"The United States-Mexico Border "The United States-Mexico Border Economy in 2012”Economy in 2012”

Alejandro Díaz-Bautista, Alejandro Díaz-Bautista, Ph.D.Ph.D.

Professor of International Economics at Colefand Distinguished ResearcherNational Council of Science and Technology

adiazbau@gmail.com

Tuesday, September 18, 2012, from 9:00 am to 12:00 pm, at the Trans-Border Institute and the Center for Peace and Commerce, University of San Diego.

Introduction Introduction

The presentation will focus on economic issues The presentation will focus on economic issues that impact the economic relationship between our that impact the economic relationship between our two countries and that have a high priority in two countries and that have a high priority in upcoming years. The conference will address some upcoming years. The conference will address some of the critical economic issues on both sides of the of the critical economic issues on both sides of the United States - Mexico border. Topics will include United States - Mexico border. Topics will include economic growth, economic integration, trade, economic growth, economic integration, trade, unemployment, migration, foreign direct unemployment, migration, foreign direct investment, exchange rates, cross border retail investment, exchange rates, cross border retail sales, energy prices, inflation and bi-national sales, energy prices, inflation and bi-national projects. projects.

IntroductionIntroduction

Mexico is doing well in economic terms: Mexico is doing well in economic terms: low debt, low deficit and moderate low debt, low deficit and moderate economic growth. economic growth.

Emerging markets are in much better Emerging markets are in much better shape, with higher levels of economic shape, with higher levels of economic growth, compared to most advanced growth, compared to most advanced economies .economies .

Unemployment is a major problem for Unemployment is a major problem for emerging and advanced economies during emerging and advanced economies during 2012.2012.

Mexico and the United StatesMexico and the United States The two countries share a maritime and land border in The two countries share a maritime and land border in

North America. Several treaties have been concluded North America. Several treaties have been concluded between the two nations bilaterally, such as the North between the two nations bilaterally, such as the North American Free Trade Agreement (NAFTA). Both are American Free Trade Agreement (NAFTA). Both are members of various international organizations, including members of various international organizations, including the Organization of American States and the United the Organization of American States and the United Nations.Nations.

The two countries have close economic ties, being each The two countries have close economic ties, being each other's first and third largest trading partners. other's first and third largest trading partners.

They are also closely connected demographically, with over They are also closely connected demographically, with over one million U.S. citizens living in Mexico and Mexico being one million U.S. citizens living in Mexico and Mexico being the largest source of immigrants to the United Sates. the largest source of immigrants to the United Sates.

Mexico and the United StatesMexico and the United States

United States Mexico

Population311.1 million in 2010 112.3 million in 2010

Population Growth 0.9% per year 1% per year

Nominal GDP 2006 (USD) $14,204,322 million $1,085,951 million

GDP per Capita 2006 (USD) 

$46,970 $14,270

Area 3,717,792 mi 758,445.2 mi

Capital Washington, D.C. Mexico City

Largest City New York Mexico City

 

The United States- Mexico border regionThe United States- Mexico border region

United States - Mexico Border States

Description:

• 10 border states.

• Nearly 2,000-mile (3,169 km or 1,969 miles) of international border.

• Population: more than 83 million.

The United States- Mexico border regionThe United States- Mexico border region

The ten Border States represent the largest binational regional economy in The ten Border States represent the largest binational regional economy in the world, with over 83 million people and a combined economy ranked the world, with over 83 million people and a combined economy ranked estimated at number four in the world in economic terms.estimated at number four in the world in economic terms.

This region has 51 border crossings, 32 bridges and seven federal railway This region has 51 border crossings, 32 bridges and seven federal railway routes, placing it as the busiest border in the world, with over 350 million routes, placing it as the busiest border in the world, with over 350 million people cross the border each year.people cross the border each year.

The economic slowdown and unemployment are among the issues that The economic slowdown and unemployment are among the issues that currently affect the people on both sides of the border. currently affect the people on both sides of the border.

The state of Arizona had an unemployment rate of 9.4 percent, Texas, 8.4 The state of Arizona had an unemployment rate of 9.4 percent, Texas, 8.4 percent; New Mexico, 6.7 percent, and California, 12 percent (the highest), percent; New Mexico, 6.7 percent, and California, 12 percent (the highest), according to the figures from July 2011, compared to an unemployment according to the figures from July 2011, compared to an unemployment rate of 9.1 percent in the United States during July 2011.rate of 9.1 percent in the United States during July 2011.

In July 2011, the northern border states of Mexico were also showing high In July 2011, the northern border states of Mexico were also showing high unemployment rates. The state of Baja California had an unemployment unemployment rates. The state of Baja California had an unemployment rate of 5.05 percent, Sonora, 5.65 percent; Chihuahua, 6.81 percent; rate of 5.05 percent, Sonora, 5.65 percent; Chihuahua, 6.81 percent; Coahuila, 6.27 percent; Nuevo Leon, 6.49 percent; and Tamaulipas, 8.81 Coahuila, 6.27 percent; Nuevo Leon, 6.49 percent; and Tamaulipas, 8.81 percent (the highest).percent (the highest).

Unemployment in Mexico (2010)Unemployment in Mexico (2010)

United States Unemployment Rate United States Unemployment Rate

The United States Mexico The United States Mexico Border Unemployment (2012)Border Unemployment (2012)

Official figures from the National Institute of Statistics and Official figures from the National Institute of Statistics and Geography (INEGI) show that during the second quarter of 2012, Geography (INEGI) show that during the second quarter of 2012, the northern border states in Mexico continue to show high the northern border states in Mexico continue to show high unemployment rates. Chihuahua had a 7% unemployment rate, unemployment rates. Chihuahua had a 7% unemployment rate, Tamaulipas with 6%; Sonora with 5.4%, Coahuila with 5.5%, Tamaulipas with 6%; Sonora with 5.4%, Coahuila with 5.5%, Nuevo Leon with 6.4% , and Baja California with a 6.1% Nuevo Leon with 6.4% , and Baja California with a 6.1% unemployment rate. On average, the unemployment rate of the unemployment rate. On average, the unemployment rate of the northern border states of Mexico is estimated close to 6.06% northern border states of Mexico is estimated close to 6.06% during the second quarter of 2012.during the second quarter of 2012.

Furthermore, at the end of July 2012, the southern U.S. border Furthermore, at the end of July 2012, the southern U.S. border states also suffered with high unemployment rates: California with states also suffered with high unemployment rates: California with 10.7%, Arizona with 8.3%, 6.6% for New Mexico, and Texas with 10.7%, Arizona with 8.3%, 6.6% for New Mexico, and Texas with an unemployment rate of 7.2 percent. On average, the an unemployment rate of 7.2 percent. On average, the unemployment rate of the southern border states of the United unemployment rate of the southern border states of the United States is estimated at 6.06% during the month of July 2012.States is estimated at 6.06% during the month of July 2012.

Unemployment in CaliforniaUnemployment in California

Unemployment in San DiegoUnemployment in San Diego

The United States Mexico The United States Mexico BorderBorder

People cross the United States People cross the United States Mexico border every day to do Mexico border every day to do business, go shopping, visit family business, go shopping, visit family members, or simply to enjoy each members, or simply to enjoy each other’s tourism. other’s tourism.

This results in around 350 million This results in around 350 million crossings and almost $400 billion in crossings and almost $400 billion in trade each year, making it the most trade each year, making it the most important border region in the world.important border region in the world.

Economic Integration in North AmericaEconomic Integration in North America

The U.S. and Mexican economies have integrated The U.S. and Mexican economies have integrated since the passage of the North American Free since the passage of the North American Free Trade Agreement (NAFTA) in 1994. Trade Agreement (NAFTA) in 1994.

In 2009, the U.S. provided up to 80% of all inputs In 2009, the U.S. provided up to 80% of all inputs for Mexico’s maquiladora manufacturing and for Mexico’s maquiladora manufacturing and assembly firms, and nearly 90% of all exports assembly firms, and nearly 90% of all exports from Mexico’s maquiladora industry went to the from Mexico’s maquiladora industry went to the U.S., with an estimated $114 billion in bilateral U.S., with an estimated $114 billion in bilateral U.S. and Mexico trade. U.S. and Mexico trade.

By 2010, the United States was Mexico’s largest By 2010, the United States was Mexico’s largest trading partner and largest foreign investor. trading partner and largest foreign investor.

California and Mexico Economic IntegrationCalifornia and Mexico Economic Integration

Trade links and economic integration between Trade links and economic integration between Mexico and California are deep in terms of the Mexico and California are deep in terms of the total value of traded goods. Mexico continues to total value of traded goods. Mexico continues to be California's number one export market. be California's number one export market. California exports to Mexico were close to $21 California exports to Mexico were close to $21 billion in 2010. billion in 2010.

More than three-quarters of all California origin More than three-quarters of all California origin exports are shipped to Mexico’s northern border exports are shipped to Mexico’s northern border states. states.

Baja California residents contribute billions of Baja California residents contribute billions of dollars annually to the California economy.dollars annually to the California economy.

Baja California and California Economic IntegrationBaja California and California Economic Integration

Economic Integration can also be seen at the regional level. Economic Integration can also be seen at the regional level. During 2010, the official data shows that the number of During 2010, the official data shows that the number of

northbound crossers from Baja California to California northbound crossers from Baja California to California reached 61,105,484 people, the majority of whom, crossed reached 61,105,484 people, the majority of whom, crossed in personal vehicles. Baja California residents constitute an in personal vehicles. Baja California residents constitute an important component in the economy of communities and important component in the economy of communities and counties on the U.S. side of the border, like San Diego counties on the U.S. side of the border, like San Diego County. County.

These visitors from Baja California enter the U.S. regularly These visitors from Baja California enter the U.S. regularly for shopping, tourism, work, and socialization with family for shopping, tourism, work, and socialization with family and friends. It’s a well known fact that cross border visitors and friends. It’s a well known fact that cross border visitors from Mexico have a significant economic impact on U.S. from Mexico have a significant economic impact on U.S. communities and counties. communities and counties.

The Border Economic Zone (BEZ) in Baja California

A major challenge for the commercial sector of Baja California is without a doubt, the increase consumer spending of Baja California residents into the U.S. market, which has been estimated at around 6 billion dollars a year.

With the implementation of the BEZ in 2012, Baja California wants to recover part of the consumer spending by Baja residents in California.

The BEZ is intended to promote the consumption of regionally made goods in the Baja California region. The economic impact of the implementation of the BEZ could be as high as an 8% reduction of spending by Baja California residents in California.

The Border Economic Zone (BEZ)The Border Economic Zone (BEZ)

A considerable amount of money is spent on A considerable amount of money is spent on a multitude of retail items including a multitude of retail items including groceries, clothing, appliances, tourism and groceries, clothing, appliances, tourism and services. services.

As a measure to increase consumer spending As a measure to increase consumer spending in the state of Baja California, the in the state of Baja California, the government and business sectors of Baja government and business sectors of Baja California in conjunction with the State California in conjunction with the State Government and the Federal Government Government and the Federal Government proposed the new Border Economic Zone proposed the new Border Economic Zone (BEZ) in 2012.(BEZ) in 2012.

“El Buen Fin” Program in Mexico

The idea of “El Buen Fin” program in Mexico was created as a private initiative to enforce the economic activity in Mexico during November of 2011. The initiative was presented through a program created by the federal government and some of the most important media networks of Mexico.

The program is similar, in some way, to the famous “Black Friday” of the United States, while this day represents the day with highest consumer spending, and when the commercial sector shows their best offers and the biggest discounts throughout the year.

The economic impact of the implementation of the “El Buen Fin Program” was estimated as high as a 2% reduction of spending by Baja California residents in California during 2011.

Economic Impacts and Expenditures

Shopping is the primary reason to cross into the U.S. for Baja California residents. Depending on the study, 42 to 68% of border crossers identify shopping as the primary reason for the visit into Southern California. Other reasons are social in nature, like visiting family and friends, or are work related.

During 2010, around 74 percent of crossers entered California in their private vehicles, since a car allows them freedom of movement between different shopping locations in the U.S. as well as enough room to handle the volume of their purchases.

The estimated average daily expenditures reported by Baja California visitors into San Diego County and California in various studies ranges from US $140 per trip to $300 per trip. The current estimation uses an average amount of expenditures per trip of $240 per trip as the base case scenario.

Economic Impacts The annual retail sales to Baja California Cross Border

Visitors are estimated considering an annual rate of economic growth in Baja California of 2.3%, with a base case spending of $178 per trip, a high case spending of $300 per trip and a low case spending of $140 per trip.

The estimation considers that 42% of border crossers identify shopping as the primary reason for the visit into Southern California.

The implementation of el “Buen Fin” program is estimated to have a reduction of 2% on annual retail sales to Baja California Cross Border Visitors. While the Border Economic Zone (BEZ) is expected to reduce annual retail sales by Baja California CrossBorder visitors by al least 8% during the first few years of the program.

Annual Retail Sales in California by Baja California Border Crossers (Economic Growth Scenario)

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California Economic Impacts

The California and Baja California border region remains an example of social and economic integration in North America, where cross-border shopping is only one aspect of that economic reality in the border region.

Mexican citizens cross frequently into the U.S. to shop, work, dine, vacation, and visit friends and family. What they spend on those visits results in a key contribution to local border economies in California.

The results reveal annual retail sales by Baja California Cross Border Visitors in the range of 5.9 to 6.8 billion dollars along the U.S.-Mexico border, depending on the complete implementation of the Border Economic Zone (BEZ) in Baja California and the “El Buen Fin Program”.

The base case scenario shows that Baja California consumer and economic drain into the U.S. market is estimated at around 5.9 billion dollars in 2012 and 6.2 billion dollars in 2014, with the implementation of the Border Economic Zone (BEZ).

San Diego County Economic Impacts

Each day thousands of people travel between the United States and Mexico via the San Ysidro, Otay Mesa, and Tecate border crossings making the San Diego-Baja California points of entry one of the busiest in the Americas. The number of northbound crossers from Baja California to San Diego County during 2010 reached 42,091,703 people, the majority of whom, crossed in personal vehicles.

It is estimated that 92% of Mexico-residing border crossers at the San Diego-Tijuana points of entry come from the Tijuana Metro Region which consists of the cities of Tijuana, Rosarito, and Tecate.

The 2010 census data from Mexico estimates approximately 475,000 households in the Tijuana Metro Region. It is estimated that 30 to 55% of households reported at least one family member with a border crossing card or visa to enter the United States.

San Diego County Cross Border Retail Sales 2010-2014

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San Diego County Economic Impacts The results reveal a substantial overall San Diego County cross border

retail sales in the order of 4 billion dollars during 2012 along the Baja California – San Diego County border.

Expenditures by cross border residents of Baja California are estimated at 4.2 billion dollars in San Diego County during 2014 using the base case spending scenario and with the implementation of the BEZ.

The San Diego-Carlsbad-San Marcos metropolitan area’s GDP in 2009 was estimated at around $171.4 billion, ranking 16th in the United States, according to the federal bureau of Economic Analysis.

In San Diego County, the Hispanic population increased from 27% in 2000 to 32% in 2010, with the resulting significant contribution to the regional economy.

From 1995 to 2010, the official estimates indicate more than 450 million personal vehicle crossings with 966 million passengers, and more than 260 million pedestrian crossings, from Baja California to California.

Expenditures by cross border residents of Baja California in San Diego County represents around 2.4% of the annual gross domestic product in San Diego County.

A new economic and competitive binational Mega-region is evolving. The Baja California – Southern California Mega Region includes Los Angeles County, Orange County, Riverside, Imperial and San Diego Counties on the California side, and Tijuana, Rosarito, Tecate and the port of Ensenada on the Baja California side.

TradeTrade

Introduction to Introduction to NAFTANAFTA

The North American Free Trade Agreement The North American Free Trade Agreement (NAFTA) was signed in 1994. It's known as (NAFTA) was signed in 1994. It's known as TLCAN in Mexico and ALENA in the French-TLCAN in Mexico and ALENA in the French-speaking parts of Canada. NAFTA speaking parts of Canada. NAFTA eliminated most tariffs or import taxes on eliminated most tariffs or import taxes on goods moving from one of the three goods moving from one of the three countries to another. countries to another.

Most economists believe this has been Most economists believe this has been good, overall, for the economies of all 3 good, overall, for the economies of all 3 countries. But like all trade agreements, countries. But like all trade agreements, NAFTA has hurt some industries and NAFTA has hurt some industries and sectors.sectors.

Economic Integration: Economic Integration: Classical TheoryClassical Theory

Old trade theory and trade creationOld trade theory and trade creation• Improved allocation of resources through exploitation Improved allocation of resources through exploitation

of comparative advantage (Ricardo, Heckscher-Ohlin-of comparative advantage (Ricardo, Heckscher-Ohlin-Samuelson).Samuelson).

• Economic Integration arguments center on:Economic Integration arguments center on:• Trade creation;Trade creation;• The effects of integration on import prices, The effects of integration on import prices,

competition, economies of scale, and factor competition, economies of scale, and factor productivity.productivity.

HOS Model: Gains from TradeHOS Model: Gains from Trade

Y

X

AA

B

C

CGE Models: Gains from TradeCGE Models: Gains from Trade

Many single-country and global CGE Many single-country and global CGE trade models.trade models.• Faithful representations of HOS model.Faithful representations of HOS model.• Widely used to evaluate trade reform.Widely used to evaluate trade reform.

ResultsResults• HOS efficiency gains from trade HOS efficiency gains from trade

liberalization.liberalization.• Magnitudes are small, much smaller than Magnitudes are small, much smaller than

gains indicated from historical analysis.gains indicated from historical analysis.

Introduction to Economic Introduction to Economic IntegrationIntegration

• Theory of customs unions (Viner – Theory of customs unions (Viner – Meade - Balassa).Meade - Balassa).

• Economic integration is best viewed as a Economic integration is best viewed as a spectrum with the various integrative spectrum with the various integrative agreements in effect today lying in the agreements in effect today lying in the middle of this spectrum.middle of this spectrum.

• The level of integration defines the The level of integration defines the nature and degree of economic links nature and degree of economic links among countries.among countries.

Economic Integration in North Economic Integration in North AmericaAmerica

The economic relationship between Mexico The economic relationship between Mexico and the U.S. is evident in the evolution of and the U.S. is evident in the evolution of some of their economic indicators since some of their economic indicators since 1993. For example, it is apparent that, 1993. For example, it is apparent that, since 1993, Mexico's GDP shares its trend since 1993, Mexico's GDP shares its trend behavior with the U.S. GDP. behavior with the U.S. GDP.

Nevertheless, during the 1980s and the Nevertheless, during the 1980s and the beginning of the 1990s the synchronization beginning of the 1990s the synchronization of the real sectors of both economies was of the real sectors of both economies was unclear. unclear.

Economic Synchronization Economic Synchronization Between Mexico and the U.S.Between Mexico and the U.S.

Castillo, Fragoso Pastrana and Diaz-Bautista (2004) Castillo, Fragoso Pastrana and Diaz-Bautista (2004) studied the synchronization between the studied the synchronization between the economies of Mexico and the United States with economies of Mexico and the United States with special reference to the manufacturing sector. special reference to the manufacturing sector. The authors examined the dependency between The authors examined the dependency between the assembly plant industry for export in Mexico the assembly plant industry for export in Mexico and the performance of the economy of the and the performance of the economy of the United States. United States.

Herrera (2004) found also synchronization of GDPs Herrera (2004) found also synchronization of GDPs in Mexico and the U.S. became evident with the in Mexico and the U.S. became evident with the implementation of the NAFTA.implementation of the NAFTA.

(Var. % anual)

Fuente: INEGI y Us Federal Reserve.

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1

MEXICO USA

FoxCalderón

Integration of Industrial Production Integration of Industrial Production between Mexico and the United Statesbetween Mexico and the United States

North American Economic North American Economic Integration and Industry Location Integration and Industry Location

Hanson (1998) discussed the recent academic literature on whether Hanson (1998) discussed the recent academic literature on whether the movement towards free trade in North America has influenced the movement towards free trade in North America has influenced the spatial organization of production in Canada, Mexico, or the the spatial organization of production in Canada, Mexico, or the United States. United States.

In Mexico, closer economic ties with the United States appear to In Mexico, closer economic ties with the United States appear to have contributed to a contraction of employment in the Mexico City have contributed to a contraction of employment in the Mexico City manufacturing belt, a rapid expansion of manufacturing employment manufacturing belt, a rapid expansion of manufacturing employment in northern Mexico, and an increase in the wage premia paid to in northern Mexico, and an increase in the wage premia paid to skilled workers. The effects of economic integration on industry skilled workers. The effects of economic integration on industry location in Canada and the United States seem to have been much location in Canada and the United States seem to have been much weaker. weaker.

Krugman and Livas (1996) examined Mexico through the lenses of Krugman and Livas (1996) examined Mexico through the lenses of the new economic geography, attempting to explain why so much the new economic geography, attempting to explain why so much industry was concentrated in Mexico City. Used the Dixit and Stiglitz industry was concentrated in Mexico City. Used the Dixit and Stiglitz monopolistically competitive market structure.monopolistically competitive market structure.

FDI and Regional Economic Growth FDI and Regional Economic Growth considering the Distance to the Northern considering the Distance to the Northern

Border of MexicoBorder of Mexico

Diaz-Bautista (2006) reviewed different Diaz-Bautista (2006) reviewed different studies to explain the effects of the NAFTA studies to explain the effects of the NAFTA agreement in regional FDI and regional agreement in regional FDI and regional economic growth. An empirical economic growth. An empirical econometric model was used to analyze econometric model was used to analyze the relation between the FDI and the relation between the FDI and economic growth at the regional level in economic growth at the regional level in Mexico, with an approach of the new Mexico, with an approach of the new economic geography and endogenous economic geography and endogenous economic growth. economic growth.

FDI and Regional Economic FDI and Regional Economic Growth Growth

The impulse caused by the opening of the The impulse caused by the opening of the economy and the signing of NAFTA in 1994 had a economy and the signing of NAFTA in 1994 had a positive effect in the growth of regional northern positive effect in the growth of regional northern border economies of Mexico and FDI in the border economies of Mexico and FDI in the northern border, where the maquiladora sector is northern border, where the maquiladora sector is one of the main motors of economic growth on one of the main motors of economic growth on the Northern Mexican Border. the Northern Mexican Border.

In almost all the regions of the Northern Border, a In almost all the regions of the Northern Border, a process of economic growth is observed, and the process of economic growth is observed, and the impulse due to the commercial opening is impulse due to the commercial opening is apparent. The exporting sector being one of the apparent. The exporting sector being one of the most dynamic sectors of the Mexican economy. most dynamic sectors of the Mexican economy.

FDI and Economic GrowthFDI and Economic Growth By the year 2000, the companies that exported more By the year 2000, the companies that exported more

than 80% of their production, paid 62% higher wages than 80% of their production, paid 62% higher wages than other types of companies. In that same year, the than other types of companies. In that same year, the maquiladora sector had wages 5 times greater than the maquiladora sector had wages 5 times greater than the average national minimum wage. Similarly, Mexico has average national minimum wage. Similarly, Mexico has diversified its export base. diversified its export base.

In the year 2000, companies producing manufactured In the year 2000, companies producing manufactured goods accounted for 87 % of Mexico’s export sales. goods accounted for 87 % of Mexico’s export sales.

In one decade, the liberalization of trade and the In one decade, the liberalization of trade and the macroeconomic policies in Mexico increased exports macroeconomic policies in Mexico increased exports from 41 trillion USD, in 1990, to 166 trillion USD in 2000. from 41 trillion USD, in 1990, to 166 trillion USD in 2000. Mexico increased its imports by 310% between 1990 Mexico increased its imports by 310% between 1990 and 2000.and 2000.

Foreign Direct Investment Foreign Direct Investment (FDI)(FDI)

Despite the global uncertainties and the deepening crisis in Europe, Foreign Direct Investment ( FDI) increased in Latin America and Caribbean by 31% in 2011 from 2010, reaching a record 153 billion dollars. Mexico was the second recipient of foreign direct investment (FDI) in Latin America, with 19.44 billion in 2011. While Brazil was ranked first place in attracting FDI, reaching more than 66 billion dollars. In 2007, FDI attraction in Mexico reached 29.714 billion dollars, the highest figure in the last ten years, but thereafter began to decline. In 2008, the amount of foreign direct investment (FDI) dropped to 25.864 billion dollars.In 2009, FDI in Mexico bottomed to only 15.206 billion, due to the international economic crisis, and in 2010 recovered to register 17.726 billion dollars.

Global FDI Flows 2011- 2012 Global FDI inflows are likely to be around $1.6

trillion.

Foreign direct investments worldwide are projected to return to pre-crisis 2008 levels this year, with inflows expected to be up to USD 1.6 trillion.

Recovery of FDI inflows would continue this year while pegging the amount at around USD 1.4 trillion to USD 1.6 trillion.

Brought down by the 2008 financial meltdown and its ripple effects, FDI worldwide tumbled to just USD 1.19 trillion in 2009. Last year, the inflows were slightly better at USD 1.24 trillion.

FDI and Growth Literature

The literature on foreign direct investment (FDI) and economic growth generally points to a positive FDI-growth relationship.

We can offer direct tests of causality between the two variables using time series analysis.

We can use Granger causality tests to analyze the variation of the FDI-growth relationship across countries.

We can also see that the FDI - growth causality is strengthened by the presence of greater trade openness.

Positive and Negative Effects of FDI on Economic Growth

Empirically, the positive effect of host country economic growth on FDI inflow has been confirmed by various studies (Veugelers, 1991; Barrell and Pain, 1996; Grosse and Trevino, 1996; Taylor and Sarno, 1999; Trevino et al., 2002).

The effects of FDI on subsequent economic growth has been shown to be both positive (Dunning, 1993; Borensztein et al., 1998; De Mello, 1999; Ericsson and Irandoust, 2000; Trevino and Upadhyaya, 2003) and also negative (Moran, 1998).

The positive growth effects of FDI have been more likely when FDI is drawn into competitive markets, whereas negative effects on growth have been more likely when FDI is drawn from countries with heavily protected industries.

GRANGER CAUSALITY

In order to test for direct causality between FDI and economic growth, we perform a Granger causality test.

Since macroeconomic time-series data are usually non-stationary (Nelson and Plosser, 1982) and thus conducive to spurious regression, we test for stationarity of the data series before proceeding with the Granger causality test.

Stationarity Tests The unit root tests on the levels of each

variable reveal the corresponding quarterly series from 1994 to 2009 to be non-stationary for Mexico, Canada and the U.S. Analogous tests on the first-difference measures of the variables, however, reveal both series to be integrated in the first order and, hence, stationary at the first-difference level.

We therefore proceed with the Granger causality tests using first-differences of the respective series.

FDI and Economic Growth in the NAFTA region

Time series analysis was used to observe the causal relationship between economic growth and increased FDI in the NAFTA region.

The variation in the FDI-growth relationship indicates that causality between the two variables cannot be generalized for all NAFTA countries region and must be considered more carefully.

The implication here is that policy makers should pay increased attention to the overall role and quality of the countries economic growth as a vital determinant of FDI along with other variables like openness and institutions.

The provision of enabling a positive economic environment provides better incentives to attract FDI inflows than the usual approaches such as petitioning via investment tours, organization of trade-expos and special initiatives aimed at attracting specific investments into the country.

FDI in the NAFTA RegionFDI in the NAFTA Region The NAFTA region has created new opportunities The NAFTA region has created new opportunities

of investment and trade for the companies of all 3 of investment and trade for the companies of all 3 countries, and 50 % of FDI in NAFTA is between countries, and 50 % of FDI in NAFTA is between trade partners. For Mexico, the United States is trade partners. For Mexico, the United States is the main source of FDI. the main source of FDI.

FDI is of great importance the Northern Border FDI is of great importance the Northern Border Mexican Region, and by the year 2004, FDI in the Mexican Region, and by the year 2004, FDI in the Northern Border States of Mexico represented Northern Border States of Mexico represented 18.7% of total FDI at the national level. The 18.7% of total FDI at the national level. The Northern Border States that are considered in this Northern Border States that are considered in this study are Baja California, Sonora, Chihuahua, study are Baja California, Sonora, Chihuahua, Coahuila, Nuevo Leon and Tamaulipas.Coahuila, Nuevo Leon and Tamaulipas.

Economic GrowthEconomic Growth The economics of growth in Mexico has come a The economics of growth in Mexico has come a

long way since it regained center stage for long way since it regained center stage for economists in the last few years. The early focus economists in the last few years. The early focus of economic growth in Mexico was based upon of economic growth in Mexico was based upon theoretical models that generated self-sustaining theoretical models that generated self-sustaining growth, but newer models of economic growth growth, but newer models of economic growth have been applied to Mexico, which have have been applied to Mexico, which have increasingly replaced older models, with an increasingly replaced older models, with an attempt to shed light on the factors affecting attempt to shed light on the factors affecting economic growth in Mexico. On the empirical economic growth in Mexico. On the empirical front, the search for determinants of growth has front, the search for determinants of growth has gone from basic economic growth variables (such gone from basic economic growth variables (such as physical and human capital) to newer as physical and human capital) to newer determinants of economic performance such as determinants of economic performance such as trade and institutions. trade and institutions.

Economic Growth in Mexico and the Economic Growth in Mexico and the United StatesUnited States

Economic Growth ModelsEconomic Growth Models A Major weakness of the neoclassical growth A Major weakness of the neoclassical growth

model has been detected by economists around model has been detected by economists around the world and has not been overlooked in Mexico. the world and has not been overlooked in Mexico. Long-run growth in that model is exogenous. Long-run growth in that model is exogenous.

Recent empirical studies have found a correlation Recent empirical studies have found a correlation between the rate of growth of FDI and economic between the rate of growth of FDI and economic growth. The direction of causality between the growth. The direction of causality between the rate of growth of investment and the rate of rate of growth of investment and the rate of economic growth has been analyzed by Carrol economic growth has been analyzed by Carrol and Weil (1994), Blomström, Lipsey and Zedjan and Weil (1994), Blomström, Lipsey and Zedjan (1996) and Barro (1997), and found that the (1996) and Barro (1997), and found that the causality was from FDI to economic growth. causality was from FDI to economic growth.

New Growth TheoryNew Growth Theory In the endogenous growth models the increases in In the endogenous growth models the increases in

investment during a period of time, increases the investment during a period of time, increases the rate of economic growth in the long run. In the rate of economic growth in the long run. In the endogenous growth models, FDI can affect growth endogenous growth models, FDI can affect growth endogenously if it generates increasing returns in endogenously if it generates increasing returns in production via externalities and productivity production via externalities and productivity spillovers. Moreover, policy changes might induce spillovers. Moreover, policy changes might induce permanent increases in output growth by providing permanent increases in output growth by providing incentives to host FDI. Specifically, FDI is thought to incentives to host FDI. Specifically, FDI is thought to be an important source of human capital be an important source of human capital accumulation and technological change. accumulation and technological change.

Helpman (1984) and Helpman and Krugman (1985) Helpman (1984) and Helpman and Krugman (1985) are also an important part of the analysis of FDI in are also an important part of the analysis of FDI in the new growth theory. In those models, distance to the new growth theory. In those models, distance to the export market is an important determinant of the export market is an important determinant of economic growth and FDI. economic growth and FDI.

Center Periphery and distanceCenter Periphery and distance Krugman (1997) uses the model developed by Krugman (1997) uses the model developed by

Dixit and Stiglitz (1977) to have a unified spatial Dixit and Stiglitz (1977) to have a unified spatial economic structure which is described by the new economic structure which is described by the new economic geography. economic geography.

Fujita, Krugman and Venables (1999) assume Fujita, Krugman and Venables (1999) assume that factors of production are less mobile that factors of production are less mobile between countries than between different regions between countries than between different regions of the same country,and analyzed the spatial of the same country,and analyzed the spatial order resulting from differing transport costs. order resulting from differing transport costs.

Derivation of the Model with FDI and Derivation of the Model with FDI and

Regional Economic GrowthRegional Economic Growth We assume a regional production function in the following We assume a regional production function in the following

form:Y = F(K, L, F, X) (1) where Y is the product, K is capital, form:Y = F(K, L, F, X) (1) where Y is the product, K is capital, L is human capital, F is FDI and X denotes the vector of L is human capital, F is FDI and X denotes the vector of observable variables that can affect the regional economic observable variables that can affect the regional economic growth and the FDI.growth and the FDI.

A Cobb Douglas function is used to obtain the logarithms in A Cobb Douglas function is used to obtain the logarithms in time that gives us the following expression:time that gives us the following expression:

gy= ζgk+ ψgf+ γgL+ θgx (2) gy= ζgk+ ψgf+ γgL+ θgx (2) The relation shows the empirical relationship between The relation shows the empirical relationship between

regional economic growth (gy) and the presence of FDI (gf), regional economic growth (gy) and the presence of FDI (gf), with other explicative factors (gx). From the conventional with other explicative factors (gx). From the conventional model of growth, the empirical model is developed using model of growth, the empirical model is developed using the economic growth ∆yjt in region j for time t, with the FDI the economic growth ∆yjt in region j for time t, with the FDI represented by F, human capital represented by L, and represented by F, human capital represented by L, and other variables (X) like distance and urban agglomerations. other variables (X) like distance and urban agglomerations.

The empirical model has the following form:The empirical model has the following form: ∆∆Yjt = β0+ β1Ljt+ β2Fjt+ β3Xjt+ ujt (3)Yjt = β0+ β1Ljt+ β2Fjt+ β3Xjt+ ujt (3)

Sources of InformationSources of Information The sources of information for the study are varied. The sources of information for the study are varied. Distance is measured by the number of kilometers on the road from Distance is measured by the number of kilometers on the road from

the capital of a state to the nearest border crossing with the United the capital of a state to the nearest border crossing with the United States. Another distance variable is included and constructed by the States. Another distance variable is included and constructed by the number of kilometers on the road from the capital of a state to Mexico number of kilometers on the road from the capital of a state to Mexico City.City.

The density per kilometer squared in each state of Mexico measures The density per kilometer squared in each state of Mexico measures the level of cluster agglomeration in the economy.the level of cluster agglomeration in the economy.

Another variable is constructed by the number of businesses in the Another variable is constructed by the number of businesses in the commercial, services or manufacturing sector per state. commercial, services or manufacturing sector per state.

The migration variable is measured by the net balance migration per The migration variable is measured by the net balance migration per state in Mexico provided by INEGI. The human capital variable is an state in Mexico provided by INEGI. The human capital variable is an indicator of the educational characteristics of the population in each indicator of the educational characteristics of the population in each state. It includes the percentage of the population 15 years of age or state. It includes the percentage of the population 15 years of age or older that have more than elementary studies in each state of Mexico. older that have more than elementary studies in each state of Mexico.

The regional economic growth is measured by the percentage annual The regional economic growth is measured by the percentage annual increase in income per capita in the period 1994-2000. The initial level increase in income per capita in the period 1994-2000. The initial level of income used in the study is the one provided by INEGI in 1994. of income used in the study is the one provided by INEGI in 1994. Foreign direct investment is constructed from the data provided by the Foreign direct investment is constructed from the data provided by the Ministry of Economy in Mexico from1994 to 2000. The econometric Ministry of Economy in Mexico from1994 to 2000. The econometric technique must take into account the endogeneity argument. technique must take into account the endogeneity argument.

Table 4. FDI and Regional Economic Regression per State of Mexico during the period 1994-2000 Dependent Variable: Growth of regional Income per capita 1994 2000 Method of Estimation: TSLS with instrumental variables Variable Coefficient t-stat. Prob. C 42.993 2.821* 0.010 Distance from the Border -0.0079 2.716* 0.012 Migration 1.9752 3.097* 0.005 R-Squared 0.654 Mean dependent var 25.30 R-Squared Adj. 0.490 S.D. dependent var 9.830 Prob(F-statistic) 0.003 Note: * Statistically Significant.

Econometric ResultsEconometric Results The results of the econometric analysis of the regional The results of the econometric analysis of the regional

economic growth with the new economic geography economic growth with the new economic geography perspective shows that the agglomeration variables are non perspective shows that the agglomeration variables are non significant, while the distance from the border is significant, while the distance from the border is statistically significant, which is evidence in favor of the statistically significant, which is evidence in favor of the agglomeration models and the NEG models.agglomeration models and the NEG models.

The distance from the border shows the importance of The distance from the border shows the importance of transport costs and trade to the United States in explaining transport costs and trade to the United States in explaining regional economic growth in Mexico. regional economic growth in Mexico.

The migration variable is also important, showing the The migration variable is also important, showing the importance of migration in determining regional economic importance of migration in determining regional economic growth, due to repulsion and attraction forces that affect growth, due to repulsion and attraction forces that affect regions and agglomerations in Mexico. regions and agglomerations in Mexico.

On the other hand, the human capital variable, which is one On the other hand, the human capital variable, which is one of the most important variables is the endogenous growth of the most important variables is the endogenous growth models is non significant in the regression.models is non significant in the regression.

Econometric ResultsEconometric Results In the empirical study, the importance of the distance to the In the empirical study, the importance of the distance to the

Northern Border of Mexico as a determinant of regional Northern Border of Mexico as a determinant of regional economic growth in Mexico is shown. economic growth in Mexico is shown.

The commercial trends in the agglomeration of industry in the The commercial trends in the agglomeration of industry in the Mexican Northern Border and the transportation technology Mexican Northern Border and the transportation technology costs to the border region (which are proxied by the distance costs to the border region (which are proxied by the distance to the border) are an important factor driving Mexico first to to the border) are an important factor driving Mexico first to regional concentration and then to regional dispersion of regional concentration and then to regional dispersion of economic activity. economic activity.

The production of manufactures is subject to increasing The production of manufactures is subject to increasing returns to scale if the production activities take place in a returns to scale if the production activities take place in a single site close to the border and the selling market.single site close to the border and the selling market.

The recent advances in the field of NEG have increased our The recent advances in the field of NEG have increased our understanding of spreading and agglomerating forces in the understanding of spreading and agglomerating forces in the Mexican economy. Mexican economy.

Griswold (2004) “After 10 Years, NAFTA Griswold (2004) “After 10 Years, NAFTA Continues to Pay Dividends”, Cato Institute Continues to Pay Dividends”, Cato Institute

The 10th anniversary of the controversial NAFTA The 10th anniversary of the controversial NAFTA was viewed as a great international public-policy was viewed as a great international public-policy success. success.

For one thing, it has delivered on its principal For one thing, it has delivered on its principal promise of increasing trade. Since 1993, the year promise of increasing trade. Since 1993, the year before the agreement took effect, two-way before the agreement took effect, two-way commerce between the United States and Mexico commerce between the United States and Mexico roughly tripled, from $81 billion to $232 billion. roughly tripled, from $81 billion to $232 billion. For another, NAFTA has helped speed Mexico's For another, NAFTA has helped speed Mexico's dramatic economic and political transformation. dramatic economic and political transformation. The trade agreement marks a major milestone in The trade agreement marks a major milestone in Mexico's turn away from a closed, centrally Mexico's turn away from a closed, centrally directed economic system, to an open and directed economic system, to an open and dynamic market democracy. dynamic market democracy.

10 AÑOS DEL TLCAN 10 AÑOS DEL TLCAN

Economists in the Northern Border of Economists in the Northern Border of Mexico at Colef also examined the NAFTA Mexico at Colef also examined the NAFTA agreement in its 10th anniversary. Diaz-agreement in its 10th anniversary. Diaz-Bautista (2003) examined the positive Bautista (2003) examined the positive effects of NAFTA in the Northern Border effects of NAFTA in the Northern Border States of Mexico using an economic States of Mexico using an economic growth model based on the Methodology growth model based on the Methodology developed by Mankiw (1992) and Barro developed by Mankiw (1992) and Barro and Sala i Martin (1995).and Sala i Martin (1995).

While Mendoza and Diaz(2003) analyzed While Mendoza and Diaz(2003) analyzed the case of the transportation sector the case of the transportation sector during the NAFTA era.during the NAFTA era.

NAFTA’s Impact on Mexico NAFTA’s Impact on Mexico

From 1994 to 2008, Mexico’s GDP has increased at an average annual rate of 2.7 %, below the average growth rates of 3.3 % and 3.6 % in the United States and Canada, respectively. Mexican exports to the United States have quadrupled since NAFTA’s implementation, from $60 billion to $280 billion per year.

U.S. exports to Mexico have also increased sharply, more than tripling as Mexico’s economy has grown.

Some critics single out Mexico’s farm industry, saying NAFTA has crippled Mexican farming prospects by opening competition to the heavily-subsidized U.S. farm industry.

NAFTA at 14NAFTA at 14

The SPP complements the success of the North The SPP complements the success of the North American Free Trade Agreement (NAFTA), which American Free Trade Agreement (NAFTA), which has helped to triple trade since 1993 among our has helped to triple trade since 1993 among our three countries to a projected $1 trillion in 2008. three countries to a projected $1 trillion in 2008. NAFTA has offered our consumers a greater NAFTA has offered our consumers a greater variety of better and less expensive goods and variety of better and less expensive goods and services, encouraged our businesses to increase services, encouraged our businesses to increase investment throughout North America, and investment throughout North America, and helped to create millions of new jobs in all three helped to create millions of new jobs in all three countries. countries.

NAFTA is key to maintaining North America's NAFTA is key to maintaining North America's competitive edge in an increasingly complex, competitive edge in an increasingly complex, fast-paced and connected global marketplace. fast-paced and connected global marketplace.

Nafta’s Economic Impact at 14Nafta’s Economic Impact at 14 In contrast to the advanced economies of In contrast to the advanced economies of

Canada and the U.S., Mexico is anCanada and the U.S., Mexico is an emerging market. emerging market. Mexico's GDP per capita is 27.86 percent Mexico's GDP per capita is 27.86 percent

that of the U.S. and 33.23 % Canada's that of the U.S. and 33.23 % Canada's using the IMF 2007 estimated of the 2008 using the IMF 2007 estimated of the 2008 world economic outlook. On the other world economic outlook. On the other hand, with a population of about 106,000 hand, with a population of about 106,000 million in 2007, with new economic million in 2007, with new economic reforms (like the proposed energy reforms (like the proposed energy reforms), there is a new economic reforms), there is a new economic dynamism in Mexico.dynamism in Mexico.

NAFTA’s Trade Impact NAFTA’s Trade Impact

In terms of trade, Canada, Mexico, and the In terms of trade, Canada, Mexico, and the United States have broadened United States have broadened substantially since NAFTA’s substantially since NAFTA’s implementation, though researcher and implementation, though researcher and trade experts disagree over the extent to trade experts disagree over the extent to which this expansion is a direct result of which this expansion is a direct result of the deal. the deal.

Trade with NAFTA partners now accounts Trade with NAFTA partners now accounts for more than 80 % of Canadian and for more than 80 % of Canadian and Mexican trade, and more than a third of Mexican trade, and more than a third of U.S. trade.U.S. trade.

Source: BANXICO

Billon Dollars

250.3

60.9

+311%

Oil Exports Non Oil Exports

Mexico’s Total Exports (billion Dollars)The leading exporter in Latin America and the third largest exporter to the US

Aspe et al. (2005), Aspe et al. (2005), “Building a North “Building a North

American Community” American Community”

Sponsored by the Council on Foreign Relations in Sponsored by the Council on Foreign Relations in association with the Canadian Council of Chief Executives association with the Canadian Council of Chief Executives and the Consejo Mexicano de Asuntos Internacionales.and the Consejo Mexicano de Asuntos Internacionales.

North America is vulnerable on several fronts: the region North America is vulnerable on several fronts: the region faces terrorist and criminal security threats, increased faces terrorist and criminal security threats, increased economic competition from abroad, and uneven economic economic competition from abroad, and uneven economic development at home. In response to these challenges, a development at home. In response to these challenges, a trinational, Independent Task Force on the Future of North trinational, Independent Task Force on the Future of North America has developed a roadmap to promote North America has developed a roadmap to promote North American security and advance the well-being of citizens of American security and advance the well-being of citizens of all three countries.all three countries.

The Council-sponsored Task Force applauds the announced The Council-sponsored Task Force applauds the announced “Security and Prosperity Partnership of North America,” but “Security and Prosperity Partnership of North America,” but proposes a more ambitious vision of a new community by proposes a more ambitious vision of a new community by 2010 and specific recommendations on how to achieve it.2010 and specific recommendations on how to achieve it.

Security and Security and Prosperity Partnership Prosperity Partnership The Security and Prosperity Partnership of North America The Security and Prosperity Partnership of North America

(SPP) was launched in March of 2005 as a trilateral effort to (SPP) was launched in March of 2005 as a trilateral effort to increase security and enhance prosperity among the United increase security and enhance prosperity among the United States, Canada and Mexico through greater cooperation States, Canada and Mexico through greater cooperation and information sharing.and information sharing.

This trilateral initiative is premised on our security and our This trilateral initiative is premised on our security and our economic prosperity being mutually reinforcing. The SPP economic prosperity being mutually reinforcing. The SPP recognizes that our three great nations are bound by a recognizes that our three great nations are bound by a shared belief in freedom, economic opportunity, and strong shared belief in freedom, economic opportunity, and strong democratic institutions.democratic institutions.

The SPP provides the framework to ensure that North The SPP provides the framework to ensure that North America is the safest and best place to live and do America is the safest and best place to live and do business. It includes ambitious security and prosperity business. It includes ambitious security and prosperity programs to keep our borders closed to terrorism yet open programs to keep our borders closed to terrorism yet open to trade.to trade.

Surface Trade between U.S. and NAFTA Surface Trade between U.S. and NAFTA Countries : 1995 – 2011. Countries : 1995 – 2011.

Surface Trade between U.S. and NAFTA Surface Trade between U.S. and NAFTA Countries : 1995 – 2011. Countries : 1995 – 2011.

Surface transportation trade between the United States and Surface transportation trade between the United States and its North American Free Trade Agreement (NAFTA) partners its North American Free Trade Agreement (NAFTA) partners Canada and Mexico increased by 14.3 percent in 2011 Canada and Mexico increased by 14.3 percent in 2011 compared to 2010, valued at $904 billion in 2011, compared to 2010, valued at $904 billion in 2011, according to official data by the Bureau of Transportation according to official data by the Bureau of Transportation Statistics (BTS) of the U.S. Department of Transportation. Statistics (BTS) of the U.S. Department of Transportation.

The 14.3 percent increase in trade was the third largest The 14.3 percent increase in trade was the third largest year-to-year increase for the years covered by these data. year-to-year increase for the years covered by these data.

The $904 billion in U.S.-NAFTA trade was the highest The $904 billion in U.S.-NAFTA trade was the highest amount since NAFTA went into effect in 1994.amount since NAFTA went into effect in 1994.

Commodities Exports Imports Total

Electrical Machinery; Equipment and Parts

29,672 50,799 80,471

Computer-Related Machinery and Parts

29,703 37,864 67,567

Vehicles Other than Railway

17,726 43,446 61,172

Plastics 12,570 3,369 15,939

Measuring and Testing Equipment

4,083 9,348 13,431

Top Five Commodities Transported between the Top Five Commodities Transported between the U.S. and Mexico by All Surface Modes of U.S. and Mexico by All Surface Modes of

Transportation, 2011. (In millions).Transportation, 2011. (In millions).

Top 10 States Exporting to Top 10 States Exporting to Mexico, 2009 to 2011.Mexico, 2009 to 2011.

United States Mexico TradeUnited States Mexico Trade

The U.S. is Mexico’s largest trading partner, The U.S. is Mexico’s largest trading partner, buying more than 80% of Mexican exports during buying more than 80% of Mexican exports during 2010. Mexico is the third largest U.S. trading 2010. Mexico is the third largest U.S. trading partner after China (1st) and Canada (2nd). partner after China (1st) and Canada (2nd). Bilateral goods trade reached $362 billion in 2010 Bilateral goods trade reached $362 billion in 2010 and in 2009 they totaled $278 billion. and in 2009 they totaled $278 billion.

Mexico and the U.S. do as much business in Mexico and the U.S. do as much business in goods and services in just over a month as goods and services in just over a month as Mexico does with all 27 countries of the European Mexico does with all 27 countries of the European Union combined in a year.Union combined in a year.

U.S. Mexico Trade in 2012U.S. Mexico Trade in 2012 Total bilateral trade between the U.S. and Mexico has returned to the Total bilateral trade between the U.S. and Mexico has returned to the

levels before the economic downturn and crisis.levels before the economic downturn and crisis. In 2011, Mexico and the United States had almost 461 billion dollars In 2011, Mexico and the United States had almost 461 billion dollars

in trade in goods, which represents more than 1,250 million dollars in trade in goods, which represents more than 1,250 million dollars or 1.25 billion in trade crossing the border in both directions every or 1.25 billion in trade crossing the border in both directions every day.day.

The economic relationship also adds 39 billion dollars in service The economic relationship also adds 39 billion dollars in service trade.trade.

Mexico continues to export more of their products and services to Mexico continues to export more of their products and services to the United States than any other country in the world. The United the United States than any other country in the world. The United States remains the main destination of Mexican goods and services. States remains the main destination of Mexican goods and services.

The trade relationship between Mexico and the United States not The trade relationship between Mexico and the United States not only is 'back' but it is getting stronger between Mexico and the only is 'back' but it is getting stronger between Mexico and the United States in 2012.United States in 2012.

Migration and border issuesMigration and border issues

Migration and border issuesMigration and border issues

Mexico has seen a significant drop in Mexico has seen a significant drop in migration recently. For the first time in 60 migration recently. For the first time in 60 years the movement of Mexicans to the years the movement of Mexicans to the United States is at a net zero. United States is at a net zero.

A mixture of tougher anti-immigration A mixture of tougher anti-immigration legislation in the southern United States, legislation in the southern United States, combined with fewer job prospects in the combined with fewer job prospects in the US may have forced many Mexicans to US may have forced many Mexicans to come back home.come back home.

Migration and border issuesMigration and border issues

The net zero migration rate between Mexico and the United The net zero migration rate between Mexico and the United States does not mean that Mexican migrants have not States does not mean that Mexican migrants have not crossed to the United States between 2011 and 2012. crossed to the United States between 2011 and 2012.

The decrease in net Mexican migration is the difference The decrease in net Mexican migration is the difference between those who go to the United States and those who between those who go to the United States and those who leave the country and go back to Mexico, a social leave the country and go back to Mexico, a social phenomenon that began five years ago and already has led phenomenon that began five years ago and already has led to the first decline in two decades of the undocumented to the first decline in two decades of the undocumented Mexican population in the United States.Mexican population in the United States.

Migration at Net ZeroMigration at Net Zero

Migration and border issuesMigration and border issues

The reduction of Mexican migration to the The reduction of Mexican migration to the United States is a social phenomenon that is United States is a social phenomenon that is explained by the slow evolution of the U.S. explained by the slow evolution of the U.S. economy during the worst economic crisis in economy during the worst economic crisis in decades, the labor market situation in the decades, the labor market situation in the United States, the deportations of migrants United States, the deportations of migrants and the increase in border enforcement and and the increase in border enforcement and security. Also the growing dangers security. Also the growing dangers associated with illegal border crossings, the associated with illegal border crossings, the long-term decline in Mexico’s birth rates and long-term decline in Mexico’s birth rates and broader economic conditions in Mexico.broader economic conditions in Mexico.

Economic Contribution of Economic Contribution of Mexicans to the U.S. EconomyMexicans to the U.S. Economy

RemittancesRemittances

The increase in remittances were one The increase in remittances were one of the key factors of macroeconomic of the key factors of macroeconomic stability in Mexico, before the stability in Mexico, before the economic crisis of 2008 and 2009.economic crisis of 2008 and 2009.

RemittancesRemittances

Remittances to Baja California, Remittances to Baja California, increased 8.75 percent in the first increased 8.75 percent in the first quarter of 2012, compared to the quarter of 2012, compared to the first quarter of 2011.first quarter of 2011.

Remittances sent to Baja California Remittances sent to Baja California were close to 96.9 million dollars, were close to 96.9 million dollars, representing approximately 17.9 representing approximately 17.9 percent of total remittances sent to percent of total remittances sent to the border states of Mexico. the border states of Mexico.

RemittancesRemittances Remittances sent by migrants to their families in several regions such as Remittances sent by migrants to their families in several regions such as

Baja California, contribute to increase the incomes of the regional economy, Baja California, contribute to increase the incomes of the regional economy, as well as other types of flows such as development aid and foreign direct as well as other types of flows such as development aid and foreign direct investment (FDI).investment (FDI).

With an increase of 8.75% in remittances sent to Baja California during the With an increase of 8.75% in remittances sent to Baja California during the first quarter of 2012, it is clear that remittances have acquired a dimension first quarter of 2012, it is clear that remittances have acquired a dimension that gives them a first-magnitude potential to generate economic growth that gives them a first-magnitude potential to generate economic growth and development in the state. Therefore, the remittances sent mainly from and development in the state. Therefore, the remittances sent mainly from the United States are a particularly attractive area for co-development the United States are a particularly attractive area for co-development projects in Baja California during 2012.projects in Baja California during 2012.

During the first quarter of 2012, remittances from abroad showed an During the first quarter of 2012, remittances from abroad showed an increase nationally of 5.3 percent compared to the same period last year, increase nationally of 5.3 percent compared to the same period last year, according to official figures from the Bank of Mexico.according to official figures from the Bank of Mexico.

Data from the central bank showed that in the January-March period of this Data from the central bank showed that in the January-March period of this year 2012, remittances of Mexicans abroad to their families in Mexico year 2012, remittances of Mexicans abroad to their families in Mexico totaled $ 372 million. totaled $ 372 million.

RemittancesRemittances

Remittances come almost entirely from the U.S., Remittances come almost entirely from the U.S., and remain one of the most important sources of and remain one of the most important sources of foreign income in Mexico.foreign income in Mexico.

Flows to the Mexican economy come from three Flows to the Mexican economy come from three main areas: oil, tourism and remittances from main areas: oil, tourism and remittances from Mexican nationals living abroad. Mexican nationals living abroad.

During 2011, Mexico managed to stay as the third During 2011, Mexico managed to stay as the third recipient of remittances in the world after India recipient of remittances in the world after India and China. and China.

Poverty in Mexico Poverty in Mexico

Inflation in July 2012Inflation in July 2012 During 2012, inflation in Mexico During 2012, inflation in Mexico

reached its highest level for a month reached its highest level for a month of July since 2002. of July since 2002.

Inflation in 2012Inflation in 2012

Inflation in Mexico is above Inflation in Mexico is above the inflation target set by the the inflation target set by the Bank of Mexico of 3% plus 1%.Bank of Mexico of 3% plus 1%.

Inflation has increased in Inflation has increased in Mexico due to the increase in Mexico due to the increase in the price of eggs and other the price of eggs and other food products and also food products and also because of the increase in because of the increase in energy prices.energy prices.

Gas Prices in Mexico and the United States

Mexico’s Energy and the Economy in 2012

Moreover, a decline in crude production due to under investment by the Mexican state oil firm Petroleos Mexicanos (Pemex) and a weak non-oil tax base are expected to draw funds away from public investment.

New oil fields in the Gulf of New oil fields in the Gulf of MexicoMexico

The discovery of a new oil field in the Gulf of Mexico during 2012, may lead to an increase in crude production in Mexico in the medium and long term.

International ReservesInternational Reserves

International ReservesInternational Reserves Mexico’s international reserves rose to 161.2 billion in the Mexico’s international reserves rose to 161.2 billion in the

week that ended August 24, 2012, according to official data week that ended August 24, 2012, according to official data by the central bank.by the central bank.

Mexico’s International Reserves are at historic levels in Mexico’s International Reserves are at historic levels in 2012. 2012.

Mexico’s reserves have climbed 13 percent this year, giving Mexico’s reserves have climbed 13 percent this year, giving the central bank greater leeway to intervene in the foreign the central bank greater leeway to intervene in the foreign exchange markets to buy pesos when needed. exchange markets to buy pesos when needed.

International ReservesInternational Reserves

International ReservesInternational Reserves On June 1, the mexican peso reached its weakest level On June 1, the mexican peso reached its weakest level

against the dollar since March 2009 on concerns that against the dollar since March 2009 on concerns that Europe’s sovereign debt crisis would affect global Europe’s sovereign debt crisis would affect global economic growth.economic growth.

Mexico uses dollar auctions to limit daily declines in Mexico uses dollar auctions to limit daily declines in the peso after it tumbled 11 percent against the dollar the peso after it tumbled 11 percent against the dollar in 2011, the most among major Latin American in 2011, the most among major Latin American currencies. currencies.

Since November 2011, the central bank has been Since November 2011, the central bank has been offering $400 million daily at an exchange rate that’s offering $400 million daily at an exchange rate that’s at least 2 percent weaker than the previous day.at least 2 percent weaker than the previous day.

This year, the peso has strengthened 5.7 percent This year, the peso has strengthened 5.7 percent against the dollar. against the dollar.

Dollar vs. PesoDollar vs. Peso

Dollar vs. PesoDollar vs. Peso

Euro vs. Peso Euro vs. Peso

Global Market Volatility

Unfortunately, all of the world’s economies, including the emerging markets, will be affected to a greater or lesser degree by the events in europe, and therefore the challenge is to mitigate the degree of economic and financial impact.

European sovereign debt crisis From late 2009, fears of a

sovereign debt crisis developed among fiscally conservative investors concerning some European states, with the situation becoming particularly tense in early 2010.

This included euro zone members Greece, Ireland and Portugal and also some EU countries outside the area.

European sovereign debt crisis In 2010 the debt crisis was mostly centered on

events in Greece, where the cost of financing government debt was rising. On 2 May 2010, the eurozone countries and the International Monetary Fund agreed to a €110 billion loan for Greece, conditional on the implementation of harsh austerity measures. The Greek bail-out was followed by a €85 billion rescue package for Ireland in November, and a €78 billion bail-out for Portugal in May 2011.

This was the first eurozone crisis since its creation in 1999.

The sovereign debt crisis that is unfolding is a fiscal crisis of the western world.

Debt to GDP ratios for EU countries

Runaway Debt in Europe

Public Debt as Percent of GDP

Debt and Debt/GDP by country

Total Public Debt vs. Fiscal Balance as a Percentage of GDP

US debt from 1940 to 2010.

The US debt The national debt rose $238 billion (or about 60% of the

new debt ceiling) on August 3, 2011. It was the largest one day increase in the history of the United States.

The US debt surpassed 100 percent of gross domestic product for the first time since World War II.

According to the International Monetary Fund, US joined a group of countries whose public debt exceeds GDP, including Japan (229 percent), Greece (152 percent), Jamaica (137 percent), Lebanon (134 percent), Italy (120 percent), Ireland (114 percent) and Iceland (103 percent).

The NASDAQ, ASX and S&P 100 lost up to four percent in value, the largest drop after that which occurred in July 2009, during the global financial crisis.

The commodities market also took losses with average spot crude oil market prices falling below $US86 a barrel.

Unemployment in the Euro Zone and Unemployment in the Euro Zone and the United Statesthe United States

Recessions in the United States According to economists, since 1854, the U.S. has encountered 32

cycles of expansions and contractions, with an average of 17 months of contraction and 38 months of expansion.

However, since 1980 there have been only eight periods of negative economic growth over one fiscal quarter or more, and four periods considered recessions:

July 1981 – November 1982: 14 months July 1990 – March 1991: 8 months March 2001 – November 2001: 8 months December 2007 – June 2009: 18 months For the past three recessions, the NBER decision has

approximately conformed with the definition involving two consecutive quarters of decline. While the 2001 recession did not involve two consecutive quarters of decline, it was preceded by two quarters of alternating decline and weak growth.

Economic Growth in Mexico and the Economic Growth in Mexico and the United StatesUnited States

Opportunities in Emerging Markets

Shifting GDP Growth in Emerging Markets vs. Developed Economies

Opportunities in Emerging Markets

Mexico’s Economic Growth in 2011 - 2012

Mexico tried to reassure investors that a global markets rout would not spark an economic crisis even as recession fears in the United States, its key trading partner, pounded Mexico's currency and stocks during 2011.

The debt crises in the United States and Europe have given Mexican debt the allure of a safe haven as Mexico's public finances are in comparatively better shape.

A new U.S. recession would undermine Mexican exports of everything from cars and refrigerators to electronics and could force Mexican policy makers to relax monetary policy.

A confirmation that there could be a sharp deceleration or recession in America, would cause interest rates in Mexico to go down and we should expect the peso to depreciate more.

Mexico’s Economic Growth

Mexico is Latin America's second biggest economy. After lagging way behind other Latin American economies, it has in recent months seen a combination of solid growth and low inflation, but it is dependent on the United States, which buys around 80 percent of its exports.

Mexico’s outlook is for an economic expansion of around 3.5 to 4 percent this year in 2012.

Mexico’s countercyclical stimulus’ measures

Mexico has $160 billion in foreign-exchange reserves, as well as a more than $70 billion line of credit with the International Montetary Fund.

That means that Mexico has more than $230 billion to ensure it can respond in an orderly fashion to any external financial markets shock.

Mexico will remain committed to responsible policies and a long-term vision and will apply ‘countercyclical stimulus’ measures consistent with an approved budget deficit equal to 0.5 percent of GDP and public-sector spending growth of 6.1 percent.

Mexico’s Economic Growth in 2011-2012

Mexico should approve the structural reforms to boost the country’s economic growth and development.

Mexico has the need for a second generation energy reform, a fiscal reform, labor reform, education reform and competitiveness reform.

Real GDP Growth: Emerging and Developing Economies vs. Advanced economies

Average Real GDP Growth during 2010 - 2011

ConclusionsConclusions Mexico continues to export more products and services to the United States Mexico continues to export more products and services to the United States

than any other country in the world. The United States remains the main than any other country in the world. The United States remains the main destination of Mexican goods and services.destination of Mexican goods and services.

Growth economists are in favor of economic policies and initiatives Growth economists are in favor of economic policies and initiatives designed to improve border affairs and trade relations between Mexico and designed to improve border affairs and trade relations between Mexico and the United States in the coming years.the United States in the coming years.

The US-Mexico relationship is moving in the right direction and will continue The US-Mexico relationship is moving in the right direction and will continue to generate opportunities on both sides of the border, strengthening to generate opportunities on both sides of the border, strengthening economies and contributing to the quality of life in both sides of the border.economies and contributing to the quality of life in both sides of the border.

The United States and Mexico enjoy over 1,250 million in bilateral trade of The United States and Mexico enjoy over 1,250 million in bilateral trade of goods daily.goods daily.

The United States is the largest investor in Mexico, while Mexico has The United States is the largest investor in Mexico, while Mexico has become an increasingly important investor in the United States.become an increasingly important investor in the United States.

The United States and the eight other countries negotiating the Trans-The United States and the eight other countries negotiating the Trans-Pacific Partnership (TPP) Agreement have extended an invitation to Mexico Pacific Partnership (TPP) Agreement have extended an invitation to Mexico to join the TPP negotiations, pending successful conclusion of their to join the TPP negotiations, pending successful conclusion of their domestic procedures.domestic procedures.

ConclusionsConclusions Increased cooperation and collaboration between both countries is Increased cooperation and collaboration between both countries is

not only necessary, but essential for economic growth in North not only necessary, but essential for economic growth in North America.America.

U.S. economic relations with Mexico are important and complex. U.S. economic relations with Mexico are important and complex. U.S. economic relations with Mexico have a direct impact on the U.S. economic relations with Mexico have a direct impact on the lives and livelihoods of millions of Americans. lives and livelihoods of millions of Americans.

The scope of U.S.-Mexican relations is broad and goes beyond The scope of U.S.-Mexican relations is broad and goes beyond diplomatic and official contacts. It entails extensive commercial, diplomatic and official contacts. It entails extensive commercial, cultural, and educational ties, with over 1.25 billion dollars worth cultural, and educational ties, with over 1.25 billion dollars worth of two-way trade and approximately one million legal border of two-way trade and approximately one million legal border crossings each day. crossings each day.

In addition, a million American citizens live in Mexico and In addition, a million American citizens live in Mexico and approximately 10 million Americans visit Mexico every year. approximately 10 million Americans visit Mexico every year.

More than 18,000 companies with U.S. investment have More than 18,000 companies with U.S. investment have operations in Mexico, and U.S. companies have invested $145 operations in Mexico, and U.S. companies have invested $145 billion in Mexico since 2000.billion in Mexico since 2000.

The probability of a recession in the United States at the end of 2012 is low.

An economic recession in the United States in early 2013, would have almost an immediate impact to the economy of the Northern Border of Mexico and for the country as a whole in 2012, due to economic dependence and synchronization of Mexico with the United States economy.

ConclusionsConclusions

"The United States-Mexico Border "The United States-Mexico Border Economy in 2012”Economy in 2012”

Alejandro Díaz-Bautista, Alejandro Díaz-Bautista, Ph.D.Ph.D.

Professor of International Economics at Colefand Distinguished ResearcherNational Council of Science and Technology

adiazbau@gmail.com

Tuesday, September 18, 2012, from 9:00 am to 12:00 pm, at the Trans-Border Institute and the Center for Peace and Commerce, University of San Diego.

ReferencesReferencesCastillo, Ramon, Díaz-Bautista, Alejandro y Edna Fragoso (2004), "Sincronización entre las Economías Castillo, Ramon, Díaz-Bautista, Alejandro y Edna Fragoso (2004), "Sincronización entre las Economías

de México y Estados Unidos: El Caso del Sector Manufacturero", en Revista Comercio Exterior de de México y Estados Unidos: El Caso del Sector Manufacturero", en Revista Comercio Exterior de Bancomext, Vol. 54, paginas 620-627.Bancomext, Vol. 54, paginas 620-627.

Díaz-Bautista, Alejandro (2003), “ El TLCAN y el Crecimiento Economico de la Frontera Norte de Díaz-Bautista, Alejandro (2003), “ El TLCAN y el Crecimiento Economico de la Frontera Norte de Mexico ”, en “10 años del TLCAN”, Revista Comercio Exterior de Bancomext, Diciembre.Mexico ”, en “10 años del TLCAN”, Revista Comercio Exterior de Bancomext, Diciembre.

Díaz-Bautista, Alejandro (2003), “The Determinants of Economic Growth: Convergence, Trade and Díaz-Bautista, Alejandro (2003), “The Determinants of Economic Growth: Convergence, Trade and Institutions” (“Los Determinantes del Crecimiento: Convergencia, Instituciones y Comercio Institutions” (“Los Determinantes del Crecimiento: Convergencia, Instituciones y Comercio Internacional”) 164 pages, june. El Colegio de la Frontera Norte, México y Editorial Plaza y Valdes.Internacional”) 164 pages, june. El Colegio de la Frontera Norte, México y Editorial Plaza y Valdes.

Díaz-Bautista, Alejandro (2006), “Foreign Direct Investment and Regional Economic Growth Díaz-Bautista, Alejandro (2006), “Foreign Direct Investment and Regional Economic Growth considering the Distance to the Northern Border of Mexico” in Analisis Economico, UAM, Number considering the Distance to the Northern Border of Mexico” in Analisis Economico, UAM, Number 46, Vol. XXI, 2006.46, Vol. XXI, 2006.

Díaz-Bautista, Alejandro (2012), Regional Economic Growth and North American Economic Integration. Díaz-Bautista, Alejandro (2012), Regional Economic Growth and North American Economic Integration.

NAFTA Website NAFTA Website http://www.nafta-sec-alena.org SPP Website http://www.spp.gov/SPP Website http://www.spp.gov/

Presidential Elections in 2012

The 12-year Cycle of Coinciding U.S.-Mexico Presidential Elections.

The presidential election in Mexico, which coincides with the U.S. presidential election every 12 years, will depend on generating change in two crucial areas: security and the economy.

Enrique Peña Nieto

Enrique Peña Nieto was born at Atlacomulco in Mexico State.

Peña Nieto has a Bachelor's degree in law from the Universidad Panamericana and a Master's in Business at ITESM.

Between 1993 and 1998, during Emilio Chuayfett’s term as governor, he was chief of staff for the Secretary of economic development of the State of Mexico. At the end of this period he worked as deputy secretary of government for the State of Mexico (1999–2000).[

His work as a state functionary and within his party helped Peña Nieto build his political career and his subsequent move into electoral positions.

On September 15, 2005, Peña Nieto was sworn in as constitutional governor of the State of Mexico.

Andrés Manuel López Obrador Andrés Manuel López Obrador, also

known as AMLO or El Peje, is a Mexican politician who held the position of Head of Government of the Federal District.

AMLO studied at UNAM. López Obrador was president of the

PRD from 2 August 1996 to 10 April 1999.

AMLO is the leader of the "MORENA" (National Regeneration Movement) in Mexico.

Lopez Obrador, PRD Candidate Former Mexico City mayor Andres Manuel

Lopez Obrador says he will make another run for the presidency in 2012, six years after he narrowly lost the last election.

The 58-year-old leftist made the comment after winning an opinion poll released by his party, Democratic Revolution, or PRD. The poll asked 6,000 supporters of left-wing candidates whether they preferred him or Mexico City Mayor Marcelo Ebrard.

In 2006, Lopez Obrador was defeated by current President Felipe Calderon.

Josefina Vázquez Mota

Mexican economist, businesswoman and politician, member of the National Action Party (PAN).

BA in Economics from the Universidad Iberoamericana.

Appointed to President Vicente Fox's cabinet, as Secretary of Social Development.

In 2006, President Calderon announced her appointment as Secretary of Public Education.

Coordinator of the Parliamentary Group of the PAN as Federal Representative.

Santiago Creel Miranda

Creel received a bachelor's degree in Law from the National Autonomous University of Mexico (UNAM) and subsequently did graduate work at Georgetown University and earned a master's degree at the University of Michigan.

His career include running for Head of Government of the Federal District in 2000 (a race he narrowly lost to Andrés Manuel López Obrador). He was later appointed to the cabinet by President Vicente Fox to serve as Secretary of the Interior, a position he held from December 2000 to June 2005.

In 2006 Santiago Creel won a proportional representation seat in the Senate to serve during the 60th and 61st Legislatures (2006–2012) and led the PAN Senate delegation until June 2008.

Ernesto Cordero Arroyo

Ernesto Javier Cordero Arroyo is a Mexican economist and politician belonging to the National Action Party. He graduated from ITAM where he obtained a BA in Actuary and an MA in Economics. He holds an MA in Economics from the University of Pennsylvania, he completed the Ph.D. courses in the same university.

Ernesto Cordero was appointed Director General of the Miguel Estrada Iturbide Foundation.

He was Integral Risk Management Director at Banco Nacional de Obras y Servicios Públicos.

At the Energy Secretariat, he served as Undersecretary of Energy Planning and Technological Development.

He served as Under-Secretary of the Secretariat of Finance and Public Credit from December 2006 to January 2008.

In 2008 President Calderón designated him as Secretary of Social Development.

Cordero was named Secretary of Finance and Public Credit (Finance Minister) for Mexico in January 2010.

If the Presidential Elections in Mexico were today.

If the Presidential Elections in Mexico were today.

Encuesta El Universal, noviembre 2011.

LATEST MATCH-UP RESULTS

The latest polls give 23 points of advantage to Enrique Peña Nieto from the PRI (with 49% of electoral preferences); and Andres Manuel Lopez Obrador from the PRD reached (26%) if the PAN presidential candidate is Josefina Vazquez Mota (25%).

In contrast, if Ernesto Cordero or Santiago Creel become the PAN candidate, the advantage of Peña Nieto over Lopez Obrador is extended to 25 points, while the PAN electoral preferences collapses.

Encuesta Reforma: Peña Nieto líder, pero AMLO a la alza, 4 de diciembre de 2011.

Electoral Preference 2012

The 12-year Cycle of Coinciding U.S.-Mexico Presidential Elections.

Fundamental changes are needed to lift the institutional capability of Mexico so as to strengthen the fight against violence, spur job growth, and increase economic growth.

Peña Nieto has a proposal to reform the country’s energy sector and allow private-sector participation in this process, using Brazil and Colombia, and their respective state energy companies Petrobras and Ecopetrol, as models.

An “encouraging” proposal from the PRI presidential hopeful and a “hopeful sign” for the possibility of a prosperous future in Mexico.

Time/CNN Polls: Newt Gingrich Leads

In Three Of Four Early Primary States

New polls released by Time magazine and CNN confirm that Newt Gingrich has shot into the lead in three of the four states with January primaries or caucuses and has crept to within 10 percentage points of Mitt Romney in the Romney stronghold of New Hampshire.

In the first in the nation caucus state of Iowa, Time and CNN find Gingrich with a 33 to 20 percent lead over Romney, confirming the findings of numerous other polls that Gingrich has taken a solid lead in that state.

2012 US Presidential MatchupsElection 2012:

Obama 45%, Gingrich 40% Although support for former House Speaker Newt Gingrich

among Republican primary voters has soared in both national and state polls, he now trails President Obama in a hypothetical 2012 general election matchup.

The Rasmussen Reports national telephone survey of Likely Voters finds Obama earning 45% of the vote to Gingrich’s 40%. Nine percent (9%) prefer some other candidate, while six percent (6%) are undecided.

Thursday, December 08, 2011

MATCH-UP RESULTS 2011 Obama 45% Gingrich 40% Dec 6-7, 2011 Obama 46% Perry 34% Dec 4-5, 2011 Obama 42% Romney 40% Nov 30-Dec 1, 2011 Obama 46% Cain 36% Nov 27, 2011 Obama 45% Bachmann 33% Nov 15-16, 2011 The national survey of 1,000 Likely Voters was

conducted by Rasmussen Reports. The margin of sampling error is +/- 3 percentage points with a 95% level of confidence.

United States Election 2012

Combinations of Mexico and US Presidents and Bilateral Relations

U.S. Mexico Bilateral Relations Democrat PRI Good Republican PRI Good Democrat PRD Normal Republican PRD Less than normal Democrat PAN Good Republican PAN Good

Conclusions

The year 2012 promises to be an interesting year for Mexico, particularly if the PRI consolidates the accumulated positive momentum, by implementing new structural reforms.

To do this, the PRI will have to prove that it is is ready to allow more comprehensive economic reforms and, through these, allow Mexico to progress and grow during the second decade of the 21st century.

Enrique Peña Nieto will be the new president of Mexico and his administration will start on December 1, 2012.