] a sum larger than the GDP of some of the region's countries.
Nonetheless, the company is heavily taxed, a significant source of revenue for the
government, of almost 62 per cent of the company's sales.[7] Without enough money to
continue investing in finding new sources or upgrading infrastructure, and being
protected constitutionally from private and foreign investment, some have predicted the
company may face institutional collapse.[7] While the oil industry is still relevant for the
government's budget, its importance in GDP and exports has steadily fallen since the
1980s. In 1980 oil exports accounted for 61.6% of total exports; by 2000 it was only
7.3%.[14]

[edit] Services

[edit] Overview

The service sector was estimated to account for 70.5% of the country's GDP, and employs
58% of the active population.[3] This section includes transportation, commerce,
warehousing, restaurant and hotels, arts and entertainment, health, education, financial
and banking services, telecommunications as well as public administration and defense.
Mexico's service sector is strong, and in 2001 replaced Brazil's as the largest service
sector in Latin America in dollar terms.[48]

[edit] Tourism

Tourism is one of the most important industries in Mexico. It is the fourth largest source
of foreign exchange for the country.[25] Mexico is the eight most visited country in the
world (with over 20 million tourists a year).[49]
[edit] Financial sector

[edit] Banking system

According to the IMF the Mexican banking system is strong, in which private banks are
profitable and well-capitalized.[50] The financial and banking sector is increasingly
dominated by foreign companies or mergers of foreign and Mexican companies with the
notable exception of Banorte. The acquisition of Banamex, one of the oldest surviving
financial institutions in Mexico, by Citigroup was the largest US-Mexico corporate
merger, at US $12.5 billion.[51] In spite of that, the largest financial institution in Mexico
is Bancomer associated to the Spanish BBVA.[52]

The process of institution building in the financial sector in Mexico has evolved hand in
hand with the efforts of financial liberalization and of inserting the economy more fully
into world markets.[53] Over the recent years, there has been a wave of acquisitions by
foreign institutions such as US-based Citigroup, Spain’s BBVA and the UK’s HSBC.
Their presence, along with a better regulatory framework, has allowed Mexico’s banking
system to recover from the 1994–95 peso devaluation. Lending to the public and private
sector is increasing and so is activity in the areas of insurance, leasing and mortgages.[54]
However, bank credit accounts for only 22% of GDP, which is significantly low
compared to 70% in Chile.[55] Credit to the Agricultural sector has fallen 45.5% in six
years (2001 to 2007), and now represents about 1% of total bank loans.[56] Other
important institutions include savings and loans, credit unions, government development
banks, “non-bank banks”, bonded warehouses, bonding companies and foreign-exchange
firms.[54]

A wave of acquisitions has left Mexico’s financial sector in foreign hands. Their foreign-
run affiliates compete with independent financial firms operating as commercial banks,
brokerage and securities houses, insurance companies, retirement-fund administrators,
mutual funds, and leasing companies. Other important institutions include savings and
loans, credit unions, government development banks, “non-bank banks”, bonded
warehouses, bonding companies and foreign-exchange firms.[57]

[edit] Securities market

Mexico has a single securities market, the Mexican Stock Exchange (Bolsa Mexicana de
Valores, known as the Bolsa). The market has grown steadily, with its main indices
increasing by more than 150% in 2003–05. It is Latin America's second largest exchange,
after Brazil's. Still, the Bolsa remains relatively small when compared to other North
American exchanges. The New York Stock Exchange is about 100 times larger; the
Toronto Stock Exchange is six times larger.

The Indice de Precios y Cotizaciones (IPC, the general equities index) is the benchmark
stock index on the Bolsa. In 2005 the IPC surged 37.8%, to 17,802.71 from 12,917.88,
backed by a stronger Mexican economy and lower interest rates. It continued its steep
rise through the beginning of 2006, reaching 19,272.63 points at end-March 2006. The
stockmarket also posted a record low vacancy rate, according to the central bank. Local
stockmarket capitalisation totalled US$236bn at end-2005, up from US$170bn at end-
2004. As of March 2006 there were 135 listed companies, down from 153 a year earlier.
Only a handful of the listed companies are foreign. Most are from Mexico City or
Monterrey; companies from these two cities compose 67% of the total listed companies.

The IPC consists of a sample of 35 shares weighted according to their market

capitalisation. Heavy hitters are America Telecom, the holding company that manages
Latin America’s largest mobile company, América Móvil; Telefonos de Mexico,
Mexico’s largest telephone company; Grupo Bimbo, Mexico and Latin America’s biggest
baker; and Wal-Mart de México, a subsidiary of the US retail giant. The makeup of the
IPC is adjusted every six months, with selection aimed at including the most liquid shares
in terms of value, volume and number of trades.

Mexico’s stockmarket is closely linked to developments in the US. Thus, volatility in the
New York and Nasdaq stock exchanges, as well as interest-rate changes and economic
expectations in the US, can steer the performance of Mexican equities. This is both
because of Mexico’s economic dependence on the US and the high volume of trading in
Mexican equities through American Depositary Receipts (ADRs). Currently, the decline
in the value of the dollar is making non-US markets, including Mexico's, more attractive.

Despite the recent gains, investors remain wary of making placements in second-tier
initial public offerings (IPOs). Purchasers of new issues were disappointed after prices
fell in numerous medium-sized companies that made offerings in 1996 and 1997. IPO
activity in Mexico remains tepid and the market for second-tier IPOs is barely visible.
There were three IPOs in 2005.[58]

[edit] Government policies and the Central Bank

Financial indicators

Banco de México headquarters

Currency exchange rate 9.93 MXN per 1 USD (July, 2008)

Reserves including gold US $85.01 billion (2006)

 Government budget US $196.5 billion (revenues)

Public debt 20.7% of GDP (2006)

External debt US $178.3 billion (2006)

Bank funding rate 7% (2/2007)

Banco de México is Mexico's central bank, an internally autonomous public institution

whose governor is appointed by the president and approved by the legislature to which it
is fully responsible. Banco de México's functions are outlined in the 28th article of the
constitution and further expanded in the Monetary Law of the United Mexican States.[59]
Banco de México's main objective is to achieve stability in the purchasing power of the
national currency. It is also the lender of last resort.

[edit] Currency policy

Mexico has had a floating exchange-rate regime since the December 1994 peso
devaluation. Under this system, Banco de México makes no commitment to the level of
the peso exchange rate, although it does employ an automatic mechanism to accumulate
foreign reserves. It also possesses tools aimed at smoothing out volatility. The Exchange
Rate Commission sets policy; it is made up of six members—three each from the
Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Publico—
SHCP) and the central bank, with the SHCP holding the deciding vote.

In August 1996, Banco de México initiated a mechanism to acquire foreign reserves

when the peso is strong, without giving the market signals about a target range for the
exchange rate. The resulting high levels of reserves, mostly from petroleum revenues,
have helped to improve the terms and conditions on debt Mexico places on foreign
markets. However, there is concern that the government relies too heavily on oil income
in order to build a healthy base of reserves. According to the central bank, international
reserves stood at US $75.8 billion in 2007.[60] In May 2003, Banco de México launched a
program that sells U.S. dollars via a monthly auction, with the goal of maintaining a
stable, but moderate, level of reserves.

In the summer of 2008, the Mexican economy became the strongest of Latin America; the
US Dollar's devaluation alongside with the Mexican Peso's strong stance has led to a
purchase parity of $9.93 MXN per $1.00 USD, the best value of the currency since the
1994 Economic Crisis when the Peso plummeted.

Experts believe that Mexico is going to be the 5th or 6th biggest economy in the world by
the year 2050, behind China, United States, India, Brazil, and Russia.
[edit] Monetary system

Mexico’s monetary policy was revised following the 1994–95 financial crisis, when
officials decided that maintaining general price stability was the best way to contribute to
the sustained growth of employment and economic activity. As a result, Banco de México
has as its primary objective maintaining stability in the purchasing power of the peso. It
sets an inflation target, which requires it to establish corresponding quantitative targets
for the growth of the monetary base and for the expansion of net domestic credit.

The central bank also monitors the evolution of several economic indicators, such as the
exchange rate, differences between observed and projected inflation, the results of
surveys on the public and specialists’ inflation expectations, revisions on collective
employment contracts, producer prices, and the balances of the current and capital
accounts.

A debate continues over whether Mexico should switch to a US-style interest rate-
targeting system. Government officials in favor of a change say that the new system
would give them more control over interest rates, which are becoming more important as
consumer credit levels rise.

Until 2008, Mexico used a unique system, amongst the OECD countries,[54] to control
inflation in a mechanism known as the corto (lit. "shortage") a mechanism that allowed
the central bank to influence market interest rates by leaving the banking system short of
its daily demand for money by a predetermined amount. If the central bank wanted to
push interest rates higher, it increased the corto. If it wished to lower interest rates, it
decreased the corto. Starting in 2008, the Central Bank will set a referential interest rate,
like the Federal Reserve Bank; nonetheless the transition period will include the use of
the corto in certain circumstances.[61]

[edit] Trade

International trade

World Trade Center in Mexico City

 Exports US $248.8 billion f.o.b. (2006)

Imports US $253.1 billion f.o.b. (2006)

Current ▼ US $400.1 million (2006)

account

Export US 90.9%, Canada 2.2%, Spain 1.4%,

partners Germany 1.3%, Colombia 0.9% (2006)

Import US 53.4%, China 8%, Japan 5.9% (2005)

partners

Mexico is an export oriented economy. It is an important trade power as measured by the

value of merchandise traded, and the country with the greatest number of free trade
agreements.[62] In 2005, Mexico was the world's fifteenth largest merchandise exporter
and twelfth largest merchandise importer with a 12% annual percentage increase in
overall trade.[63] In fact, from 1991 to 2005 Mexican trade increased fivefold.[64] Mexico is
the biggest exporter and importer in Latin America; in 2005, Mexico alone exported US
$213.7 billion, roughly equivalent to the sum of the exports of Brazil, Argentina,
Venezuela, Uruguay, and Paraguay.[63] However, Mexican trade is fully integrated with
that of its North American partners: close to 90% of Mexican exports and 50% of its
imports are traded with the United States and Canada. Nonetheless, NAFTA has not
produced trade diversion.[13] While trade with the United States increased 183% from
1993–2002, and that with Canada 165%, other trade agreements have shown even more
impressive results: trade with Chile increased 285%, with Costa Rica 528% and
Honduras 420%.[14] Trade with the European Union increased 105% over the same time
period.[14]

[edit] Free trade agreements

Mexico joined the General Agreement on Tariffs and Trade (GATT) in 1986, and today is
an active and constructive participant of the World Trade Organization. Fox's
administration promoted the establishment of a Free Trade Area of the Americas; Puebla
served as temporary headquarters for the negotiations, and several other cities are now
candidates for its permanent headquarters if the agreement is reached and implemented.

Mexico has signed 12 free trade agreements with 44 countries:

• the North American Free Trade Agreement (NAFTA) (1994) with the United
States and Canada;
 • Grupo de los tres, Group of the three [countries], or G-3 (1995) with Colombia
and Venezuela; the latter decided to terminate the agreement in 2006; Mexico
announced its intention to invite Ecuador, Peru or Panama as a replacement;
• Free Trade Agreement with Costa Rica (1995);
• Free Trade Agreement with Bolivia (1995);
• Free Trade Agreement with Nicaragua (1998);

Countries with which Mexico has signed an FTA

• Free Trade Agreement with Chile (1999);

• Free Trade Agreement with the European Union (2000);
• Free Trade Agreement with Israel (2000);
• TN Free Trade Agreement (2001), with Guatemala, El Salvador and Honduras;
• Free Trade Agreement with the European Association of Free Trade, integrated by
Iceland, Norway, Liechtenstein and Switzerland (2001);
• Free Trade Agreement with Uruguay (2004); and
• Free Trade Agreement with Japan (2005)

Mexico has shown interest in becoming an associate member of Mercosur.[65] The

Mexican government has also started negotiations with South Korea, Singapore and
Peru.[66], and also Mexico have interested with Australia to start negotiations for a trade
agreement between the two countries.

[edit] NAFTA

Main article: North American Free Trade Agreement

NAFTA emblem

The North American Trade Agreement (NAFTA) is by far the most important Trade
Agreement Mexico has signed both in the magnitude of reciprocal trade with its partners
as well as in its scope. Unlike the rest of the Free Trade Agreements that Mexico has
signed, NAFTA is more comprehensive in its scope and was complemented by the North
American Agreement for Environmental Cooperation (NAAEC) and the North American
Agreement on Labor Cooperation (NAALC).

The NAAEC agreement was a response to environmentalists' concerns that companies

would relocate to Mexico or the United States would lower its standards if the three
countries did not achieve a unanimous regulation on the environment. The NAAEC, in an
aim to be more than a set of environmental regulations, established the North American
Commission for Environmental Cooperation (NACEC), a mechanism for addressing
trade and environmental issues, the North American Development Bank (NADBank) for
assisting and financing investments in pollution reduction and the Border Environmental
Cooperation Commission (BECC). The NADBank and the BECC have provided
economic benefits to Mexico by financing 36 projects, mostly in the water sector. By
complementing NAFTA with the NAAEC, it has been labeled the "greenest" trade
agreement.[67]

The NAALC supplement to NAFTA aimed to create a foundation for cooperation among
the three members for the resolution of labor problems, as well as to promote greater
cooperation among trade unions and social organizations in all three countries, in order to
fight for the improvement of labor conditions. Though most economists agree that it is
difficult to assess the direct impact of the NAALC, it is agreed that there has been a
convergence of labor standards in North America. Given its limitations, however,
NAALC has not produced (and in fact was not intended to achieve) convergence in
employment, productivity and salary trend in North America.[68]

The agreement fell short in liberalizing movement of people across the three countries. In
a limited way, however, immigration of skilled Mexican and Canadian workers to the
United States was permitted under the TN status. NAFTA allows for a wide list of
professions, most of which require at least a Bachelor's degree, for which a Mexican or a
Canadian citizen can request TN status and temporarily immigrate to the United States.
Unlike the visas available to other countries, TN status requires no sponsorship, but
simply a job offer letter.

The overall benefits of NAFTA have been quantified by several economists, whose
findings have been reported in several publications like the World Bank's Lessons from
NAFTA for LA and the Caribbean,[68] NAFTA's Impact on North America,[69] and NAFTA
revisited by the Institute for International Economics.[13] They assess that NAFTA has
been positive for Mexico, whose poverty rates have fallen, and real income salaries have
risen even after accounting for the 1994–1995 Economic Crisis. Nonetheless, they also
state that it has not been enough, or fast enough, to produce an economic convergence nor
to reduce the poverty rates substantially or to promote higher rates of growth. Some have
suggested that in order to fully benefit from the agreement Mexico should invest in
education and promote innovation as well as in infrastructure and agriculture.[68]

Contrary to popular belief, the maquiladora program was in place far before NAFTA, in
some sense dating all the way back to 1965. A maquiladora manufacturer operates by
importing raw materials into Mexico either tariff free (NAFTA) or at a reduced rate on a
temporary basis (18 months) and then using Mexico's relatively less expensive labor
costs to produce finished goods for export. Prior to NAFTA maquiladora companies
importing raw materials from anywhere in the world were given preferencial tariff rates
by the Mexican government so long as the finished good was for export. The US, prior to
NAFTA, allowed Maquiladora manufactured goods to be imported into the US with the
tariff rate only being applied to the value of non US raw materials used to produce the
good, thus reducing the tariff relative to other countries. NAFTA has eliminated all tariffs
on goods between the two countries, but for the maquiladora industry significantly
increased the tariff rates for goods sourced outside of NAFTA.
Given the overall size of trade between Mexico and the United States, there are
remarkably few trade disputes, involving relatively small dollar amounts. These disputes
are generally settled in WTO or NAFTA panels or through negotiations between the two
countries. The most significant areas of friction involve trucking, sugar, high fructose
corn syrup, and a number of other agricultural products.[38]

[edit] Mexican Trade Facilitation & Competitiveness

A research brief published by the World Bank[70] as part of its Trade Costs and Facilitation
Project suggests that Mexico has the potential to substantially increase trade flows and
economic growth through trade facilitation reform. The study examines the potential
impacts of trade facilitation reforms in four areas: port efficiency, customs administration,
information technology, and regulatory environment (including standards).

The study projects overall increments from domestic reforms to be on the order of $31.8
billion, equivalent to 22.4 percent of total Mexican manufacturing exports for 2000-03.
On the imports side, the corresponding figures are $17.1 billion and 11.2 percent,
respectively. Increases in exports, including textiles, would result primarily from
improvements in port efficiency and the regulatory environment. Exports of transport
equipment would be expected to increase by the greatest increment from improvements
in port efficiency, whereas exports of food and machinery would largely be the result of
improvements in the regulatory environment. On the imports side, Mexican
improvements in port efficiency would appear to be the most important factor, although
for imports of transport equipment, improvements in service sector infrastructure would
also be of relative importance.[71]

[edit] See also

• Infrastructure
o Communications in Mexico
o Transportation in Mexico
• List of Mexican companies
• Next Eleven
• Demographics of Mexico

[edit] References
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 71. ^ "Trade Facilitation Reform Promises Large Gains to Trade in Mexico", John S.
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[show]
v•d•e
North American Free Trade Agreement (NAFTA)

[show]
v•d•e
Member economies of the Asia-Pacific Economic Cooperation (APEC)

[show]
v•d•e
Caribbean Community (CARICOM)

[show]
v•d•e
Organisation for Economic Co-operation and Development (OECD)

[show]
v•d•e
Members of the World Trade Organization (WTO)

[edit] External links

• (Spanish) Mexican Council for Economic and Social Development
• (Spanish) Mexico Development Gateway
• (English) OECD's Mexico country Web site and OECD Economic Survey of
Mexico

Retrieved from "http://en.wikipedia.org/wiki/Economy_of_Mexico"

Categories: Economy of North America | Economy of Mexico | WTO member economies
| OECD member economies