Mexico - International University of Japan · Catholic Mexico, known as the Cristero War (1926-29). The conflict was brought to an end not by victory by either side but through negotiation

Country Profile 2004

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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Mexico 1

© The Economist Intelligence Unit Limited 2004 www.eiu.com Country Profile 2004

Contents

3 Regional overview3 Membership of organisations

4 Basic data

5 Politics5 Political background6 Recent political developments9 Constitution, institutions and administration10 Political forces14 International relations and defence

15 Resources and infrastructure15 Population16 Education18 Health19 Natural resources and the environment20 Transport, communications and the Internet23 Energy provision

25 The economy25 Economic structure27 Economic policy29 Economic performance30 Regional trends

32 Economic sectors32 Agriculture33 Manufacturing36 Mining and semi-processing37 Construction37 Financial services41 Other services

42 The external sector42 Trade in goods44 Invisibles and the current account46 Capital flows and foreign debt47 Foreign reserves and the exchange rate

49 Appendices49 Sources of information52 Reference tables52 Population52 Labour force52 Unemployment rates in urban areas52 Crude oil and gas production53 Non-financial public-sector finances53 Federal government budget revenue and expenditure53 Money supply54 Interest rates

2 Mexico


54 Gross domestic product54 Gross domestic product by sector55 Gross domestic product by expenditure55 Prices and earnings55 Production of principal crops56 Livestock production56 Manufacturing production56 Minerals production57 Stockmarket indicators57 Merchandise sales57 Tourism57 Main exports and imports58 Main trading partners58 Balance of payments59 Total foreign investment59 External debt, World Bank series59 Gross external debt, national estimates60 Amortisation schedule of global external debt60 Foreign reserves60 Exchange rates

Mexico 3


Regional overview

Membership of organisations

The North American Free-Trade Agreement (NAFTA), which came into force onJanuary 1st 1994, will liberalise trade over a 15-year period, although someacceleration of the process was negotiated subsequently. Acknowledgingimbalances in development, the timetable for Mexico to dismantle its tradebarriers is more gradual than that for the US and Canada, and special rulesapply to trade in textiles, vehicles and parts, and agricultural products. Inaddition, the state has retained exclusive rights to ownership, production andinvestment in oil, gas, refining, petro-chemicals, nuclear energy and electricity.The treaty also covers trade in services, including overland transport, ports,telecommunications, financial services and government procurement.

A free-trade agreement between Mexico and the EU was signed on March 23rd2000, and came into force on July 1st. Complete elimination of tariffs will taketen years, with the tariff reduction timetable also addressing the imbalancebetween both parties. Agricultural products deemed sensitive by both partiesare excluded, including several crops, meat, sugar and milk products. Rules oforigin are in the 40-60% range, with those for cars starting at 45%, beforeincreasing to a permanent level of 60% by 2005.

Mexico joined the Asia-Pacific Economic Co-operation (APEC) forum inNovember 1993. APEC works to reduce tariffs and other trade barriers acrossthe Asia-Pacific region. Unlike other multilateral trade bodies, APEC operates onthe basis of non-binding commitments. Decisions made within APEC arereached by consensus and commitments are undertaken voluntarily. APEC has21 member economies: Australia; Brunei Darussalam; Canada; Chile; China;Hong Kong, China; Indonesia; Japan; South Korea; Malaysia; Mexico; NewZealand; Papua New Guinea; Peru; the Philippines; Russia; Singapore; ChineseTaipei; Thailand; the US; Vietnam.

NAFTA

The Mexico-EU free-tradeagreement

APEC

4 Mexico


Basic data

1,964,375 sq km

103.6m (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 2002: Ps9.68:US$1; exchange rate onFebruary 23rd 2003: Ps10.9: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

Mexico 5


Politics

The election of Vicente Fox Quesada of the Partido Acción Nacional (PAN) aspresident in July 2000 signified the start of a new era in Mexican politics, endingseven decades of political domination by the Partido RevolucionarioInstitucional (PRI). Mr Fox pursues similar market-based policies to those ofprevious administrations. Governability has been weakened, as for the first timein the country’s modern history the ruling party does not have a majority ineither house of Congress. The PAN saw a decline in its representation in theChamber of Deputies (the lower house) following the July 2003 legislativeelections. It will remain in a minority position in the lower house and theSenate until the elections in 2006. Under Mr Fox, consensus-building betweenthe executive and Congress has been poor, and this has severely delayed thepassage of legislation.

Political background

Independence from Spain was achieved in 1821 but Mexico suffered civil warsand predatory incursions. Texas seceded from Mexico in 1835-36. In 1845 a warbroke out with the US, which cost Mexico the additional territorial losses of thestates of California, Arizona and New Mexico. In 1864 France imposed aHapsburg archduke, Maximilian, as emperor. However, after the withdrawal ofFrench troops in 1867, the archduke was quickly overthrown and executed.Under the dictatorship of General Porfirio Díaz (1876-1911), order was imposedand the economy developed. When he engineered his own re-election for theseventh time in 1910, however, opposition forces led by Francisco Maderorebelled. They were joined by peasants who were led by Emiliano Zapata.General Díaz was forced into exile in 1911 and Mr Madero became president, buthe was ousted and killed in 1913. New rebellions followed and although therebels were crushed, their ideals, including land reform, were incorporated into anew constitution in 1917.

General Plutarco Elías Calles (president from 1924 to 1928) had a major impacton political developments, particularly through the creation of the PartidoNacional Revolucionario (PNR). He also sought to suspend the practice ofCatholicism as the Church was deemed to challenge the power of the modernstate that the authorities were trying to establish. This sparked a rebellion byCatholic Mexico, known as the Cristero War (1926-29). The conflict was broughtto an end not by victory by either side but through negotiation. An agreementwas reached by church and state to co-exist and to keep their respective realmsseparate. Another important presidency was that of Lázaro Cárdenas (1934-40),who redistributed land and expropriated foreign oil companies. In 1938Mr Cárdenas re-named the party as the Partido de la Revolución Mexicana(PRM) and instituted a corporatist structure made up of labour, peasant and"middle class" movements. In 1945 the PRM was renamed the PartidoRevolucionario Institucional. For many years sustained economic growthensured that it enjoyed a high degree of popular support, and additionally theregime frequently co-opted potential opponents and engaged in electoral fraud

Instability and dictatorshipfollow independence

The PRI is created

6 Mexico


to ensure an absolute monopoly of power. Political stability came under strainin the late 1960s when intellectuals and students sought more politicalopenness, but were repressed by the state. A deterioration in economic policy inthe 1970s precipitated an external debt crisis in 1982 and the then president,Miguel de la Madrid (1982-88), was forced to embark on politically costlystructural reform. His choice of technocrat, Carlos Salinas de Gortari, as the PRI’scandidate in 1987 prompted a split in the PRI, led by a former minister and PRIpresident, Porfirio Muñoz Ledo, and a former governor of Michoacán,Cuauhtémoc Cárdenas, son of Lázaro Cárdenas, who had aimed to democratisethe presidential candidate selection process. They went on to form the FrenteDemocrático Nacional (FDN) alliance to contest the 1988 election withMr Cárdenas as their candidate. The alliance attracted the support of most of theleft. The official results in July 1988, alleged to be fraudulent, gave Mr Salinas avictory with only 50.4% of the vote—the lowest in the PRI's history.

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 government’sunpopularity following the peso crisis in 1994-1995. For the first time in almost70 years, the PRI lost its majority in the Chamber of Deputies in the 1997 mid-term election, as well as a number of governorships and the mayorship of theFederal District. By the beginning of 2000 the opposition held the governorshipsof ten states. Confidence in clean elections had increased substantially andcandidates and regional issues had become more important. The presidentialelection of July 2000 brought sweeping political change when Mr Fox, thecandidate of the coalition formed by the PAN and the Partido Verde Ecologistade México (PVEM, the green party), defeated the PRI’s candidate, FranciscoLabastida, ending the party’s 71-year reign. Although Mr Fox’s share of the votewas the lowest ever obtained by a winning presidential candidate (42.4%), thisdid not affect his legitimacy as the PRI was defeated by a substantial margin.The PRI won 36.1% of the vote.

Recent political developments

On December 1st 2003 Mr Fox reached the midpoint in his six-year presidentialterm. An opinion poll published by a national daily newspaper, Reforma, on

Reforms accelerate in responseto unrest in 1994

A multiparty democracyemerges

Mr Fox reaches his term mid-point with little achieved

Mexico 7


the same day established that Mr Fox remained quite popular. Of thosequestioned, 58% approved of the way he was carrying out his job, whereas 34%disapproved. A much lower fraction approved of the government’s economicmanagement (37%). In fact, the Fox administration is widely perceived asineffectual and this has come about for a number of reasons, but has not beenhelped by the fact that the first non-PRI government in modern history has hadto cope with a difficult external economic environment for much of its time inoffice. Since coming to power in 2000, Mr Fox has had difficulty in gainingsupport for his reform policies. This is partly because of his own limited politicalexperience, negotiating capacity and clout, and his poor management ofrelations with the PAN hierarchy, and partly because of the PAN's minorityposition in Congress, and divisions within the PAN's prime negotiating partner,the PRI.

Following the PAN’s poor showing in the July 2003 congressional election,Mr Fox made a number of important changes to his cabinet in September ofthat year. The changes suggest that Mr Fox is keen to improve relations with thePAN by appointing career politicians from its ranks to replace technocrats.Mr Fox had previously tended to distance himself from the PAN, apparentlytaking its support for granted. A relative newcomer to politics, he was initiallyviewed with suspicion by some party grandees, who resented the fewpositions the party had in the cabinet. In addition, by bringing moreexperienced politicians into the cabinet, the government’s negotiating powershould strengthen. Mr Fox appointed Felipe Calderón Hinojosa as minister ofenergy to replace Ernesto Martens. Previously Mr Calderón had led the PANlegislators in the Chamber of Deputies (2000-03), served as PAN secretarygeneral (1993-95) and president (1996-99). If successful with energy reform,Mr Calderón would become a strong potential PAN presidential candidate forthe 2006 contest. Mr Fox appointed a long-standing personal ally and PANstalwart, Alberto Cárdenas Jiménez, as minister of the environment to replaceVíctor Lichtinger. Mr Cárdenas had previously served—and been quitepopular—as governor of the Pacific state of Jalisco (1995-2001).

Following the election for the Chamber of Deputies in July 2003, the PAN'sminority position was confirmed. This means that governability will continueto be impaired, and the passage of legislation slow, for the remainder ofMr Fox's term. The PAN lost 55 seats whereas the opposition parties, the PRIand the PRD, increased their representation in the lower house. However, noparty won a working majority (as was also the case in the 1997-2000 and 2000-03 legislatures). In the six governorship contests that also took place, the PANhad expected to make some gains. However, the number of states governed bythe PAN (two) and the PRI (four) did not change. The PRI won an importantstrategic victory in the governorship race in the northern state of Nuevo León,an important industrial centre and a traditional PAN stronghold. The PAN wonthe governorship of the central state of San Luis Potosí, ousting the PRI.

Cabinet reshuffle brings inmore career politicians

Minority position in Congressis confirmed

8 Mexico


Composition of the Chamber of Deputies, 2000-062000-03

Legislaturea2003-06

LegislatureRMb PRc Total RM PR Total

Partido Acción Nacional (PAN) 136 70 206 80 71 151Partido Revolucionario Institucional (PRI) 132 79 211 161 63 224

Partido de la Revolución Democrática (PRD) 24 26 50 56 41 97Partido Verde Ecologista de México (PVEM) 6 11 17 3 14 17

Partido del Trabajo (PT) 2 6 8 0 6 6Convergencia 0 3 3 0 5 5

Partido de la Sociedad Nacionalista (PSN) 0 3 3 0 0 0Partido Alianza Social (PAS) 0 2 2 0 0 0México Posible (MP) 0 0 0 0 0 0

Fuerza Ciudadana (FC) 0 0 0 0 0 0Partido Liberal Mexicano (PLM) 0 0 0 0 0 0

Total 300 200 500 300 200 500

a Initial share of seats but this changed owing to defections during the three years. b RM is relative majority (first-past-the-post). c PR isproportional representation.

Sources: Chamber of Deputies; Insituto Federal Electoral.

Under Mr Fox, the legislature has begun to fulfil its constitutional role as acounterweight to executive power. Although this is positive for democratisation,it has impaired governability owing to the government's minority position. As aresult, the government has had great difficulty in gaining congressional supportfor its reform programme. Fiscal reform to increase revenue and reduce thereliance on oil revenue, liberalisation of the electricity sector to boost supply andreduce prices, changes to labour legislation to reduce formal sector labour costs,and further liberalisation of telecommunications have all been subject to seriousCongressional delays. Following the inauguration of the 2003-06 Congress, thepolitical parties appeared willing to co-operate to make progress in passingreform. This became impossible when infighting within the PRI broke outtoward the end of 2003 between traditional statists and modernisers, and on apersonal level between the president of the PRI, Roberto Madrazo, and thesecretary general and (at the time) the leader of the PRI in the Chamber ofDeputies, Elba Esther Gordillo. Although the disputes appear to have beensettled for the time being, internal political considerations will continue toinfluence Mr Madrazo's actions and thereby the extent of the PRI's support forthe government. As a further round of gubernatorial races approaches in mid-2004 and the preparations for the presidential election begin in 2005, themomentum to pass reform will slow even further.

The 2003 legislative election also revealed a large degree of apathy amongvoters, with the level of abstention reaching almost 60%, the highest everrecorded. Although Congress now asserts more power (for most of the PRI eraCongress was a rubber stamp for executive decisions), its members remainlargely unaccountable to the electorate. As they cannot be re-elected tosuccessive terms, legislators depend upon their parties to help to find them jobswhen their terms in Congress come to an end. Hence members tend to followthe party whip rather than pursue their constituents’ interests.

Congress is stronger butunaccountable

Mexico 9


Important recent events

1998-99

The opposition continues to advance after significant progress in 1997, but the PRIproves resilient. Of the 17 governorships contested in 1998-99, only five go to theopposition. Francisco Labastida wins the first-ever PRI presidential primary, held atthe end of 1999.

July-December 2000

National elections are held. Vicente Fox Quesada, the PAN’s presidential candidate,wins the presidency and takes office on December 1st, appointing a mostly non-partisan pro-business cabinet.

2001-02

A sharp economic slowdown, inexperience in government and clashes withCongress contribute to a failure by the Fox administration to achieve its maininitiatives and a fall in its popularity.

July 2003

Congressional elections are held. The PAN lost 55 seats, whereas the PRI and the PRDincreased their representation, but no party won a working majority (as was also thecase in the 1997-2000 and 2000-03 legislatures). Abstention was around 60%—thehighest ever recorded.

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 systemcovering 31 states and the Distrito Federal (the Federal District, which includesMexico City) and provided for the separation of executive, legislative andjudicial powers. In practice, government has been centralised and, until themid-1990s, the executive dominated the other branches of government.Reforms implemented in 1994-95 gave the Suprema Corte de Justicia de laNación (SCJN, the Supreme Court) greater autonomy and Congress has alsogained strength. Mr Fox has called several times for a thorough revision of theconstitution, but far-reaching reform is unlikely in the near term.

Congress comprises the Senate (the upper house) and the Chamber of Deputies(the lower house). Senators serve for six years and deputies for three. Indivi-duals cannot be re-elected for either position. In the Chamber of Deputies, 300seats are allocated using the first-past-the-post system and 200 by proportionalrepresentation. In 1993, the number of senators was doubled from 64 to 128 sothat each state and the Federal District has three senators directly elected byrelative majority and one senator elected by the first minority principle (thecandidate that comes second in each state race). Of the directly elected seats inthe Senate, 64 are elected via the first-past-the-post system and 32 are electedusing proportional representation. Reforms approved by Congress in 1996 madeit easier for a single party to gain a working majority in Congress, but imposs-

A resilient constitution

Composition of Congress

10 Mexico


ible for any one party to achieve the two-thirds majority necessary to changethe constitution. Despite these reforms, the 2000 election result was unprece-dented in that no single party enjoys a working majority in either house.

The most important political post in the cabinet is that of minister of theinterior, 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 much moreactive role 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, although ithas widened slightly beyond these groups since the early 1990s. Althoughinclined to free-market policies, the party has also shown some populisttendencies. The leadership of Luis Felipe Bravo Mena, who was electedpresident of the party in March 1999, and re-elected for another three-year termon March 9th 2002, has been undermined by the authority of the party chiefs inCongress and by the powerful personality of Mr Fox. PAN members are dividedin their support for Mr Fox as a significant number consider that he hijacked theparty to further his personal ambition. Mr Fox largely shares the party’s policyorientation, notably in his strong support for free-market policies, but he is notseen as a loyal party servant and occasionally breaks from PAN positions. As aresult of his uncertain loyalty to the party line, the PAN cannot count on Mr Foxto put its interests first. Conversely, the president cannot count on the fullsupport of his own party for his legislative initiatives.

For the first time since it was established in 1929, the PRI is in opposition at thefederal level, a reality that has proved difficult for most of its members to accept.Detached from presidential power, the PRI is struggling to reinvent itself. Havinglacked any coherent ideology for decades, the party became a means of winningand exercising power, and largely followed the direction set by the president. Inaddition, since the early 1980s a clear separation developed between the party’straditionalists, mostly positioned in the legislature and local government, andits technocrats, a minority who dominated the federal executive.

Following the loss of the presidency, a battle for control of the party ensued,with the traditionalists emerging as the dominant force. In an election open toall citizens on February 24th 2002, Roberto Madrazo, a former presidential pre-candidate and governor of Tabasco, and Elba Esther Gordillo, the de facto leaderof the powerful Sindicato Nacional de Trabajadores de la Educación (SNTE, theNational Union of Teachers), were elected as party president and secretary-

Ranking of ministries

The PAN adapts to governmentunder Mr Fox

The PRI struggles to adapt toits loss of power

Mexico 11


general, respectively. Popular among its grassroots, and with a long career as aPRI member, Mr Madrazo has a populist touch, but he is also considered to be apragmatist. Several governors and legislators, however, have already evolved asimportant figures with authority, and Mr Madrazo frequently finds it difficult tomaintain party unity. This became impossible in late 2003 when clashesbetween traditional statists and modernisers broke out over government plansto extend value-added tax (VAT) to food and medicine and Mr Madrazo'ssimmering antipathy to Ms Gordillo came to the fore. She had been in favourof supporting the government's VAT plan. In the end she was removed as leaderof the PRI in the Chamber of Deputies. She was replaced by Emilio Chuayfettand the PRI voted against the government's reform.

Ideologically, the PRI is evolving into a centre-left party with a social-democraticagenda. It is likely to hold together, aiming to regain the presidency in 2006.Currently it has 17 of the 31 state governorships and the biggest parliamentarygroups both in the Chamber of Deputies and the Senate.

The PRD was formed in 1989 by supporters of Mr Cárdenas’s 1988 presidentialbid. After his defeat in the 1994 election, the party suffered a temporary decline.Between 1996 and 1999, under the leadership of Andrés Manuel López Obrador,the party’s electoral fortunes improved, partly owing to the significant protestvote against the government during the economic crisis. The party diversifiedits base by embracing disaffected PRI members, winning over states that hadbeen considered 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. Mr Cárdenas still enjoys a significant following. Inthe 2003 congressional elections, the PRD increased its share of the vote from13% to 18% but its performance was below the expectations created by itspresident, Rosario Robles. Under pressure from opponents within the partywho leaked information about the party’s debt levels to the press, she resignedand Leonel Godoy, a close ally of Mr Cárdenas, was appointed as interimleader for a year.

A three-party system has evolved since 1997, with five other small parties beingrepresented in Congress. The most important among them is the PVEM, whichbenefited greatly from having supported Mr Fox as a presidential candidate (interms of seats in Congress gained from the coalition it formed with PAN).However, it openly broke ranks with the government in September 2001, mainlybecause it did not get any cabinet positions, and opted to fight some legislativeseats with the PRI in 2003. A total of 11 political parties competed in the 2003congressional election but five of them failed to obtain the minimum share of2% of the vote and lost their deposit. These were: the Partido Alianza Social(PAS), the Partido de la Sociedad Nacionalista (PSN), México Posible (MP),Fuerza Ciudadana (FC) and the Partido Liberal Mexicano (PLM). The PVEM,with 17 deputies, reaffirmed its standing as the fourth-biggest party. The twoother survivors were the Partido del Trabajo (PT), which has six seats in theChamber of Deputies, and Convergencia (a PRI splinter founded in 1999), withfive seats.

The PRD loses its popularity

12 Mexico


Mexico has an important rebel group, the Ejército Zapatista de LiberaciónNacional (EZLN), which is based in the state of Chiapas. Other relatively smallguerrilla movements have at times emerged, but have either fizzled out or beendeactivated by government forces. No formal peace negotiations have takenplace since 1996 as both the government and the EZLN have been unwilling togive ground on certain questions. The EZLN, cornered militarily, has a smallpolitical base but a formidable propaganda machine. In September 1997 apolitical front, the Frente Zapatista de Liberación Nacional (FZLN), wasestablished to mobilise national support for the Zapatistas, but it will notparticipate in elections. As soon as he entered office, Mr Fox tried to re-startpeace negotiations. He removed the army from several areas, freed EZLNprisoners and sent a constitutional initiative to Congress to increase theautonomy of indigenous groups. Congress ultimately passed a much watered-down version of the initiative that proved unacceptable to the EZLN, which thenrefused to enter into peace talks.

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 (61)

President. A relative newcomer to politics after a successful career in business.Mr Fox joined the Partido Acción Nacional (PAN) in the late 1980s and becamecongressman for Guanajuato in 1988. Having failed to win the election in 1991, hebecame governor of his state in 1995. From 1995 he campaigned vigorously for thepresidency, becoming a national figure. Although not popular among the leaders ofhis own party, he was able to circumvent their hostility by building a strong politicalsupport group. Despite a flawed campaign, his offer of change was a powerfulmessage, luring many voters away from the Partido Revolucionario Institucional(PRI) and the Partido de la Revolución Democrática (PRD). His pragmatic and pro-business approach to government was reflected in the appointment of severalcabinet ministers with strong business backgrounds. However, Congress has radicallyslowed down and altered his ambitious legislative agenda. After three years ingovernment, his administration is considered ineffectual, but his personal approvalratings remain high. He is perceived as well-intentioned and, most importantly, notcorrupt.

Santiago Creel Miranda (49)

Minister of the interior. Mr Creel, a lawyer, received the PAN’s nomination tobecome a member of the Instituto Federal Electoral (IFE, Federal Electoral Institute) in1994, just as that organisation had been granted full autonomy. He became a deputyfor the PAN in 1997, although he was not officially a party member until 1999,building his political reputation as one of the main leaders of the opposition bloc

Forces outside parliament

Mexico 13


that held a majority in the Chamber of Deputies. In 2000 he was the PAN’scandidate for the governorship of Mexico City and came a close second to the PRD.In his role as interior minister, Mr Creel has dealt skilfully with opposition parties,carefully following the presidential line of seeking a consensus whenever possible.

Roberto Madrazo Pintado (53)

PRI national leader. Mr Madrazo, a lawyer, became a nationally known figure in1999, when he stood for the PRI presidential nomination against the eventualwinner, Francisco Labastida. He is popular among the PRI’s grassroots as he has hada long career in the party, having risen from being a leader of its youth movement tothe post of secretary of organisation. Mr Madrazo was governor of Tabasco in1995-2000 and has twice been elected to the Chamber of Deputies—in 1976-79 and in1991-94—and to the Senate in 1988-91. He was elected as PRI leader in February 2002.He faces the challenge of unifying the party and drawing up a cohesive strategy.

Andrés Manuel López Obrador (51)

Mayor of Mexico City. A long-time ally of PRD founder Cuauhtémoc Cárdenas,Mr López Obrador defected from the PRI in 1988. An energetic social activist, he wasfederal deputy (1988-91) and twice (in 1988 and 1994) failed to win the governorshipof his native Tabasco. Supported by Mr Cárdenas, he became president of the PRDfrom 1996 to 1999. Under his vigorous leadership, the party experienced stronggrowth. In 2000 he won the governorship of Mexico City. His straightforwardmanner and populist policies (diverting expenditure from investment to financehandouts to certain groups) have made him very popular and he is tipped as astrong candidate for the 2006 presidential elections.

Diego Fernández de Cevallos (63)

Senator. A long-standing member of the PAN and a powerful lawyer, he gainednational prominence as federal deputy in the 1991-94 legislature, when as leader ofthe PAN faction in the Chamber of Deputies he worked closely with the PRIgovernment. A presidential candidate in the 1994 election, he came a strong second,and positioned his party as a credible electoral alternative. A long-time rival ofVicente Fox Quesada, he has frequently and publicly clashed with the president.Senator for the 2000-06 period, his influence on many PAN members, and abilitiesto work with the PRI, are sorely needed by the government to push forward itslegislative agenda.

Francisco Barrio Terrazas (53)

Comptroller and administrative development (Secodam) minister. One of the fewtraditional PAN members in the cabinet. With a BA in Accounting and an MBA, aswith many PAN members he moved in the early 1980s from business activities topolitics. He joined the party in 1983, and in the same year became mayor of hisnative Chihuahua City. In an election heavily tarnished by fraud in 1986, he wasdefeated as candidate for governor, a position he won six years later (1992-98) Hisinterest in fighting corruption motivated his appointment to Secodam and has madehim a national figure, particularly because of his investigations into the PRI.

14 Mexico


International relations and defence

The Fox administration espouses an activist foreign policy, a reversal of thenon-interventionist stance adopted by PRI governments since the 1930s, andone that largely supports US initiatives. But after an auspicious start, relationswere overtaken by the terrorist attacks on the US in 2001 and more recently,differences over the war in Iraq. Since late 2003, however, relations have begunto improve again. This is in part because of the US presidential elections inNovember 2004, and the need of the US president, George W Bush, to court theHispanic vote and in part because of Mexico's importance to the US as astrategic ally in Latin America. This has increased in recent months in the faceof the growing strength of a left-of-centre bloc led by Brazil, which seeks to takea more strident stance against US policy in specific areas of trade, such as accessto agricultural markets, investment and services than has been evidentpreviously. Mexico seems to have won one of the most important measuresthat Mr Fox had sought from Mr Bush, namely improvements in the status andtreatment of illegal Mexican workers in the US. In January 2004 Mr Bushunveiled a plan to change fundamentally the status of illegal immigrants in theUS, although it may well not gain US Congressional approval this year.

Mexico has strengthened ties with other countries and economic blocs. It wasadmitted as a full member of the Asia-Pacific Economic Co-operation (APEC)forum in 1993 and to the OECD in 1994, having joined what is now known asthe World Trade Organisation (WTO) in 1986. Mexico has also pursued greaterregional integration by entering into free-trade agreements (FTAs) with CostaRica, Bolivia, Venezuela and Colombia (1995), Nicaragua (1998), Chile (1992 and1998), Israel and the EU (2000), the European Free-Trade Association (EFTA;2001), and Uruguay (2003). Mexico is also a member of the Triángulo del Norte(Northern Triangle) trade bloc along with Guatemala, Honduras and El Salvador.Negotiations to reach an FTA with Japan started formally in November 2002and despite a number of stumbling blocks, look set to be completed in 2004 (seeEconomic policy).

Armed forces, 2002

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.

Strong relations with the US

Mexico 15


Air force

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

Although the armed forces are ill-equipped to defend Mexico from externalaggression, their role in domestic affairs has increased in the past few years. Inaddition to waging a perennial war against drug-traffickers, they have beencalled on to contain guerrilla groups, notably the EZLN, and even to take onpolicing duties. However, scandals related to corruption and human rightsabuses have tarnished the army’s image. Defence spending is low, andamounted to just 0.5% of GDP in 2002.

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.

Violent crime

Since the mid-1990s all forms of crime have risen sharply, particularly in Mexico City.Theft of merchandise and assaults on staff are among the top security concerns ofbusinesses operating in Mexico. The judiciary and municipal police are oftencorrupt, making arrest and prosecution of criminals more difficult. Businesses,especially those dealing with the public, should expect to spend heavily on security.Large firms allocate about 10% of their total expenses to security.

Organised crime

Drugs cartels are entrenched in Mexican states near the US border. The assassinationof public officials in these states is often drug-related. Southern states such asGuerrero and Michoacán are used for growing illegal crops like marijuana.

Kidnapping

Although conventional kidnapping gangs do not generally target foreigners, the risingincidence of “express kidnappings” means that executives are at growing risk ofbecoming the targets of violent crime.

Resources and infrastructure

Population

Mexico is in an advanced stage of demographic transition—the transformationof countries from having high birth and death rates to low birth and death

Priorities of the armed forces

16 Mexico


rates. According to the Consejo Nacional de Población (Conapo, the NationalPopulation Council), the rate of population growth has slowed from more than3% per year in the early 1970s to an estimated 1.3% in 2003. According to officialdata, the average age of the population is 27, the number of people under sixyears old has fallen since 1990, and life expectancy is 75 years. The number ofpeople aged 6-14 years has also been declining since 1999. Despite thesechanges, a third of the population is aged 14 years or under, which results inpressures 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).The fertility rate fell from 5.6/woman in 1976, to 3.9/woman in 1986, to2.7/woman in 1996 and finally to an estimated 2.34/woman in 2001. The fall inthe fertility rate has come about owing to a range of factors, including improvedaccess to education for women, increased use of contraceptives and betterhealthcare, which has lowered infant mortality, thereby encouraging people tohave fewer children.

According to the 2000 census, 65% of the population lives in urban areas, witharound 18m in the Metropolitan Area of Mexico City. According to thegovernment's Programa Nacional de Población (2001-06), the demographic andeconomic concentration in large metropolitan areas did not change markedly inthe 1980s and 1990s. Around 24% of the population still lives in small ruralcommunities with fewer than 2,500 inhabitants, many of which are isolatedand widely dispersed. Around 12.7m Mexicans are indigenous and tend tosuffer high poverty rates—68% of high or extremely high levels of margin-alisation are indigenous. There are over 60 recognised ethnic and languagegroups, and around 1% of the total population does not speak any Spanish. Themost numerous indigenous groups are the Náhuatl, the Maya, the Zapotec andthe Mixtec.

Emigration, primarily to the US, continues in large numbers. According togovernment estimates, over 0.4m people migrated every year in 2000-02. In2002 the number of Mexican-born people living in the US was estimated byConapo at 9.5m, around 30% of US immigrants and around 3.5% of the USpopulation. If those of Mexican origin but born in the US are counted, in 2002there were 25.5m Mexicans living in that country. The average age of an illegalimmigrant is estimated at 34 years old, with 61% having at most secondaryeducation. In 2002 76,531 Mexicans became US citizens through naturalisation.According to US statistics, in 2002 the total number of Mexican-born peopleofficially admitted into the US stood at 219,380, and a total of 0.99m weredetected as deportable aliens (although this figure may be considerablyinflated, as many people return to the US soon after being expelled).

Education

In 2000 9.6% of the population aged 15 years and above was illiterate. Theaverage number of years of schooling per child stood at 7.6 years, comparedwith 6.5 years in 1990. Although primary education for children aged betweenfive and 11 years is both free and compulsory, in 2000 only 70.3% of the

The workforce is poorlyeducated

Mexico 17


population age 15 years or over had completed the primary level. Only 25% ofthe adult population has reached an upper-secondary level of education (theOECD average being 64%), and of those aged 15-19 years, approximately half arenot in education (the OECD average is 20%).

Given the rapid growth of the population reaching working age (about 1m peryear), a major effort is needed to facilitate the transition from school to work. InAugust 1997 the Programa de Educación, Salud y Alimentación (Progresa, aprogramme promoting better education, health and nutrition) was introducedto provide additional subsidies to some of the country’s poorest families.Secondary schooling for children aged 11-14 years has been made compulsoryand technical training facilities have been expanded. For the 2002/03 academicyear, there were more than 5,533 centres training students for jobs in industry.

In February 2001, the president, Vincente Fox Quesada, announced two neweducation programmes, the Programa Nacional de Becas para Estudios de TipoSuperior (Pronabes, which provides scholarships to poor students in highereducation) and the Programa de Escuelas de Calidad, which will provideadditional financing for public schools to improve their quality. In March 2002the government announced the replacement of Progresa with a programmecalled Oportunidades. In addition to the three areas covered by Progresa,Oportunidades will include temporary employment programmes, financing forsmall-scale projects and the regularisation of housing in urban and rural areas.It is estimated that Oportunidades will benefit over 5m families in 2004.

According to government estimates, spending on education in 2002 amountedto 6.8% of GDP (with 1.3% of GDP coming from private sources), a level thatcompares favourably with the 5.5% OECD average (1999 figure). However,spending is heavily skewed towards higher education, with university studentsreceiving a subsidy that is 4.4 times higher than their counterparts at primaryschool, and double the OECD average. In the 2002/03 academic year therewere only 2,250 students in higher education per 100,000 of the population(about one-third the US figure). It is not yet clear what the government plans todo to rebalance this situation. Total education spending is due to increasesharply. At the end of 2002 Congress changed the General Education Law,establishing that by 2006 the government should spend an equivalent of 8% ofGDP on education. Mr Fox welcomed the change (although it is unclear howthat huge increase will be financed).

Students('000)

2001/02 2002/03 2003/04Pre-school 3,432.3 3,495.7 3,725.2

Primary school 14,843.4 14,858.9 14,878.4Secondary school 5,480.2 5,672.7 5,813.2High school 3,120.5 3,275.6 3,479.2

University 2,147.1 2,259.8 2,354.6Other (technical training) 1,121.9 1,230.0 1,236.9

Total 30,145.4 30,792.7 31,487.5

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

Educational spending is biasedtowards the tertiary level

18 Mexico


Health

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. Universal vaccination programmes have helped to reducecases of whooping cough and tuberculosis, and poliomyelitis has been almosteradicated. Efforts continue to be made to curb outbreaks of cholera and thespread of AIDS. The government has tried to combat malnutrition by institutingseveral programmes of food support, including the provision of subsidised milkto 2.93m families, free school breakfasts for about 4.7m children and 1 kg/day offree tortillas to 140,000 families, according to 2003 estimates. Neverthelessmalnutrition remains a serious problem, particularly in remote rural areas.

The Instituto Mexicano del Seguro Social (IMSS, the social security institute) andthe Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado(ISSSTE, the social security institute for public-sector workers) are the two mainproviders of healthcare. According to official figures, in 2003 an estimated 47.0mpeople were covered by the IMSS, with 15.9m affiliates paying contributions. TheISSSTE, with 2.4m affiliated state workers, offered services to a further 10.3mpeople. The two organisations are funded by employer and employeecontributions, returns on investments and, in the case of the ISSSTE, increasingtransfers from the federal government (otherwise it would become insolvent).

In addition to the IMSS and the ISSSTE, some healthcare services are providedby the Ministry of National Defence, the Ministry for the Navy, PetróleosMexicanos (Pemex, the state oil company) and by state organisations such asthe Instituto Nacional Indigenista (INI, the Institute for Indigenous People) andDesarrollo Integral de la Familia (DIF, an agency promoting familydevelopment), as well as by private institutions. Those people who are notcontributors to the national social security system nor members of privateschemes can obtain free healthcare from either the Ministry of Health or theIMSS-Solidaridad anti-poverty programme.

Many Mexicans use private healthcare services (particularly for minorailments), as service quality in public facilities varies considerably. In 2003 thegovernment estimated that there were 3,124 private medical establishments inthe country (of which 73 had at least 50 beds).

Hospital units, 2003Type No.Open to allMinistry of Health 454Instituto Mexicano del Seguro Social-Solidaridad (IMSS-Solidaridad)a 69Open to beneficiaries onlyInstituto Mexicano del Seguro Social (IMSS) 264Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado (ISSSTE) 106Petróleos Mexicanos (Pemex) 23Ministry of National Defence 42Ministry for the Navy 32

a Hospitals funded under the IMSS-Solidaridad anti-poverty programme.


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 4.8Hot & dry 23Temperate 23.1

Dry 28.3Very 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. Air pollution is a seriousproblem in Mexico City (in 1992 its air was considered the most polluted in theworld by the UN), Guadalajara and Monterrey. Northern border areas, whereindustries have operated without adequate environmental controls, also suffera high degree of pollution and other environmental problems. In the 1980s theauthorities saw the need to tackle environmental degradation, but the GeneralLaw of Ecological Balance and Environmental Protection was not enacted until1988. In 1992, the Procuraduría Federal para la Protección del Ambiente (Profepa,the Federal Bureau for the Protection of the Environment) was established.

During the administration of Ernesto Zedillo (1994-2000), the Ministry forFisheries became the Ministry of Environment, Natural Resources and Fisheries.Amendments to the law in 1996 delegated important enforcement functions to

Topography

Climate

Land use

Environmental standards

20 Mexico


both state and local governments and introduced the “polluter pays” principle.Mr Fox has transferred the fisheries brief to the Ministry of Agriculture. Ownersof old cars in Mexico City are required to leave them at home on one day eachweek and on two days a week during environmental emergencies. Moves arebeing made to substitute natural gas for diesel in power stations and industry,and environmental policing is being stepped up generally, althoughenforcement remains lax.

Transport, communications and the Internet

Private companies were offered concessions to build and to operate toll roadsunder the administration of Carlos Salinas de Gortari (1988-94). A lower thanexpected volume of traffic and economic crisis from December 1994 caused thegovernment to revoke 23 of the concessions, while also offering financialassistance to the companies involved. New concessions started to be offeredunder the Fox administration in 2003.

Integral port administrators were created in 1993. The administration of eachseaport was awarded by concession to an administrator, who operates portterminals and facilities, providing related port services. The privatisation of portadministration began in 1995 and continued under the Zedillo administration.Foreign investors may hold up to 49% equity in a port administrator and up to100% equity in ventures providing some port services. Concessions last for upto 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.

The process of privatising the country’s 35 airports, which deal with 97% oftotal passengers, started in 1998. The airports were divided into three groups forauction according to their geographical location, with the addition of a specialgroup for Mexico City. A minority but controlling share, usually of 15%, wasoffered to strategic investors, who must include a foreign investor withexperience in airport management, while the rest of the shares are supposed tobe offered to the public on the stock exchange. The 1995 Airports Act permitsup to 49% of investment in enterprises to be from external sources, althoughauthorisation for a higher percentage may be obtained from the ComisiónNacional de Inversiones Extranjeras (CNIE, National Commission for ForeignInvestment).

In October 2001 the government decided to site a new airport for Mexico Cityin Texcoco, about 14 miles east of the city centre, to ease bottlenecks at theexisting Benito Juárez airport. Environmental groups and landowners affected

Roads

Port facilities

Railways

Airports and air transportation

Mexico 21


by the project, particularly the latter, sought judicial injunctions and stagedstrong protests to reverse the decision. This led the government to cancel theproject in August 2002. The cancellation of the project has not helped Mr Fox’simage. The new airport had been one of the most important public worksprojects of his presidency. Instead, the government opted in 2003 to extend theexisting Benito Juárez airport.

As an alternative, and without publicising the strategy much, the governmentaims to expand the airports in nearby urban areas in order to ease the pressureon Benito Juárez airport (it cannot be expanded because of the huge costsinvolved). Airports in nearby Toluca, Morelos, Querétaro and Puebla are amongthe alternatives being studied. The expansion of Puebla airport started in earlyNovember 2002, and the new extension of the Querétaro airport was openedin July 2003.

Transport and communications, 2003Roads (km)a 348,529Paved roads (km) 113,590

Registered vehicles (m)b 19633Railway track (km) 26,655

Rail passengers ('000)a 232Rail freight ('000 tonnes)a 81,567International airports (no.) 57

Domestic airports (no.) 28Air passengers (m) 33854

Air freight ('000 tonnes)a 407Ports (no.) 97Port facilities (sq km) 187

Maritime passengers (m)c 7944Shipping ('000 tonnes) 257,286

Telephone lines ('000)d 15,959Cellular telephones ('000)d 28,379

Internet users ('000)e 12,250

a Estimate from the Tercer Informe de Gobierno. b Figure from October 2003. c January-Octoberfigure. d September 2003 figure. e End-2003 estimate.

Sources: Instituto Nacional de Estadística, Geografía e Informática; Secretaría de Comunicaciones y Transportes; Aeropuertos y

Servicios Auxiliares; Caminos y Puentes Federales de Ingreso; Comisión Federal de Telecomunicaciones; Presidencia de la

República, Tercer Informe de Gobierno.

In 1998-2000 three airport groups were privatised. Aeropuertos del Sureste,manager of nine airports in six states, of which Cancún is the jewel in thecrown, was the first group to be auctioned. Control was won by a consortiumwith Mexican, Danish, French and Spanish capital in December 1998. Aconsortium of Mexican and Spanish investors won the bidding to manageAeropuertos del Pacífico, a group of 12 airports, including Guadalajara andTijuana, in August 1999. Control of Aeropuertos del Centro-Norte, a group of 13airports, including those serving Acapulco and Monterrey, was won by aconsortium of Mexican and French investors in May 2000. The privatisation ofMexico City airport has been delayed indefinitely until the expansion workshave been completed. The placement of 85% of shares in privatised airportgroups on the stock exchange has been delayed several times. Shares in the

22 Mexico


Sureste group were placed on the Mexico City and New York stock exchangesin September 2000. Share placements for the other airport groups have beenpostponed until market conditions improve.

Adverse market conditions are also the reason why the government hasrepeatedly postponed the privatisation of the airlines that compose the Cintraconsortium (with the two national airlines Aeroméxico and Mexicana at itscore). Cintra is under the management of the Instituto Bancario de Protección alAhorro (IPAB, the Institute for the Protection of Bank Savings), and, inaccordance with the legislation that created IPAB, all the assets under itsadministration are supposed to have been sold off by January 2004. However,the airlines have yet to be sold and it is not clear when this will take place.When the privatisation process is implemented, Aeroméxico and Mexicana willhave to be sold separately to ensure some competition on domestic routes(which currently does not exist), according to a ruling from the ComisiónFederal de Competencia (CFC).

The national telephone company, Teléfonos de México (Telmex), was privatisedin 1990. Since then the number of telephone lines has increased substantially.Between 1990 and 2003 density rose from 6.4 lines per 100 people to 15.5 linesper 100 people (September 2003 figure). With privatisation came concessionsfor cellular telephone operations, and in August 1996 the long-distance marketwas opened to competition.

A total of 24 concessions were granted and 19 companies had won concessionsto compete against Telmex in the local telephone service market by the end of2000. However, Telmex continues to wield considerable market power and hasbeen accused frequently of abusing its position. The Comisión Federal deTelecomunicaciones (Cofetel, the telecoms industry regulator) has tried manytimes to rein in the company, without success as Telmex has won judicialinjunctions against its rulings. The Office of the United States TradeRepresentative (USTR) has pressed more successfully, through requests to theWorld Trade Organisation (WTO) to set up arbitration panels and rule on theopenness of the Mexican telecoms market. These requests (the most recenthaving taken place in February 2002) have pushed Telmex to settle with itscompetitors disputed issues such as interconnection fees. Since March 2001 allpolitical parties have been working on a new telecoms law. The issue is stillofficially on the government's agenda, but a consensus has not been reached,and it is not clear when a proposal will be officially presented to Congress, orwhether it will have enough support to be enacted.

Telmex’s monopoly power and the subsequent high cost of fixed-line servicesare a major reason for the explosion in mobile phone services. The mostpowerful company, and by far the most dominant in the market, is Telcel (partof América Móvil, a Telmex spin-off). However, in that field (contrary to whathas been happening with fixed lines), Telmex faces increasingly powerfulcompetition. Telefónica Móviles México (an affiliate of Spain’s Telefónicagroup) has emerged as the second-largest operator in the country after a buyingspree that included Motorola (in 2000) and Pegaso (2002). As of the fourthquarter of 2003, Móviles México had about 3.5m subscribers (against Telcel’s

Telecommunications

Mexico 23


22m). Among the small operators, some consolidation has taken place.MovilAccess, a company owned by Grupo Salinas (that also controls mobiletelephone company Unefon and TV Azteca, the second-biggest televisionbroadcasting company in the country), bought Iusacell, another mobilecompany, at the end of July 2003 from Verizon Communications (US) andVodafone (UK). MovilAccess paid US$10m and officially assumed Iusacell'sestimated US$815m in debt. Verizon and Vodafone are estimated to haveinvested around US$2bn into the company. As a result Grupo Salinas controlsaround 13% of the mobile phone market. Competition is expected to increasebetween Telcel and Telefónica.

The number of households owning a computer has risen markedly, althoughregional differences are large. By the end of 2002 there were an estimated10.03m Internet users in Mexico, with 5.59m accessing the web from homecomputers. At the end of January 2003 the government formally started thefirst phase of the e-Mexico project, which aims to provide high-speedconnection to the Internet through satellite to 3,200 communities.

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 numbersthanks to advertising, government subsidies, and cash hand-outs, but since theFox administration 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, Excelsior (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.

Energy provision

Mexico was the world’s fourth-largest producer and eighth-largest exporter ofoil in 2002. It was also the second largest supplier of crude oil to the US afterSaudi Arabia. In 2003 production reached an historic high of an average of3.37m barrels/day (b/d), constituting an increase of 6.1% year on year. Theambitious goal set for 2006 is to produce 4m b/d. The country produces threetypes of oil: heavy Maya, at 22.3° American Petroleum Institute (API); Isthmus(34.6° API); and Olmeca (39.1° API). Official hydrocarbons reserves at the start of2002 stood at 52.9bn barrels (enough to keep production at current levels for 35years), of which 43.21bn were crude oil and condensates, and 9.74bn gasequivalent. Reserves have declined steadily in the past 19 years, reflecting acontraction in exploration.

Media

Oil production

24 Mexico


Under the constitution, Petróleos Mexicanos (Pemex, the state-owned oilcompany) has a monopoly on all upstream oil and gas activities. Although ithas a refining joint-venture with Royal Dutch/Shell in Texas, Mexico does notallow production joint-ventures. Outside companies have been brought in toundertake drilling operations, although to date they have been doing so underlimited service and performance contracts. The constitution allows Pemex toenter into contracts involving works and delivery of services. However, it alsostates that any remuneration should be made in cash, and under nocircumstances will a percentage of the goods or participation in the results ofthe exploitation be granted.

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 concentrate its political efforts onliberalising the electricity sector.

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 October and November 2003.The first contracts were to produce gas in the Burgos Basin, which lies acrossthe US border from Texas's most productive gas fields. A total of US$8bn ininvestment is expected, which is estimated to double the production of gas inthe area to 2.0bn cu ft/day by 2006.

Pemex aims to reduce the share of its revenue that goes to the government sothat it can invest more in its own infrastructure and in oil exploration. This isunlikely to occur in the medium term as the fiscal reform approved at the endof 2001 did not raise sufficient revenue from other sources to reducesignificantly the state’s reliance on Pemex. The company's directors haveclaimed that, unless Pemex's tax burden is reduced substantially, Mexico willeventually become a net importer of oil, as has occured with natural gas. In themeantime, the company is financing much of its investment through debt soldin the domestic and international capital markets.

Oil and gas productiona

2003 % change on 2002Crude oil incl liquid gas ('000 b/d) 3,788 5.7Gas (m cu ft/day) 4,498 1.7

a January-November.

Source: Petróleos Mexicanos; International Energy Agency.

Gradual participation of theprivate sector

Oil production capacitythreatened by tax burden

Mexico 25


The Fox administration is also keen to open the electricity sector to privateinvestment in order to expand supply but this plan has also encounteredconsiderable political opposition. In April 2002 the Senate rejected a far-reaching liberalisation proposal that had initially been made by the Zedilloadministration in early 1999. Also in April 2002 the Suprema Corte de Justiciade la Nación (SCJN, the Supreme Court) overruled changes that Mr Fox hadmade by decree, in May 2001, to legislation governing the sector on thegrounds that he required the assent of Congress. Mr Fox’s changes hadincreased the amount of electrical power that the Comisión Federal deElectricidad (CFE, the electricity commission) could buy from privatecompanies that generate excess electricity. The SCJN ruling has a quitesignificant coda: it calls into question the constitutionality of the Ley delServicio Público de Energía Eléctrica (the public electricity law) enacted in 1992,under which private investment in generation is allowed, through schemessuch as co-generation and production for self-consumption. Investment hascontinued, but the legal uncertainty remains.

Partly to dispel that uncertainty and to increase private investment in the sector,Mr Fox submitted a constitutional reform proposal to the Senate in August 2002that would allow private electricity to be sold to big consumers. Crucially, itwould establish that the government has to guarantee non-discriminatoryaccess to the electricity transmission and distribution infrastructure. This wouldmean that the private sector could supply electricity unhindered, and wouldestablish the concept of the autoconsumidor (self-consumer). Autoconsumidoresare those that use at least 2,500 mw of energy a year, making up about 60% ofthe market, and would be able to purchase energy from the Comisión Federalde Electricidad (CFE, Federal Electricity Commission) and the state-owned Luz yFuerza del Centro (LyFC, that provides electricity to Mexico City and surroun-ding areas) or private companies. A new minister of energy, Felipe CalderónHinojosa, was appointed in September 2003. Mr Calderón started to negotiatea simplified version of the August 2002 initiative with the opposition. A voteon the issue should take place in 2004.

While it awaits legislative approval of its reform plans, the government hassought to make the sector more efficient by cutting subsidies and increasinginvestment through Proyectos de Inversión Diferida en el Registro del Gasto(Pidiregas, investment projects financed initially by the private sector butultimately paid for with the revenues generated by the projects themselves).

The economy

Economic structure

The Mexican economy has undergone a profound transformation since the1980s as a result of economic liberalisation and joining the North AmericanFree-Trade Agreement (NAFTA, a free-trade bloc with the US and Canada).Having relied heavily on oil for foreign-exchange earnings in the late 1970s,manufacturing quickly became the main source of export earnings. In 2003 thesector accounted for around 20% of GDP and around 85% of export earnings,

A service-sector economy

Electricity liberalisation

26 Mexico


according to preliminary estimates. Almost half of total exports was producedin maquiladoras (in-bond assembly for re-export plants). Services, however, arethe most important contributor to national output. During the first threequarters of 2003 the sector accounted for 66.6% of GDP.

Main economic indicators, 2003Real GDP growth (%; based on constant 1993 prices) 1.3

Consumer price inflation (%; year-end) 4.0Current-account balance (US$ bn) -10.5a

External debt (US$ bn) 141.5b

Exchange rate (av; Ps:US$) 10.8Population (m) 103.6

a October 2002 to September 2003. b June 2003.

Sources: Instituto Nacional de Estadística, Geografía e Informática; Banco de México; Secretaría de Hacienda y Crédito Público;

Consejo Nacional de Población.

Agriculture has declined in importance economically (it accounted for just 4%of GDP in 2003) but remains an important source of employment (around one-fifth of the workforce is involved in agricultural activities). Mining is estimatedat just 1.4% of GDP in 2003 but this heavily understates the importance of oilproduction to the economy and, particularly, to the Treasury. Oil exportsrepresented 11.3% of total export earnings in 2003. The average price of oilduring the year stood at US$24.78/barrel, a significant increase compared withUS$21.58/b recorded in 2002.

The results of the first systematic attempt to measure informal economicactivities were published by the Instituto Nacional de Estadística, Geografía eInformática (INEGI, the National Institute of Statistics, Geography andInformatics) in August 2000. According to the results, the informal sector—excluding illegal activities—had a value of Ps445.5bn (US$47bn), equivalent to12.7% of GDP, and provided 17% of the profits generated by the economy. Ofnon-agricultural jobs, 28.5% are in the informal sector. Commerce andrestaurants employ the greatest number of workers informally, estimated ataround 30.8% of the total, followed by personal services (11.5%), manufacturing(6.1%), transportation (4.6%) and construction (3.3%).

The 1994-95 economic crisis hit domestic consumption and investment hard,but thanks to a weak exchange rate and privileged market access in the US andCanada (both of which were growing strongly) exports became the engine ofgrowth. Producers aggressively re-directed their production abroad. Until thesecond quarter of 2001 the growth in external trade was impressive, and largelyattributable to the dynamism of the maquiladora industry. Combined exportsand imports soared, from US$117bn in 1993 to US$341bn in 2000. From April2001 until June 2002, however, a sharp US economic slowdown reversed thetrend. Exports began to recover in July 2002, but strong competition in the USmarket from other countries such as China and weak productivity growth inMexico partly explains an uneven recovery. Estimates from INEGI indicate thatnon-oil exports increased by a meagre 0.4% in 2002 and 0.3% in 2003, with therespective figures for manufacturing being 0.5% and 0.4%.

Mexican exports lose out in USmarket

Mexico 27


Comparative economic indicators, 2002Mexico a Brazil a Argentinaa Chile a Ecuadora

GDP (US$ bn) 637.2 460.8 102.0 66.4 24.4GDP per head (US$) 6,257b 2,618 b 2,699b 4,414 1,973b

GDP per head (US$ at PPP) 9,077b 7,643 b 10,689b 10,373 3,683b

Consumer price inflation (av; %) 5.0 8.5 25.9 2.5 12.5

Current-account balance (US$ bn) -14.0 -7.7 9.6 -0.6 -1.2Current-account balance (% of GDP) -2.2 -1.7 9.4 -0.8 -5.0Exports of goods fob (US$ bn) 160.8 60.4 25.7 18.3 5.2

Imports of goods fob (US$ bn) -168.7 -47.2 -8.5 -15.8 -6.2External debt (US$ bn) 159.0b 227.1 b 135.0b 40.9 b 14.9b

Debt-service ratio, paid (%) 22.5b 71.8 b 39.2b 24.8 b 19.7b

a Actual. b Economist Intelligence Unit estimates.

Source: Economist Intelligence Unit, CountryData.

Economic policy

Mexican economic policy has followed an orthodox trajectory since the 1980s,seeking growth through increased private-sector participation in the economyand openness to foreign trade and capital. It has also sought to bring greaterstability to the economy by controlling inflation, boosting domestic savings andensuring that the public finances are firmly on a sustainable path in a bid toreduce the reliance on external borrowing and the vulnerabilities that suchreliance causes. The pursuit of stability has come to dominate at the expense ofpolicies to stimulate growth as the government of the president, Vicente FoxQuesada, has failed to gain Congressional support for structural reforms, whichwould enable it to implement a more counter-cyclical fiscal policy.

Since the mid-1990s, the credibility of the Banco de México (Banxico, thecentral bank) and the government to adhere to monetary and fiscal targets hasincreased, which has boosted confidence among economic agents. Banxico hasmaintained a free-floating peso since 2001, which has increased transparencyand helped to stabilise the peso in nominal terms. This has helped Banxico inits inflation-targeting strategy, which targets 3% inflation (with a tolerance bandof plus or minus 1 percentage point). Although inflation edged up to 5.7% by theend of 2002, it had fallen to barely under 4% by the end of 2003, just within theintended margin. By mid-February, however, annual inflation had reached 4.4%owing to higher input costs prompted by the weaker US dollar. At thebeginning of 2004, Banxico announced that the 3% target, with its permissibledeviation, would be maintained indefinitely. The government's close adherenceto its fiscal targets and its debt management policy have also boosted thecredibility of fiscal policy.

According to official figures, the non-financial public-sector (NFPS) balance—comprising central government and public enterprises, but excluding develop-ment banks—registered a surplus at the end of the first 11 months of 2003 ofPs10bn (US$92.6m), equivalent to around 0.2% of estimated GDP for the period.Data on the public-sector borrowing requirement (PSBR), which includes off-budget items such as Proyectos de Impacto Diferido en el Registro del Gasto(Pidiregas, which are projects financed with private capital which is repaid by

Credible fiscal and monetarypolicies

Economic orthodoxy

28 Mexico


the public sector over a specified period) are published quarterly, but the latestfigure available for the first three quarters was Ps74bn, which was equivalent to1.3% of GDP for the period. The PSBR is much lower than the government'sinitial projection of 3.1% of GDP, and is explained by the fact that far fewerventures than originally envisaged were financed through Pidiregas in 2003.

Despite the free-floating currency, international reserves have accumulatedmarkedly over the past three years. In an attempt to slow this accumulation,Banxico introduced a rules-based mechanism in May 2003, selling dollarsdirectly in the foreign-exchange market in order to preserve its current positionof reserves, but at the same time reduce the rate of reserve accumulation. Eachquarter Banxico announces the total amount of dollars it will supply to thecurrency market in the following quarter. This makes financial sense as theinterest rate that Banxico has to pay on domestic notes issued to buy thereserves is higher than the yield it receives from investing the reserves in liquidinstruments.

In an attempt to boost domestic savings, the authorities began a radicaltransformation of the pensions system in 1997, moving from a pay-as-you-gosystem—with all funds managed collectively by the Instituto Mexicano delSeguro Social (IMSS, the social security institute)—to one where workers wouldhave individual pension contributions handled by private pension managers.The increasing amount of resources managed by the Administradoras deFondos para el Retiro (Afores, the administrators of individual pension accounts)has had a significant impact on domestic savings. By October 2003, Aforeswere managing pensions for 31.1m people, with a total amount of Ps391.5bn(US$35.5bn), and of that figure 82.7% was invested in government debt.

Significantly, since 2001 the government has announced that net externalindebtedness would be zero, with the financing of the fiscal deficit obtainedentirely through internal debt. For 2004 the government's target is to achieve anet external debt reduction of US$500m, a relatively small amount but quiteimportant symbolically. Afores have also allowed the issuing of long-term peso-denominated bonds (with a maturity of up to 20 years), carrying a fixednominal interest rate. Although Afores have mostly invested in publicinstruments, debt issued by blue-chip Mexican companies has also beenbought by the pension funds.

Thorough structural reform, however, has been blocked by a divided Congress,as nationalism and a fondness for statist policies remain strong amonglegislators, particularly those from the Partido Revolucionario Institucional (PRI)and the Partido de la Revolución Democrática (PRD). A large-scale fiscal reformproposal that sought to increase public revenues substantially was radicallywatered down before being approved at the end of 2001. At the end of 2003 anew attempt to implement a radical fiscal reform was defeated, as one of itsmain components, the extension of value-added tax (VAT) to a number ofgoods and services, notably food and medicine, was extremely unpopular. Arenewed effort to agree on a tax reform began in February 2004 with theestablishment of a Convención Nacional Hacendaria (see Regional trends).

Political divisions thwartstructural reform

Boosting domestic savings

Rule-based mechanismintroduced to slow reserves

Mexico 29


Without a comprehensive reform of the tax system, there will continue to bevirtually no margin for fiscal policy to boost the economy. In June 2002 thegovernment presented an ambitious medium-term plan, the Programa Nacionalde Financiamiento del Desarrollo (Pronafide, the National Programme for theFinancing of Development). This aims to implement a number of structuralreforms, such as the liberalisation of electricity and telecommunications, in abid to boost growth and job creation. Again, however, progress in agreeing onthese reforms has been slow and could potentially be postponed until the nextgovernment takes office in 2006.

Under the Fox administration, the emphasis on pursuing new free tradeagreements (FTAs) has lessened in favour of a more active industrial policy thatseeks to foster backward linkages between companies that serve exportmarkets and domestic firms. This should boost the growth of small andmedium-sized enterprises and spread the benefits of increased market accessmore widely throughout the Mexican economy. The Secretaría de Economía(the Ministry of Economy) was formed in December 2000, replacing theSecretaría de Comercio y Fomento Industrial (Secofi, the Ministry of Trade andIndustry) and is responsible for implementing this policy. It uses micro-creditsand incentives for the establishment of production chains and certainpreferences in public procurement to develop the industrial sector, butbudgetary constraints have limited its efforts.

In addition to NAFTA, Mexico has an extensive array of FTAs, and enjoyspreferential market access in both the US and the EU. The Fox government hasalso sought to increase Mexico's trade links, but with only limited success. In2002 the government started negotiations with Uruguay and Japan. InNovember 2003, the FTA with Uruguay was officially signed—the first betweenMexico and a member of the Mercado Común del Sur (Mercosur, the southerncone customs union). However, significant disagreements over agriculture, steeland auto-parts held up talks with Japan. Negotiations to date in 2004 appear tobe proceeding more smoothly and the Mexican government aims to sign anagreement in the first quarter of the year. In November 2003, the governmentopted to shelve a number of FTA negotiations with countries such as Panamaand Singapore, again apparently preferring that the economy ministry focus onstrengthening domestic production.

Economic performance

According to preliminary figures from INEGI, growth in the last quarter of 2003was 2% year on year, bringing growth for the year as a whole to just 1.3%. Weakmanufacturing output was a major contributor to this poor performance. Theindustrial sector as a whole, which comprises manufacturing, construction andmining, contracted by 0.8% year on year. Services grew by 2.1% and agricultureby 3.9% year on year. This is the third consecutive year of weak growth (in factin 2001 growth was negative) and brings annual average growth in the first halfof the Fox administration to just 0.63%, the weakest on record. A number offactors contributed to this.

A more active industrial policy

Economy virtually stagnatesunder Fox

30 Mexico


Mexico is highly integrated into the US market. Weak growth in the US,combined with increasing competition from other countries in that market,reduced demand for Mexican exports, of which manufactured goods are themajor share. Mexico faces stiff competition from other countries despite itscomparative advantage of geographical proximity to the US and membershipof NAFTA. China, for example, has been able to undercut Mexico in the lower-value-added sector (notably textiles), increasing its market share in the US. SinceMexico does not innovate technologically as rapidly as either China or the US,its capital depreciates more quickly, productivity suffers and the country has torely on movements in the exchange rate to boost its competitiveness. In the firstthree quarters of 2003, gross fixed capital formation declined by an average of0.8% year on year. Without structural reform to encourage investment, Mexicowill continue to be in this position and potential output growth will bedepressed over the long term. Other reasons for the poor performance ofmanufactured exports are linked to specific sectors and products. For example,automotive exports typically account for around 15% of total export earningsand reportedly vehicle models produced in Mexico have not performed as wellas models produced elsewhere. However, auto-parts did sell well.

Full-year figures for demand-side GDP in 2003 have yet to be published butdata on the first three quarters show that domestic demand held up relativelywell, with private consumption growing by an average of 2.7% and governmentconsumption growing by an average of 2.1%. Imports declined by an average of2% year on year, reflecting the weak state of the manufacturing industry andinvestment spending.

Weak domestic demand kept the prices of non-tradeable goods in check andlimited the pass-through of currency depreciation to the prices of tradeablegoods throughout 2003. Annual inflation was 3.98% at the end of the fourthquarter, which brought it just inside the tolerance band set by Banxico of 3%(plus or minus 1 percentage point).

Inflation2003 1999-2003

% change, year on year annual averageConsumer prices (year-end) 4.0 7.1

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

Regional trends

Regional development is uneven owing in part to the heavy concentration ofpolitical and economic power in the Distrito Federal (DF, Mexico City) but alsoto geographical differences and varying natural resource endowments. The sixnorthern border states, for example, account for much of the country’smanufacturing, and particularly maquiladoras, producing goods that are thensold to the US. On the Gulf coast, Veracruz has benefited from agriculture andoil production.

In 2000 the DF accounted for 22.7% of GDP, and its neighbouring state, theheavily industrialised Estado de México, for an additional 10.8%. But over the

Inflation ends 2003 withintarget range

Competitiveness problemsdepress manufacturing

Mexico 31


past two decades the emergence of economic opportunities in other regions,combined with the pollution and other urban problems of the capital havereduced the DF’s attractiveness as a place to live and work. The Gulf states,particularly Quintana Roo, have experienced strong growth since the 1970s as aresult of the development of tourism. Quintana Roo’s contribution to GDP hasrisen from 0.18% in 1970 to 1.33% in 2000. Neighbouring Campeche has seen itscontribution rise from 0.44 to 1.08% over the same period, owing to oilexploration.

The south-east of the country, which is largely agricultural, remains extremelypoor. The states of Chiapas and Oaxaca, along with some areas of Guerrero, allon the Pacific side of the country, have high poverty rates. In 2000 the threestates combined accounted for just 4.8% of GDP.

Since the 1980s government policy has been geared towards reducing theinequalities between regions but resources have tended to be misallocated aspolitics has influenced spending decisions. Efforts have been made to devolvemore power to the federal states by increasing transfers and the number ofpolicy areas under state control in a bid to boost local democracy and improveservice delivery. Since 1998 transfer payments have been made to the states andmunicipal governments to cover basic education, healthcare and municipalinfrastructure. The Programa de Apoyos para el Fortalecimiento de lasEntidades Federativas (PAFEF, the state strengthening programme) also providesmoney for the states. Revenue-raising responsibilities have not increased inparallel, as state governors have steadfastly refused to assume the political costof levying local taxes.

A complete overhaul of the tax and spending responsibilities of federal, stateand municipal governments to streamline and improve the efficiency of the taxsystem is the subject of discussions within a Convención Nacional Hacendaria(CNH, the National Convention of Public Finance). The CNH began talks inFebruary 2004 and has until July 2004 to draw up some proposals. It has thepotential to achieve profound structural changes, which would lead tonumerous positive outcomes. Above all, it offers an opportunity to implementa well-structured fiscal reform, where cross-agency and inter-governmental co-ordination could foster public-sector efficiency. However, much will depend onwhether its decisions are fully implemented by Congress.

The influence of governors over the federal government, and with that thestates’ ability to extract more concessions, is likely to increase since theestablishment in July 2002 of the Conferencia Nacional de Gobernadores(Conago, National Governors’ Conference). Conago is made up of 23 stategovernors or their representatives (17 from the PRI and six from the PRD, as yetthere are no Partido Acción Nacional members). Conago aims to provide thegovernors with a forum to reach a common negotiating position in theirdiscussions with the federal government.

The Fox government also has an ambitious plan, the Plan Puebla-Panamá (PPP),to develop the south of the country and integrate it more with the markets ofCentral America. But financing constraints have made for limited progress todate. The PPP was transferred from the Presidencia de la República (Office of

32 Mexico


the President) in January 2003 to the Secretaría de Relaciones Exteriores (SRE,Ministry of Foreign Relations), under the Vice-Ministry for Economic Relationsand International Co-operation.

Economic sectors

Agriculture

The agricultural sector accounted for an estimated 4% of GDP in 2003 butremained an important source of employment (around 17% of nationalemployment, according to the Secretaria del Trabajo y Previsión Social—STPS,the employment and social welfare ministry). Since the coming into force of theNorth American Free-Trade Agreement (NAFTA) in 1994, the sector has beenundergoing a period of adjustment. Production has diversified and agriculturalexports have increased: agricultural export earnings rose 23% year on year in2003 to reach US$4.8bn. But the sector has largely grown at lower rates than therest of the economy and the full benefits of NAFTA have yet to be realised.Although producers for the export market (mainly fruit and vegetables) havebenefited, the rest of the sector has had difficulty in shifting production to morecompetitive commodities. This appears to be because, despite direct transfersunder the Programa de Apoyos Directos al Campo (Procampo, a programmeproviding yearly cash payments to producers of cotton, rice, sunflower, barley,beans, maize, sorghum, soybeans and wheat) to cushion the impact on smalland subsistence crop producers from liberalisation, other forms of support—notably training 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 August2003 the Ministry for Agrarian Reform and agrarian tribunals had providedtitles to about 3.4m ejidatarios, covering 66m hectares (ha), but credit has notincreased markedly. 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 the Programa de Apoyos Directos al Campo (Procampo, a programmeproviding yearly cash payments to producers of cotton, rice, sunflower, barley,beans, maize, sorghum, soybeans and wheat) cash transfers are provided withthe aim of encouraging producers to cultivate more productive crops. Under thegovernment of the president, Vicente Fox Quesada, around 2.8m ruralproducers benefit from Procampo. However, it has yet to encourage much

Small producers struggle to becompetitive

Support programmes to helpwith adjustment

Mexico 33


crop diversification and in many cases continues to support unprofitable sub-sistence production.

Following the failure of public agricultural development banks to act asefficient 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.

Excessive exploitation and a lack of investment and planning have hinderedforestry output growth. Reform of the land tenure system has not reducedexploitation; forested areas in some 23 states are reportedly at risk. Aiming toconfront the problem, the Fox administration established the ComisiónNacional Forestal (Conafor, National Forestry Commission), that becameoperational in April 2001. Conafor is in charge of conservation and sustainabledevelopment of the sector.

The fisheries sector continues to underperform. In 2002 the catch was 1.6mtonnes, slightly above the 1.5m tonnes recorded in 2001. Preliminary estimatesfor 2003 indicate that the catch fell by about 7% year on year because ofgovernment attempts to reduce excessive exploitation. Catches of sardine andsquid were among the most affected by this policy. An estimated 440,941tonnes of fishing products were processed in 2002, up from 407,212 tonnes in2001. Total fisheries exports reached US$584m in 2002, markedly down on theUS$731m recorded in 2001. This reduction is explained by the plunge in theshrimp exports, which fell from US$469m to US$260m, owing to lower pricesand volumes. At an estimated 12.2 kg per head in 2002, domestic consumptionis not high, although it shows slightly higher levels than those observed at theend of the 1990s.

Manufacturing

In the latter half of the 1990s the manufacturing sector benefited greatly fromstrong US growth and the market access in North America provided by NAFTA.However, given Mexico’s dependence on imported intermediate goods, exportgrowth inflated the import bill. Within the sector, there are three mainsubsectors. Metal products, machinery and equipment is the most important,representing nearly 30% of sectoral output in 2003. Automotive and auto-partsproduction is included within this division. Food, beverages and tobaccomanufacturing is the second most important activity, accounting for 27% of thesector's output. Chemicals, petroleum derivatives and plastic products (whichincludes petroleum refining) represented about 15% of the sector in 2003.

The sector depends on both external demand (mainly that of the US) and thedomestic market. The sharp economic slowdown observed in 2001-02 in theUS, and the economic stagnation that took place in Mexico during 2001-03, hitmanufacturing extremely hard. In 2003 the value of its GDP was virtuallyunchanged on the level recorded in 1999, and 6.4% below the all-time highrecorded in 2000. Mexico, like Canada, has an important advantage relative toits competitors, namely its geographical proximity to the US. However, over thelast three years that factor has lost some importance, while others such as

34 Mexico


technology and labour productivity have gained in relevance. From 1999 untilApril 2002 a peso that strengthened in real terms did not help to make thelabour force attractive when compared with that in other emerging economies.From US$3.5/hour in 1998, average wages in the manufacturing industryincreased to US$5.5/hour in 2002. In 2001-02 wages in the sector were similar,when measured in US dollars, to those of South Korea.

Manufacturing output(% unless otherwise indicated)

1999-2003 2003Annual average Change in Sectoral output Exports Employment

real growth output (% of total) (US$ m) (% of total)a

Food, beverages & tobacco 2.6 1.2 26.7 4,637 27.7Clothing & footwear -2.9 -8.9 7.0 10,469 11.8

Wood products -1.4 0.2 2.5 810 1.7Paper, printing & publishing 0.0 -1.7 4.4 1,285 6.6Chemicals, petroleum products, rubber & plasticsb 0.7 1.8 15.1 10,341 16.6

Non-metallic minerals excl oil 1.7 0.7 7.2 3,034 5.2Basic metal industries 0.2 3.4 5.0 4,443 3.8

Metal products, machinery & equipment 1.1 -5.9 29.4 106,300 25.8Other industries 0.1 -8.3 2.8 1,712 0.7

Total manufacturing output 0.9 -2.0 100.0 143,031 100.0

a January-November 2003. b Figure for exports includes petroleum derivatives.


Productivity in January-October 2003 when compared to that recorded in thesame period of 2000 showed an increase of 8.5% in Mexico, above the 3.3%recorded in Germany and the 5.2% of Japan, but well below the 14.3% and14.4% managed during the same period by South Korea and the US respectively.Owing to the peso depreciation observed since April 2002, wages measured indollars had fallen to US$4.7/hour by October 2003. The nominal exchange rateis not expected to appreciate in the near future, which should help to improvecompetitiveness. During 2003 manufacturing was the main recipient of foreigndirect investment (FDI), with US$5.2bn (48.1% of the total).

Despite a relatively strong domestic market, owing to real wage increases, lowinterest rates and improved availability of financing, the fall in external sales hitthe automotive sector hard. Total car production was 1,540,565 units in 2003,15.3% below the record high of 1,817,807 registered in 2001. Of the total numberof vehicles produced in Mexico, about one-quarter is sold domestically, withthe rest being exported, and around 60% of cars sold in Mexico are imported.With the purchase of imported European and Japanese cars increasingsignificantly, it seems that consumer loyalty towards vehicles manufactured inthe country has been lost.

Although it is a relatively small part of the manufacturing sector, representingjust 7% of output in 2003 (but nearly 12% of manufacturing jobs) clothing andfootwear has been the division that has been most severely hit in 2001-03. Itcontracted by 21.5% over that period, having lost market share in the US toCentral American countries and China. It is estimated that between November2000 and the same month of 2003 about 256,400 jobs were lost in the industry.

Mexico 35


The maquiladora (in-bond assembly for re-export) sector produces a variety ofgoods, including vehicles, electrical goods, textiles and furniture. The majorityof the maquiladoras are based along the US-Mexico border. In recent yearscentres of specialisation have emerged: electronics production is based inGuadalajara, auto-parts manufacture is based in the Saltillo-Monterrey industrialcorridor, television production is based in the Tijuana-Mexicali area, and plantsin the states of Puebla and Tlaxcala concentrate on textiles.

The sector has also suffered heavily from the US economic slowdown,regulatory uncertainties and from increased competition from other low-wagecountries. In addition new security arrangements introduced in 2001 slowedcross-border goods transport. But since the second quarter of 2002 the sectorhas begun to recover. Over the long term, however, labour-intensive low-endmaquiladoras look set to lose out to China, other Asian economies and CentralAmerica, where production costs are lower than in Mexico. However, this doesnot mean that Mexican maquiladoras will cease to operate but that they willevolve from being a low-cost supply source to a logistically inter-linked part ofUS industry, adding value as productivity increases. In addition, Mexico’sgeographical proximity to the US means that for trans-portation costs and otherlogistical matters, it cannot be beaten.

In addition to strong international competition, the sector has also beenaffected by regulatory changes. Under NAFTA, maquiladoras started to payduties in Mexico on non-NAFTA originating materials used in their operations,when exporting their finished products to the US or Canada. To offset theseduties, the government has developed Programas de Promoción Sectorial(Prosecs, sectoral promotion programmes). The Prosecs (a total of 22 were inoperation during 2002), reduce or eliminate duties on certain imports intoMexico, regardless of their origin, and are available to all manufacturers (inmany cases the Prosec rate is zero). However, although Prosecs have benefitedmanufacturers, companies need to establish on a case-by-case basis whetherthe materials they require are covered by a Prosec—a process which can becostly and lengthy. Moreover, the programmes were designed as a temporarymeasure and are subject to changes. An alternative for maquiladoras whenimporting materials is Rule 8 of the General Import Duty Law. This rule allowsimporters to pay one rate of duty (in most cases the rate is zero) on all itemsbought from abroad to manufacture a given product. A permit must beobtained from the Ministry of Economy to secure this concession. However,there is an element of discretion in the granting of those permits, which createsuncertainty and has led to allegations of corruption.

Further seeking to help the industry, in October 2003 the Ministry of Economyannounced amendments to legislation governing the Decreto Maquilador andthe Programa de Importación Temporal (Pitex, the Temporary ImportProgramme). The changes aim to reduce some of the paperwork and processingrequired. The time-frame for settling maquiladora programme applications, fornew programmes, extensions or modifications to existing programmes, wasreduced from 20 to 15 working days. Services can now qualify as maquiladoraoperations.

36 Mexico


The maquiladoraa industry, Nov 2003b

Plants EmployeesFood-related products 46 9,448Clothing & textile products 625 198,252

Shoe & leather products 33 5,795Furniture, wood & metal products 293 51,504

Chemical products 121 22,256Construction & assembly of transport equipment 259 237,949Assembly & repair of tools & machinery 62 16,921

Assembly of electrical articles 165 95,694Electric & electronic parts & materials 468 240,418

Assembly of toys & sports equipment 42 8,723Services 252 35,886Other 463 147,997

Total 2,829 1,070,843

a In-bond assembly for re-export. b Preliminary estimates.

Source: Instituto Nacional de Estadística Geografía e Informática.

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. Havingunderperformed the rest of the economy since 1997, mining increased by 3.7% in2003 owing to an increase in global demand. Mexico is the world’s largestproducer of silver, with mines in the states of Chihuahua and Zacatecas.Mexico also leads the world in fluorite, celestite and sodium sulphate, and isone of the biggest producers of bismuth, graphite, anti-mony, arsenic, barite,sulphur and copper.

Minerals production('000 tonnes unless otherwise indicated)

2003a

Gold (kg) 19,701.0Silver ('000 kg) 2,648.1

Copper 268.4Zinc 374.0

Manganese 100.8Lead 130.6Molybdenum 3.2

Arsenic 1.6Antimony 0.4

Cadmium 1.5Bismuth 1.0

a January-November.


Mexico 37


Construction

Construction accounted for around 4% of GDP and 6.7% of employmentaccording to estimates for 2003. The mild recession of 2001 caused the sector tocontract by 4.5% but it recovered in 2002 and 2003, outperforming the rest ofthe economy. In addition to lower interest rates and increasing availability ofmortgages from private banks, which should boost private-sector construction,government-sponsored house-building and infrastructure programmes are alsohelping to increase the sector's output.

A National Housing Plan was unveiled in November 2001, which aims to co-ordinate all public bodies involved in the sector; encourage primary andsecondary markets for mortgages; deregulate the sector; and promote a greatersupply of land for housing. At the same time the government increased thefinancing for the Fondo de la Vivienda del Instituto de Seguridad y ServiciosSociales de los Trabajadores del Estado (Fovissste, the public body that financesthe construction of housing for public workers), allowing it to provide 100,000extra mortgages. Fovissste grants an average of 18,000 mortgages a year. TheInstituto del Fondo Nacional de Vivienda para los trabajadores (Infonavit, thepublic body that receives contributions for housing from all private-sectorworkers) also moved to speed up its concession of mortgages. It is estimatedthat the country has 22m homes, and a shortage of about 3.8m, with demandadding 800,000 units per year to that figure. During 2003 an estimated 500,000new homes were built.

Following a prolonged period of little progress in road construction, thegovernment began offering concessions to build, operate and maintain someroads in 2003. The first projects offered were a bypass round Matehuala (in thestate of San Luis Potosí) and a 108-km road between the cities of Amozoc andPerote. The government plans to increase road building during the second halfof its term. In May 2003 Mr Fox unveiled a Fondo Carretero (Foncar, a roadbuilding fund) and a Programa de Desarrollo de Autopistas de Cuota (a tollroad development programme). The former will operate as a trust fund andwill require co-financing from local governments and the private sector.

Financial services

The banking sector and financial services in general have strengthenedmarkedly since the near collapse of the system and subsequent re-capitalisationof many of the banks by the Treasury through the Fondo Bancario deProtección al Ahorro (Fobaproa, the bank fund for savings protection) in themid-1990s. This was later replaced by the Instituto para la Protección delAhorro Bancario (IPAB, the bank savings protection institute, see box below).The lifting of restrictions on foreign ownership in 1998 has led to a massiveincrease in foreign participation in the banking sector. By the end of 2002 allmajor banks, with the exception of Banco Mercantil del Norte (Banorte), thefourth-biggest institution, were controlled by foreign capital. Foreign-controlledinstitutions had 81.7% of assets and 81.9% of liabilities in the banking system atthe end of September 2003. The most recent bid by a foreign bank to increase

A stronger banking sector butprivate credit remains limited

38 Mexico


its participation in the banking sector occurred in February 2004. A Spanishbank, BBVA, launched a cash bid to acquire the 40.6% stake that it does notalready own in BBVA-Bancomer, one of the country's largest commercial banks.This was officially approved by the SHCP and the Comisión Nacional Bancariay de Valores (CNBV, the National Banking and Securities Commission) onFebruary 19th. The shift in ownership has also led to improved capitalisationand a consolidation of the sector. Efforts have continued to be made to improvebanking supervision and capital adequacy requirements, to tighten rules onlending and and to increase transparency. However, with private-sector creditequivalent to just 16.7% of GDP, much remains to be done to improve andextend financial intermediation. (Lending by commercial banks to the privatesector in the US was equivalent to 42% of GDP at the end of 2003.)

New bankruptcy and secured lending legislation was approved in April 2000.A new law on foreclosure and guarantees clarified the legal procedures for therecovery of bad loans and provided lenders with tighter loan guarantees. Newcapital adequacy requirements are being phased in. Full implementation wasscheduled for 2003, but by the end of 2001 the majority of banks alreadycomplied with the new requirements. New portfolio rating and provisioningrequirements have also been introduced. In 2001 Congress granted powers tothe CNBV to determine early corrective measures (such as limiting dividendpayouts) for banks with a deteriorating capital base, as well as to disclose allrelevant information so that depositors are able to ascertain the financialstrength of each bank. Tighter rules on related lending were introduced, limitingthe amount and providing a more precise definition of related parties. Underthe IPAB, a limited deposit insurance scheme was introduced in 1999 for alldeposits. Starting in 2004, the amount of insurance the scheme provides hasbeen reduced from 10m unidades de inversion (UDIs, a unit indexed toinflation) to 5m UDIs. This level is still relatively high by international standards(5m UDIs being equivalent to approximately US$1.5m). The amount insuredwill be reduced to 400,000 UDIs (about US$110,000) by the beginning of 2005.This amount is in line with international standards (in the US the limit isUS$100,000). Moreover, it covers practically all accounts in Mexico, as bankdeposits reflect accurately the enormous wealth disparity that prevails in thecountry: at the end of 2003, 0.5% of bank accounts held 36% of the moneydeposited.

The decline in lending by commercial banks witnessed since the 1995 bankingcrisis has been partly offset by increased lending from other sources. By mid-2001, the total amount of credit granted by alternative sources of finance was ata level comparable to that lent by domestic commercial banks, a trend that hascontinued. By September 2003 the total amount of credit given by commercialbanks to the private sector stood at Ps931bn (US$86.2bn). The correspondingfigure for non-banks stood at Ps1,4trn. Foreign banks based outside the country,suppliers’ credit, and non-bank financial intermediaries are the most importantalternative sources and, among the latter, the Sociedades Financieras de ObjetoLimitado (Sofoles, limited purpose financial companies) stand out. Sofoles, aseither part of a financial conglomerate or fully independent, do not takedeposits and concentrate either on a given type of lending (for example

Alternative lenders

Mexico 39


mortgage and consumer credit) or on a particular sector (such as theautomobile or construction sector).

Banks have also been partly substituted as recipients of savings, notably by theAdministradoras de Fondos para el Retiro (Afores, administrators of individualpension accounts) and their investment vehicles, the Sociedades de InversiónEspecializadas en Fondos para el Retiro (Siefores, pension fund managers). InOctober 2002 Congress approved changes to the legal framework of the Afores,allowing any worker to join one (until then, only private-sector employees,about 30.4m people, were eligible), adding a potential 24m contributors to thesystem (including federal and local government workers). Additionally, Aforescan accept complementary and voluntary contributions from new and existingmembers. The investment regime of Siefores was liberalised, allowing them toinvest up to 10% of their funds in foreign fixed-income securities (classified asextremely safe by ratings agencies). Siefores are allowed to invest in a widerange of fixed-income securities and equities in Mexico.

The controversial Fobaproa/IPAB and an overhauled banking sector

The Fondo Bancario de Protección al Ahorro (Fobaproa, the bank fund for savings protection) and IPAB schemes channeledaround US$100bn in public money to bail out the banks following the collapse of the peso at the end of 1994. Theysuccessfully shored up the sector but remain a highly controversial issue as the taxpayer essentially bailed out bankowners, many of whom had engaged in extremely unsound lending operations, and by association the businesses that hadtaken out the loans. They constitute a sizeable fiscal burden. At the end of 2003, IPAB liabilities stood at Ps791.3bn,equivalent to 12.1% of GDP.

The money came in the form of government bonds, registered as temporary debt (by-passing the need to consult Congress).In 1998 the government requested congressional authorisation to convert the Fobaproa debt into government debt,recognising the fact that it was not "temporary" but the request was denied. In 1999 the Zedillo government and the PANapproved the establishment of IPAB, a new body that would take over all the Fobaproa liabilities.

Beginning in 1999 IPAB carried out several auctions of the rights to manage and to recover segments of past-due loansaccumulated by Fobaproa. By the end of 2003, past-due loans still to be sold represented only 6.7% of the total assets heldby IPAB, down from 11.1% at the end of 2002.

From 2000 it began to sell off its shares in banks, such as the 100% share in Banca Serfín to Spain’s Banco Santander inMay 2000. In June 2002 the government and the IPAB auctioned their shares (10.2% and 1.6%, respectively) in the BBVA-Bancomer financial group. In May 2003 it sold 36% of the shares in the Scotiabank-Inverlat financial group to the Bank ofNova Scotia (Scotiabank, which already owned 55% of the group). With that operation, IPAB ended its participation infunctioning commercial banks.

In 2000 IPAB started to issue three- and five-year bonds, which can be swapped for Fobaproa promissory notes. Banks thathold Fobaproa bonds want to exchange them for IPAB ones. The former are illiquid and might not be repaid when they falldue (if Congress rules against repayment). No swaps have taken place to date, but the Fobaproa notes should be exchangedfor bonds during 2005 and 2006. IPAB decided in May 2002 to audit the four banks that survived the crisis with theirownership structure roughly intact, to determine if there were any irregularities with the Fobaproa operations. IPABdecided to do this because in case of any irregularities, it would claim back the bonds used in those operations—reducingthe cost of the rescue. Congress supports this notion, stating that audits should take place before IPAB swaps any Fobaproabonds for its own. However, in recent years three of the four banks in question were bought by foreign interests: Bancomerby BBVA (Spain) in 2000, Banamex by Citigroup (US) in 2001 and Bital by HSBC (UK) in 2002.

40 Mexico


The four banks have resisted, through judicial injunctions, any attempt to conduct the audits. If the banks are forced to giveback to IPAB a significant amount of Fobaproa bonds, it could damage foreign and domestic investor sentiment, andnegatively affect the capitalisation of the institutions, and with it incipient private-sector credit. Those are the reasons whythe Fox administration wants the Fobaproa bonds to be honoured and exchanged in full. However, for the population atlarge the Fobaproa/IPAB issue is simply a matter of the use of public money to bail out bankers. If the banks were forced togive back some of the Fobaproa bonds, the move would be applauded.

Public development banks have traditionally played a significant role in thefinancial system. Also badly hit by the 1995 crisis, the sector was recapitalisedthrough the Fideicomiso Liquidador de Instituciones y OrganizacionesAuxiliares de Crédito (Fideliq, a trust for the liquidation of financialinstitutions). It still requires a degree of consolidation as there is considerableoverlap between the institutions. The most important development banks areNacional Financiera (Nafinsa, mainly for small and medium-sized businesses),the Banco Nacional de Comercio Exterior (Bancomext, for foreign trade) andthe Banco Nacional de Obras y Servicios Públicos (Banobras, for public worksand services). A new bank, Financiera Rural, was set up in December 2002 toreplace the troubled Banco Nacional de Crédito Rural (Banrural, for agriculture).Another agricultural development institution, the Financiera Nacional Azucarera(Fina, for the sugar industry) is being liquidated. In 2001 the Fox administrationfounded two banks: the Sociedad Hipotecaria Federal (SHF, Federal MortgageBank), modelled loosely on the US Fannie-Mae, was established to increase theavailability of mortgages for low-income earners. The Banco del AhorroNacional y Servicios Financieros (BANSF, National Savings and FinancialServices Bank) was established to boost domestic savings.

Four stocks dominate the Indice de Precios y Cotizaciones (IPC, the generalequities index), accounting for almost 50% of the index. These are the telecom-munications companies Teléfonos de México (Telmex) and AMX, the super-market chain Walmex (owned by Walmart of the US) and a cement company,Cemex. In 2003 the IPC, like several of its international peers, rose sharply,despite feeble economic growth. Among the domestic factors that explain theincrease are low interest rates and the expectations of an improvement incorporate profits and in the economy. On February 16th 2004 the IPC endedabove the level of 10,000 points for the first time ever. Foreign investment is animportant source of capital. Total foreign investment in the Bolsa Mexicana deValores (BMV, the Mexican Stock Exchange) at the end of 2003 stood atUS$58.6bn, which is equivalent to 48% of the IPC's total market capitalisation.

The BMV is not an especially attractive way for firms to raise capital as it is stillrelatively expensive. Limited activity on the equities market has been partiallyoffset by an increase in fixed income activity as firms tend to prefer issuingdebt rather than shares. The relative macroeconomic stability attained after1997, the development of long-term public debt and the growing demand forlong-term instruments by institutional investors have created the conditions forthe private sector to issue long-term debt in the Mexican market. However,corporate debt is just starting to emerge as significant, and the market remainsdominated by public debt instruments. Only important companies with a highcredit rating have been able to obtain financing through issuing debt.

Development banks requireconsolidation

Mexico 41


Since 2001 a new debt instrument has been available for private firms andpublic issuers: the Certificado Bursátil (stock market 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 for to combat practices such as insidertrading and market manipulation. The CNBV is for the first time allowed toshare information with foreign financial authorities.

The Bolsa in 2003(year-end index figures)

2002 2003 % changeIPCa 6,127.09 8,795.28 43.5

Extractive industry 3,919.27 10,390.38 165.1Transformation industry 2,488.83 2,948.19 18.5

Construction industry 10,265.35 14,634.66 42.6Commerce 11,285.76 15,325.10 35.8Communications & transport 24,651.56 36,720.60 49.0

Services 836.41 1,103.30 31.9Others 2,185.75 3,198.10 46.3

Foreign Portfolio Investment (US$m) 44,563 58,578 31.4

a Equities index

Source: Bolsa Mexicana de Valores.

Other services

Since trade liberalisation in the 1980s and the signing of NAFTA, the retailsector has become more diversified and the quality of goods has improved.Foreign companies have entered the market, setting up price clubs, discountstores and hyper-market chains, sometimes merging with or even buying majorMexican retailers. Competition from foreign firms pushed leading Mexicancompanies to modernise, and as the main urban centres have come to beincreasingly well-served they have widened their areas of operation to thesmaller provincial cities. That foreign competition is epitomised by US-basedgiant Wal-Mart, which opened in Mexico in 1991. With more than 100,000employees in 2003, it is the country's largest private employer. In October 2003,its biggest rivals—Gigante, Soriana and Comercial Mexicana—announced thecreation of a joint purchasing and distribution alliance. The aim is to have asimilar market power to that of Walmex, to force suppliers to grant them the bigdiscounts they require to implement the same low-price strategy as their rival.

The retail sector has weathered the sharp economic slowdown observed since2001 relatively well, with sales expanding by 2.7% in 2001, remaining flat in2002, and growing by 3.2% during January-November 2003, compared with theyear-earlier period. This positive performance reflects rising real incomes, an

Retail trade flourishes

42 Mexico


expansion of consumer credit and greater competition in the sector. Strongergrowth of retail sales will depend on job creation, particularly in themanufacturing sector, and that of wholesale sales on the recovery of industrialproduction. In addition, although consumer credit has risen rapidly, it is still notwidely available.

Mexico captures 3-4% per year of tourism worldwide, with 80-85% of visitorscoming from the US. The country is the eighth most popular destination in theworld in terms of visitors and 11th in terms of revenue earned. Tourismtypically generates about 8.5% of GDP and about 9% of all jobs (1.77m by mid-2003) are related to tourism, directly or indirectly. The sector was hit hardfollowing the September 11th terrorist attacks on the US, not only because of afall in visitor arrivals but also because of tightened security at the US-Mexicoborder. Visitors crossing the border to shop or just visit have been greatlydeterred from doing so because of the increased time that the border crossingnow demands. Bilateral agreements on security procedures should help in thefuture—negotiations on the issue are taking place between the two countries—but it is unclear when “daytrip” tourism will recover. In 2003 earnings fromtourists (including cross-border trips) stood at US$9.5bn (US$6.7bn if cross-border tourism is excluded). The number of tourists that visited the interior ofthe country (as opposed to making cross-border day-trips) during January-November 2003 stood at 10.35m.

The external sector

Trade in goodsManufacturing exportsa

(% change)

1999 2000 2001 2002 2003Food, beverages & tobacco 7.0 9.3 2.0 7.3 4.2

Clothing & footwear 14.0 11.6 -10.8 -1.9 -5.1Wood products 5.3 2.3 -21.1 -5.3 -4.5

Paper, printing & publishing 14.7 1.1 -5.0 -1.8 0.9Chemicals, plastics & rubber products 12.5 21.5 -5.5 2.2 8.3Non-metallic, non-oil mineral products 12.9 11.6 3.6 -5.4 5.3

Basic metals -12.1 7.9 -11.7 1.5 3.5Metallic products, machinery & equipment 18.7 22.3 -1.7 -0.4 -0.3

Other manufacturing industries -8.8 -10.2 3.3 53.5 -25.0Total 15.2 19.3 -3.0 0.3 -0.1

a Includes maquiladora (in-bond assembly for re-export) sector.


According to figures from the Instituto Nacional de Estadística Geografía eInformática (INEGI, the national statistics office), high international prices andhigher output volumes than in the previous year made for strong oil earningsgrowth throughout 2003—revenue from oil exports was up by 28% on thatrecorded in 2002. Non-oil exports grew by just 2.8% overall, having contractedby 2% year on year in the first eight months of 2003 and almost 5% year on

Tourism begins to recover

Manufactured exports growthslumps

Mexico 43


year in the period September to December 2003. Manufactured exportsfollowed a similar trend, contracting by 3.2% year on year in January to Augustand growing by around 5% in the last four months of the year. These figuressuggest that manufacturing finally began to benefit from stronger importdemand in the US in the second half of 2003. However, a further year ofcontraction following the poor performance of the previous two years points tothe problems of competitiveness Mexico faces. Given that US import volumesbegan to recover in the second quarter of 2002 but that Mexico only really sawa pick up in sales in the second half of 2003 points to Mexico's difficulty inmaintaining its market share in the US.

Import growth was virtually flat in 2003, with spending rising by just 1.3% on2002. This reflects the weaker peso and the sluggish performance of themanufacturing sector for much of the year as maquiladora (in-bond assemblyfor re-export) operations, which account for around 40% of manufacturingoutput, have a high content of imported inputs. However, as is the case withexports, import spending began to recover in the last four months of the year.According to INEGI, the trade deficit fell from US$7.9bn in 2002 to US$5.6bn in2003, but the fact that this has come about because of import stagnation ratherthan strong merchandise export earnings is less positive.

Foreign trade regulations

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 Ministry ofEconomy. 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

The maximum import tariff is 20% and the minimum 10%; exceptions pay 0-5%.

Import licences

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

44 Mexico


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.

Despite efforts to diversify, Mexico’s reliance on the US market has increasedrather than diminished in recent years. Mexico has moved to develop tradewith other countries and blocs in a bid to reduce its vulnerability tofluctuations in the US business cycle. It has free-trade agreements (FTAs) withChile, Colombia, Venezuela, Costa Rica, Bolivia and Nicaragua. In May 2000negotiation of an FTA with the Triángulo del Norte (the Northern Triangletrading bloc comprising Guatemala, Honduras and El Salvador) was concludedand the agreement came into effect in 2001. FTAs with the EU, Israel theEuropean Free-Trade Area (EFTA, comprising Iceland, Liechtenstein, Norway andSwitzerland) were signed in 2000. Mexico has now signed FTAs with 32 nationswith a total of 860m consumers, and about 90% of its exports enjoy some kindof preferential treatment.

Mexico, a member of the Asia-Pacific Economic Co-operation (APEC) forum, isalso seeking stronger trade relations with Pacific Rim countries, particularlythrough FTAs. Negotiations to establish an FTA with Japan started formally inNovember 2002 and, despite disagreements over agricultural trade, look set tobe completed and an agreement signed in the first quarter of 2004. An FTAwith Japan would be beneficial for Mexico as that country is an importanttrade partner and potential source of foreign investment. Over the long term,FTAs with the EU and Japan should help to reduce Mexico’s dependence onthe US market but the US will remain its dominant partner.

Main trading partners, 2003a

Exports to: % of total Imports from: % of totalUS 88.9 US 62.2

Canada 1.7 China 5.4Spain 0.9 Japan 4.4Germany 1.1 Germany 3.7

Netherlands 0.3 Canada 2.4UK 0.4 South Korea 2.4

Brazil 0.3 Taiwan 1.5

a January-November.


Invisibles and the current account

Tourism is important both as a credit and debit item. According to the WorldTourism Organisation Mexico moved from 13th to 10th in their ranking ofmajor tourism destinations by earnings. According to preliminary estimatesMexican tourism earnings reached US$9.5bn in 2003, up by around 7% on theprevious year. The type of tourism is changing, with a reduction in short cross-

Services

Mexico 45


border trips and a rise in longer trips in the interior of the country. These trendsillustrate that cross-border trips (largely day shopping trips in the border areas)have yet to recover from the fall they suffered owing to the increased bordersecurity that followed the September 11th 2001 terrorist attacks on the US. Atthe same time, they show that Mexico is increasing in importance as a tourismdestination for longer trips.

The largest element under factor services on the debit side is interest payments,which totalled US$12bn in 2002 and US$9.1bn during the first nine months of2003. On the credit side, interest income reached US$2.8bn in 2002 andUS$1.9bn during the first three quarters of 2003. Interest income is earnedpartly on deposits of foreign reserves abroad and partly on investments madeoverseas by Mexican companies. Other factor service receipts are made up ofroyalties, technical assistance payments and earnings from Mexicans living inthe northern border region but who work in the US.

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 (below 4% of GDP). Stimulated by strong economic growth, the deficitwidened to US$18.2bn in 2000, mainly owing to increases in the trade andnon-factor services accounts. The weak economic performances observed since2001 have reduced the deficit, which stood at US$14bn (2.2% of GDP) in 2002.In light of weak import spending, high remittances and strong oil earnings, thecurrent-account deficit is expected to have narrowed further in 2003.

Current account(US$ m)

2003a

Merchandise exports 121,445Merchandise imports 124,463Trade balance -3,018

Net non-factor services -3,092Net factor services -9,911

Net transfers 10,291Current-account balance -5,730

a January-September.

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

Transfers are an important element in the invisibles account and contribute asizeable surplus to the balance of payments. They are made up largely ofremittances from migrant workers and totalled US$10.3bn in 2002, significantlyabove the US$7bn recorded in 2000. During the first three quarters of 2003, nettransfers stood at US$10.3bn. Remittances are set to reach around US$13bn in2003 as a whole. Although some of the increase is a result of better registrationof the remittances, easier and cheaper payment options and a rise in thenumber of migrant workers have also contributed.

Current account

46 Mexico


Capital flows and foreign debtUnder the administration of the former president, Ernesto Zedillo (1994-2000),inflows of short-term capital were overtaken by foreign direct investment andlong-term debt. Mostly fuelled by foreign direct investment (FDI), in 1997-2002healthy capital-account surpluses allowed a steady (and in some years quitesignificant) accumulation of international reserves by the Banco de México(Banxico, the central bank). The year 2001 was notable in that sense. Theacquisition of the Banamex-Accival (Banacci) financial group by US-basedCitigroup led to a surge in FDI, with the capital-account surplus swelling to ahistorical high of US$24.5bn, outstripping the current-account deficit, andcontributing to a rise in reserves of US$7.3bn. The capital-account surplus in2002 was nearly as high, at US$22.1bn. In January-September 2003, the surplusrecorded was a much more modest US$9bn, although it still comfortablysurpassed the current-account deficit, and was mostly explained by a netreduction in the amount of foreign indebtedness.

The aim of the government of the current president, Vicente Fox Quesada, toboost annual FDI inflows to around US$20bn has been hindered by a lack ofstructural reform, its inability to liberalise foreign investment legislation further,and the legal uncertainty surrounding foreign investment in the energy sector.Nevertheless, despite the economic slowdown experienced worldwide, FDIinflows stood at US$14.5bn during 2002, a figure that compares quite favourablywith that of 2001 when the Banamex acquisition is not considered. However, inthe first three quarters of 2003, FDI stood at US$8.3bn, the lowest for a similarperiod since 1996. During the same nine-month period foreign portfolio invest-ment (FPI) in the stockmarket fell by US$778m, and that in the money marketsincreased by US$987m.

Foreign investment regulations

The Foreign Investment Law that took effect in December 1993 allows for 100%foreign participation in the equity of Mexican companies except in specific areas.Exceptions include activities reserved exclusively for the state such as oil, carbons,basic petrochemicals, electricity distribution, nuclear power and radioactive minerals;telegraphs, radiotelegraphs and postal services; and the issue of monetary bills.Areas reserved for national investment include domestic cargo and passenger landtransport, including transport for tourism; the retailing of petrol and the distributionof liquefied gas; radio and television broadcasting other than cable television; andcredit unions, development banks and the technical and professional servicesprovided for in other legislation. Foreigners can participate in other areas, but onlythrough neutral investments (non-voting equity). There are specific limits to interestsheld by foreign investors, including limits of 10% in production co-operatives; 25% indomestic air transport, air taxis and specialised air transport; and 49% in certainactivities in finance, communications, transport and agriculture (foreign investmentcan exceed the 49% limit, but only in the form of non-voting equity).

Since the mid-1990s the authorities have focused on developing a domesticdebt market a priority. In addition to encouraging domestic debt purchases byforeign investment banks, it introduced privately managed pension plans tofoster the creation of a pool of domestic savings. As this policy proved to be

External public-sector debt

Mexico 47


successful, the government was able to reduce public-sector externalindebtedness. The authorities continue a policy of active debt management toreduce servicing costs and roll over debt. The central aims of the governmentare to avoid any peak in the payments’ horizon, and to develop a long-termyield curve for the Mexican external public debt.

The government engaged for several years in de facto bond swaps by financingbuy-back operations of Brady bonds (issued in 1990 after a debt reductionagreement with commercial creditors) with the proceeds of new external bondissues. Buying back Bradies was a particularly attractive as their principal iscollateralised with US zero-coupon bonds (that are recovered along with thebonds). In July 2003 the government concluded the buy-back of Bradies,becoming the first formerly highly-indebted country to do so. Since then, the defacto refinancing operations have continued, although the Ministry of Financeand Public Credit has had to focus on other debt. For example, in January 2004it announced the prepayment of 11 credits, totalling US$292m, owed to theInter-American Development Bank (IDB) since 1989, and which were paying afixed interest rate.

The government's debt-management policy received a boost by the mainratings agencies at the beginning of 2002: Standard & Poor’s upgraded the long-term Mexican debt to investment grade on February 7th. The move followedupgrades by Moody’s the previous day—to one notch above minimum invest-ment grade status—and by Fitch in mid-January, which also raised governmentdebt to investment status for the first time. Contrary to what happened to othercountries during 2002, government debt was not downgraded by any ratingsagency. Moody's announced in mid-November 2003 that it would considerupgrading the government's long-term rating further in 2004. If that happens, itwould reach an investment grade similar to that enjoyed by Chile. At the endof 2003, the net external public debt was down by US$2.5bn but, owing tocurrency adjustments and a decline in the Federal Government's externalassets, the stock reached US$77.3bn, which constitutes an overall increase ofUS$1.4bn compared with 2002.

In recent years private-sector foreign borrowing has increased because domesticcredit has been rationed, while larger companies have found it cheaper toborrow from foreign banks and to raise money through foreign bond issuesand the placement of commercial paper. According to the most recent estimatesby the finance ministry, private-sector external debt stood at US$54.5bn at theend of June 2003, slightly below the US$55.6bn recorded at the end of 2002.

Foreign reserves and the exchange rate

Owing to capital inflows registered in the item of errors and omissions, reserveaccumulation reached US$7.3bn in 2001. But with a free-floating peso reserveaccumulation is no longer a priority and Banxico ceased to auction peso calloptions that year. The Foreign Exchange Commission also suspended thecontingent sales of foreign exchange from July 2001 onwards, arguing that themove would maintain the symmetry of the floating exchange regime. Reserveaccumulation has continued mostly through purchases of foreign currency by

Private sector borrowing

48 Mexico


Banxico from Pemex. In an attempt to slow this accumulation, Banxicointroduced a rules-based mechanism in May 2003, selling dollars directly in theforeign-exchange market in order to preserve its current position of reserves butat the same time reduce the rate of reserve accumulation. By the end of 2003,reserves stood at US$59bn according to national figures. Banxico hasestablished a reputation for being committed to a floating peso, resistingpressures to intervene.

Mexico 49


Appendices

Sources of information

Banco de México (the central bank), Indicadores del Sector Externo (monthly)

Banco de México, Indicadores Económicos (monthly)

Banco de México, Informe Anual (annual)

Banco de México, Informe sobre la Inflación (quarterly)

Banco de México, Programa Monetario (annual)

Banco Nacional de Comercio Exterior, Comercio Exterior (monthly)

Instituto Nacional de Estadística, Geografía e Informática (INEGI, the NationalInstitute of Statistics, Geography and Informatics), Bulletin of StatisticalInformation (quarterly)

Instituto Nacional de Estadística, Geografía e Informática, Sistema de CuentasNacionales (annual)

INEGI also produces annual and quarterly surveys of urban employment,national income and expenditure, industrial performance, as well asinformation on the activity of maquiladoras (in-bond assembly plants)

Nacional Financiera, El Mercado de Valores (monthly)

Presidencia de la República, Informe de Gobierno (annual)

Secretaría de Hacienda y Crédito Público (SHCP, Ministry for Credit and PublicFinance), Cuenta de la Hacienda Pública Federal (annual)

Secretaría de Hacienda y Crédito Público, Informe sobre la SituaciónEconómica, las Finanzas Públicas y la Deuda Pública (quarterly)

Secretaría de Hacienda y Crédito Público, Mexico: Economic and FinancialStatistics Data Book (half-yearly)

Energy Data Associates, Bishops Walk House, 19-23 High Street, Pinner,Middlesex HA5 5PJ

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)

National statistical sources

International statistical sources

50 Mexico


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 Cárdenas, La Política Económica en México 1950-1994, FCE, 1996

Jorge G Castañeda, La Herencia, Alfaguara, 1999

Enrique Krauze, La Presidencia Imperial, Tusquets Editores, 1997

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

Carlos Salinas de Gortari, México: Un Paso Difícil a la Modernidad, Plaza andJanés, 2000

Luis Spota, Casi el Paraíso, FCE, 1963

Luis Spota, Paraíso 25, FCE, 1983

Main government portal, http://www.gob.mx

Presidencia de la República (Office of the President), http://www.presidencia.gob.mx

Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación(SAGARPA, Ministry of Agriculture, Livestock, Rural Development, Food andFisheries), http://www.sagarpa.gob.mx

Secretaría de la Reforma Agraria (SRA, Ministry of Agrarian Reform),http://www.sra.gob.mx

Secretaría de Comunicaciones y Transportes (SCT, Ministry of Communicationsand Transport), http://www.sct.gob.mx

Secretaría de la Defensa Nacional (Sedena, Ministry of National Defence),http://www.sedena.gob.mx

Secretaría de Marina (Ministry of the Navy), http://www..semar.gob.mx

Secretaría de Economía (Ministry of the Economy), http://www.economia.gob.mx

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

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

Secretaría de la Contraloría y Desarrollo Administrativo (Secodam,Ministry of the Comptroller and for Administrative Development),http://www.secodam.gob.mx

Procuraduría General de la República (PGR, Ministry of the Attorney General),http://www.pgr.gob.mx

Secretaría de Hacienda y Crédito Público (SCHP, Ministry of Finance and PublicCredit), http://www.shcp.gob.mx

Secretaría de Medio Ambiente y Recursos Naturales (Semarnat, Ministry of theEnvironment and Natural Resources), http://www.semarnat.gob.mx

Select Bibliography andwebsites

Mexico 51


Secretaría de Relaciones Exteriores (SRE, Ministry of Foreign Relations),http://www.sre.gob.mx

Secretaría de Salud (SSA, Ministry of Health), http://www.ssa.gob.mx

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

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

Banco de México (the central bank): http://www.banxico.org.mx

Sistema de Informacion Empresarial Mexicano (SIEM, Mexican BusinessInformation System), http://www.siem.gob.mx

Cámara de Diputados (Chamber of Deputies), http://www.camaradediputados.gob.mx

Senado de la República (Senate), http://www.senado.gob.mx

Congress (Cámara de Diputados del Honorable Congreso de la Unión),http://www.cddhcu.gob.mx

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

Comisión Reguladora de Energia (CRE, Regulatory Commission for Energy),http://www.cre.gob.mx

Comisión Federal de Electricidad (CFE, Federal Electricity Commission),http://www.cfe.gob.mx

Comisión Federal de Competencia (CFC, Federal Competition Comisión),http://www.cfc.gob.mx

Comisión Federal de Telecomunicaciones (Cofetel, Federal TelecommunicationsCommission), http://www.cofetel.gob.mx

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

Legislation: http://www.juridicas.unam.mx/infjur/leg/

Banco Nacional de Comercio Exterior (Bancomext, National Bank for ForeignTrade): http://www.bancomext.gob.mx

Petróleos Mexicanos (Pemex), http://www.pemex.com

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

Suprema Corte de Justicia de la Nación (SCJN, Supreme Court),http://www.scjn.gob.mx

52 Mexico


Reference tablesPopulationa

('000)

2000 2001 2002 2003 2004Total population 99.9 101.2 102.4 103.6 104.8

a Estimates from the 1995 population count and the 2000 census.

Source: Consejo Nacional de Población.

Labour forcea

(m unless otherwise indicated)

1999 2000 2001 2002 2003Menb 25.3 25.8 26.1 26.4 26.9

Womenb 13.3 13.9 13.9 14.1 14.6Total 38.6 39.7 40.0 40.5 41.5 Insured 14.6 15.2 15.1 15.5 15.8Participation rate (urban areas; %) 55.8 56.3 55.7 55.2 55.6

a Working population at least 12 years old. b Data for 1995-99 estimated by the EconomistIntelligence Unit using figures from Conapo and INEGI; data for 2000-01 are Economist IntelligenceUnit estimates based on INEGI figures.

Sources: OECD, Economic Survey of Mexico; Instituto Mexicano de Seguro Social; Consejo Nacional de Población; Instituto Nacional

de Estadística, Geografía e Informática; Economist Intelligence Unit.

Unemployment rates in urban areasa

(annual averages; %)

1998 1999 2000 2001 2002 2003Openb 3.2 2.5 2.2 2.4 2.7 3.3Underemploymentc 21.4 19.3 18.9 18.6 18.6 20.5Insufficient incomed 11.4 10.6 10.2 9.7 8.5 10

a Sample covering 45 cities up to 2002, when the sample was reduced to 32 cities. b A narrowmeasure covering persons age 12 years or over who did not work, but were available for work in thereference week and who had unsuccessfully sought employment in the two months before.c Economically active population unemployed, plus those employed for less than 35 hours per week.d Proportion of economically active population unemployed or employed and earning less than theminimum wage.


Crude oil and gas production1999 2000 2001 2002 2003

Crude oil production (m barrels) 1,094.8 1,138.1 1,178.7 1,198.1 n.a. Daily average (m barrels) 2,906 3,012 3,127 3,177 3,370 % change, year on year -5.4 3.6 3.8 1.6 6.1

Oil reserves (bn barrels) 57.7 58.2 53.0 n.a. n.a.Gas production (m cu ft/day) 4,790.0 4.679 4.511 4.424 4.498 % change, year on year 0.0 -2.3 -3.6 -2.0 1.7

Gas reserves (m barrels equivalent) 12.093 11.994 13.528 n.a. n.a.

Sources: Petróleos Mexicanos; Secretaría de Energía; Instituto Nacional de Estadística, Geografía e Informática.

Mexico 53


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

1999 2000 2001 2002a 2003Revenue 956.5 1,187.7 1,271.4 1,387.2 1,599.8Expenditure 1,009.30 1,248.2 1,311.7 1,460.0 1643.8

Balanceb -52.9 -60.5 -40.3 -72.7 -44.0 % of GDP -1.15 -1.1 -0.7 -1.2 -0.7c

a Expenditure includes a one-off charge of Ps48.9bn for the liquidation of Banrural. b Net of off-budget items, transfers and interest payments between federal government and public enterprises;includes accounting differences from financing sources. c Economist Intelligence Unit estimate.

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

Federal government budget revenue and expenditure(Ps bn)

1998 1999 2000 2001 2002a

Revenue 545.3 674.4 868.2 939.0 987.5 Taxes Income 169.5 216.1 258.7 285.5 319.3 Value-added tax 119.9 151.2 189.6 208.4 218.3 Excise taxes 76.6 106.7 81.5 110.7 136.5 Foreign trade 21.5 27.3 32.9 28.9 27.4 Other 16.8 20.4 18.9 21.3 26.1 Non-tax revenue 141 152.7 286.6 284.2 259.9 Oil duties 88.8 90.5 196.1 187.6 139.8Expenditure 610.3 761.2 952.1 996.9 1124.5 Primary 514.6 616.4 775.6 830.1 965.9 Wages, purchases & services 74.9 87.5 130.8 123.1 136.3 Subsidies & transfers 301 361.3 439.1 492.4 593.4 Transfers to local governments 113.9 140.7 178.1 196.9 214.9 Other primary expenditure 24.8 26.9 27.6 17.7 21.3 Debt financial cost 95.7 144.8 176.5 166.8 158.6Balance -65.0 -86.8 -83.9 -57.9 -137.0

a Expenditure includes a one-off charge of Ps48.9bn for the liquidation of Banrural.

Sources: Instituto Nacional de Estadística, Geografía e Informática; Secretaría de Hacienda y Crédito Público.

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

1998 1999 2000 2001 2002Money (M1) incl others 323.9 407.6 465.5 527.5 596.7 % change, year on year 21.2 25.8 14.2 13.3 13.1Quasi-money 997.3 1,161.4 1,033.1 1,157.9 1,238.7

Money (M2) 1,321.3 1,569.0 1,498.6 1,685.4 1,835.4 % change, year on year 17.4 18.7 -4.5 12.5 8.9

Source: IMF, International Financial Statistics.

54 Mexico


Interest rates(%; period averages unless otherwise indicated)

1999 2000 2001 2002 2003Lending interest rate (%) 23.7 16.9 12.8 8.2 6.9Deposit interest rate (%) 11.6 8.3 6.2 3.8 3.1

Money market interest rate (%) 24.1 17.0 12.9 8.2 6.8Long-term bond yield (%) 24.1 16.9 13.8 8.5 7.4

Source: IMF, International Financial Statistics.

Gross domestic product(market prices)

1999 2000 2001 2002 2003Total (US$ bn)At current prices 481.1 581.4 624.0 637.2 626.1

Total (Ps bn)At current prices 4,599.4 5,497.4 5,830.1 6,152.8 6754.8At constant (1993) prices 1,503.5 1,602.3 1,600.4 1,612.1 1633.1 % change, year on year 3.7 6.6 -0.1 0.7 1.3Per head (Ps)At current prices 47,238 55,596 58,085 60,413 65,390At constant (1993) prices 15,442 16,205 15,945 15,828 15,809 % change, year on year 2.1 4.9 -1.6 -0.7 -0.1

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

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

1999 2000 2001 2002 2003Agriculture, livestock, forestry &

fishing 3.6 0.6 2.5 2.4 3.9Mining -2.1 3.8 -0.6 -0.8 3.7Manufacturing 4.2 6.9 -3.9 -1.1 -2.0

Construction 5.0 5.1 -4.5 1.7 3.4Electricity, gas & water 7.9 1 1.7 3.5 1.1

Commerce, restaurants & hotels 3.1 12.4 -1.3 -0.5 1.3Transport & communications 7.8 9.6 2.8 1.6 3.3

Community & social services 2.1 2.9 0.5 1.3 0.5Financial services & real estate 3.6 3.2 4.1 4.4 4.3Imputed banking services 5.9 6.8 6.2 7.9 n.a

GDP 3.7 6.6 -0.3 0.9 1.3

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

Mexico 55


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

1999 2000 2001 2002 2003a

Private consumption 4.3 8.3 3.4 1.2 2.7Government consumption 4.7 2 -1.4 -1.3 2.1

Gross fixed investment 7.7 11.4 -5.9 -1.3 -0.8Exports of goods & services 12.4 16.4 -5.1 1.4 -0.2

Imports of goods & services 14.1 21.5 -2.9 1.6 -2.0GDP at market prices 3.7 6.6 -0.3 0.9 0.9


Sources: Instituto Nacional de Estadística, Geografía e Informática.

Prices and earnings(% change, year on year)

1999 2000 2001 2002 2003Consumer prices (av) 16.6 9.5 6.4 5.0 4.5

Average nominal wages 16.1 23.5 9.3 6.4 5.0Average real wages -0.4 12.8 2.8 1.3 0.4Unit labour costs 2.2 7.7 6.8 0.6 -7.5

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

Production of principal crops('000 tonnes)

1999 2000 2001 2002 2003a

Sugar cane 45,106 42,867 45,501 45,800 44,944

Maize 17,706 17,557 20,134 19,210 19,300Sorghum 5,720 5,842 6,517 5,203 5,213Wheat 3,021 3,493 3,276 3,232 3,275

Beans 1,059 888 1,063 1,546 1,612Barley 454 713 762 737 791

Rice 327 351 227 227 231Soybeans 133 102 122 84 84

a Estimate.


56 Mexico


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 2,161Turkey n/a n/a n/a n/a n/a

Milk (m litres) 9,008 9,443 9,612 9,745 10,022Eggs 1,635 1,788 1,892 1,896 1,925Honey 55 59 59 55 62

a Includes turkey. b Estimate.

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

Manufacturing production(% change; 1993 prices)

1999 2000 2001 2002 2003Food, beverages & tobacco 4.0 4.0 1.8 1.8 1.2

Clothing & footwear 3.1 5.4 -10.1 -5.8 -8.9Wood products 0.4 3.9 -4.5 -4.9 0.2

Printing, paper & publishing 5.0 2.7 -4.0 -1.8 -1.7Chemicals, petroleum products,

rubber & plastics 2.4 3.2 -4.3 -0.2 1.8Non-metallic minerals excl oil 1.8 4.1 -4.2 3.8 0.7

Basic metal industries 0.4 3.0 -5.7 1.3 3.4Metal products, machinery &

equipment 6.9 13.5 -6.2 -2.2 -5.9Other industries 5.8 8.0 -0.7 -3.2 -8.3

Total manufacturing 4.2 6.9 -3.9 -0.7 -2.0

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

Minerals production('000 tonnes unless otherwise indicated)

1999 2000 2001 2002 2003Gold (kg) 23.5 25.8 25.7 19.5 19.70Silver ('000 kg) 2.5 2.7 3.0 2.4 2.65Zinc 339.8 358.6 427.3 329.7 374

Copper 340.1 339.0 349.4 255.9 268.4Manganese 169.1 156.1 99.8 57.0 100.8

Lead 131.4 160.6 146.8 90.5 130.6Molybdenum 8.0 6.9 5.5 3.0 3.2Arsenic 2.4 2.5 2.4 1.6 1.6

Antimony 0.3 0.1 0.1 0.2 0.4Cadmium 1.3 1.3 1.4 1.2 1.5

Bismuth 0.5 1.1 1.4 1.0 1.5


Mexico 57


Stockmarket indicators1999 2000 2001 2002 2003

Trading value (US$bn) 36.04 45.34 40.04 27.73 n.aShare price index (year-end) 7,129.9 5,652.2 6,372.3 6,127.1 8,795.3 % change in US$ terms 87.8 -22.0 18.8 -15.3 31.8Market capitalisation (US$ bn) 154.0 125.2 126.3 103.1 122.5

Sources: Bolsa Mexicana de Valores. Standard & Poors, Global Stock Markets Factbook 2003. Standard & Poors, Emerging Stock

Markets Review January 2004

Merchandise sales(real terms; 1994=100)

1999 2000 2001 2002 2003a

Retail 92.4 101.7 104.4 146.2 109.5Wholesale 95.1 99.6 92 97.0 88.3

a December 2002 to November 2003.


Tourisma

1999 2000 2001 2002 2003Arrivals ('000) 10,216 9,674 10,153 9,885 10,353Revenue (US$ m) 5,062 5,816 5,942 6,084 6,680

a Excluding crossborder tourism from the US.

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

Main exports and importsa

(US$ bn)

1999 2000 2001 2002 2003b

Exports fobManufacturesc 122.1 145.3 141.4 142.0 141.4Oil exportsd 9.9 16.4 12.8 14.5 18.6Agricultural products 3.9 4.2 3.9 3.9 4.8Mining products 0.5 0.5 0.4 0.4 0.5Total 136.4 166. 5 158.4 160.8 165.4Imports fobConsumer goods 12.2 16.7 19.8 21.2 21.5Intermediate goods 109.3 133.6 126.1 126.5 129.2Capital goods 20.5 24.1 22.5 21.0 20.2Total 142.0 174. 5 168.4 168.7 171.0

a Includes maquiladoras. b Preliminary estimates. c Excludes oil products. d Includes oil products.


58 Mexico


Main trading partners(% of total)

1999 2000 2001 2002 2003Exports fob to:US 88.3 88.7 88.5 89.0 88.8Canada 1.8 2.0 1.9 1.7 1.7Germany 1.5 0.9 0.9 0.8 1.1Spain 0.6 0.9 0.8 0.9 0.9Switzerland 0.3 0.3 0.3 0.3 0.4Japan 0.6 0.6 0.4 0.3 0.4Imports from:US 74.1 73.1 67.6 63.2 61.8China 1.4 1.7 2.4 3.7 5.5Japan 3.6 3.7 4.8 5.5 4.5Germany 3.5 3.3 3.6 3.6 3.7South Korea 2.1 2.3 2.5 2.7 2.4Canada 2.1 2.2 2.2 2.3 2.4

Source: Secretaría de Economía.

Balance of payments(US$ m)

1998 1999 2000 2001 2002Goods: exports fob 117,460 136,391 166,455 158,443 160,763

Goods: imports fob -125,373 -141,975 -174,458 -168,396 -168,679Trade balance -7,914 -5,584 -8,003 -9,954 -7,916Services: credit 11,523 11,692 13,712 12,660 12,692

Services: debit -12,428 -13,491 -16,036 -16,218 -16,740Income: credit 5,047.0 4,516.9 6,090.7 5,138.7 4,098.5

Income: debit -18,313.5 -17,448.1 -20,924.2 -19,067.9 -16,448.3Current transfers: credit 6,039.5 6,340.1 7,023.2 9,359.9 10,303.7Current transfers: debit -27.2 -26.9 -29.5 -21.9 -35.2

Current-account balance -16,072.4 -14,000.6 -18,166.3 -18,102.5 -14,045.7Direct investment in Mexico 11,897.0 13,055.0 16,075.0 26,204.0 14,622.0

Direct investment abroad – – – -4,405.0 -969.0Inward portfolio investment

(incl bonds) 10,685.9 23,516.9 9,038.4 15,167.0 11,274.0Outward portfolio investment -768.0 -836.0 1,290.0 3,857.0 1,134.0

Other investment assets 1,201.0 -3,169.0 5,809.0 -3,287.0 11,601.0Other investment liabilities 70.0 -3,604.0 198.0 -974.0 -3,455.0

Financial balance 23,085.9 28,962.9 32,410.4 36,562.0 34,207.0Net errors & omissions 401.0 824.0 3,075.0 129.0 -828.0Overall balance -3,502.0 4,250.0 7,127.0 7,314.0 7,358.0Financing (– indicates inflow) Movement of reserves -3,003.6 38.3 -3,752.2 -9,225.1 -5,860.2 Use of IMF credit & loans 0.0 1,414.5 1,193.9 0.0 0.0

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

Mexico 59


Total foreign investment(US$ m)

1999 2000 2001 2002 2003a

Total 15,619 15,719 26,313 14,481 8,303Direct investment 12,767 15,318 25,221 14,435 8,094

Portfolio investment 2,852 401 1,092 46 210 Stockmarket 3,769 447 151 -104 -777 Government securities -917 -461 941 150 987


Source: Banco de México.

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

1997 1998 1999 2000 2001Public medium- & long-term 84,373 87,974 88,698 89,653 86,199Private medium- & long-term 27,382 37,228 50,017 49,893 54,091Total medium- & long-term debt 111,755 125,202 138,715 139,546 140,290

Official creditors 22,978 23,056 21,821 20,838 19,852 Bilateral 6,534 5,961 5,131 3,587 3,088 Multilateral 16,444 17,095 16,690 17,251 16,763 Private creditors 88,778 102,146 116,893 118,708 120,438Short-term debt 27,860 26,321 24,062 18,932 18,000 Interest arrears 0 0 0 0 0Use of IMF credit 9,088 8,380 4,473 0 0Total external debt 148,703 159,903 167,250 158,478 158,290Principal repayments 30,831 18,193 23,472 45,033 35,491Interest payments 11,162 11,165 12,030 13,467 12,809 Short-term debt 2,231 1,774 1,924 1,892 1,192Total debt service 41,993 29,358 35,502 58,500 48,300Ratios (%)Total external debt/GDP 37.0 38.0 34.8 27.3 25.4Debt-service ratio, paida 31.9 20.9 22.3 30.2 25.9

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(s): World Bank, Global Development Finance.

Gross external debt, national estimates(US$ m; debt stocks as at year-end)

1999 2000 2001 2002 2003a

Total 166,381 148,652 144,526 140,099 141,505 Public sector 92,289 84,601 80,339 78,818 80,084 Commercial banks 14,124 11,203 8,481 5,651 6,918 Banco de Méxicob 4,468 0 0 0 0 Non-bank private sector 55,499 52,849 55,706 55,629 54,503

a As of June 30th 2003. b The central bank (debt owed to the IMF).

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

60 Mexico


Amortisation schedule of global external debta

(US$ m)

2004 2005 2006 2007 2008Public sector 10,231 6,237 6,002 5,601 7,005 Commercial banks 1,333 362 300 296 35 Bonds 3,526 3,072 2,996 3,202 5,122 World Bank & IDBb 1,884 1,965 1,998 1,802 1,591 External trade 1,033 462 362 244 255 Restructured debt 540 376 346 57 3 Pidiregasc 1,914 0 0 0 0Private sectord 12,171 4,855 8,369 5,578 5,317 Commercial banks 6,487 3,759 4,169 2,641 3,231 Bonds 3,649 731 3,915 2,671 1,448 External trade 2,034 364 285 266 638Total 22,401 11,092 14,371 11,179 12,322

a As of June 30th 2003. b Inter-American Development Bank. c Registered as zero after 2005 becauseonly payments for the immediate year are recorded. d Does not include Mexican banks.

Source: Secretaría de Hacienda y Crédito Público.

Foreign reserves(US$ ; end-period)

1999 2000 2001 2002 2003Total reserves incl gold 31,826.3 35,578.5 44,803.6 50,663.8 59,017.7Total international reserves

excl gold 31,782.0 35,509.0 44,741.0 50,594.0 58,956.0Gold, national valuation 44.3 69.5 62.6 69.8 61.7

Source:IMF, International Financial Statistics.

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

1999 2000 2001 2002 2003US$ 9.6 9.5 7.6 9.7 10.8

£ 15.5 14.3 10.9 14.5 17.6€ 10.2 8.7 6.8 9.1 12.2C$ 6.43 6.37 4.91 6.15 7.70

Rmb 1.15 1.14 0.92 1.17 1.30¥ 0.084 0.088 0.063 0.077 0.093

Source: Economist Intelligence Unit, CountryData.

Editors: Mary Stanier (editor); Ondine Smulders (consulting editor)Editorial closing date: February 23rd 2004

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

Documents

Mexico - International University of Japan · Catholic Mexico, known as the Cristero War (1926-29). The conflict was brought to an end not by victory by either side but through negotiation