Macroeconomic stability lets us address other problems

Inside México talks with Jonathan Heath

By Inside México Original Print Publication: March, 2007

Mexico’s Macro and the World Economy

Step back. Look at the big numbers. See the stunning economic interdependence between the US and Mexico. (All monetary values in USD.)

$213.4 Billion worth of goods exported by Mexico in 2005

87.6 Percentage of 2005 exports went to the US

1.8 Percentage of 2005 exports went to Canada

$223.7 Billion worth of goods imported by Mexico in 2005

55.1 Percentage of 2005 imports came from the US

7.1 Percentage of 2005 imports came from China

47 Approximate number of countries with which Mexico has free-trade agreements

$6,770 2005 average per capita income

20 Percentage of the population earns 55 percent of the income

1 World rank of Mexico for production of avocadoes, onions, limes, lemons and safflower seeds

4 Percentage of the contribution of agriculture to GDP

27.9 Percentage of rural Mexicans lived in poverty in 2004

$89 Billion of US capital invested in Mexico between 1999 and 2006

$16 Billion invested by Spain in Mexico between 1999 and 2006

$62 Million invested by China in Mexico between 1999 and 2006

$18 Billion remitted annually to the country by Mexicans living abroad

Jonathan Heath is HSBC’s Head of Research and Chief Economist for Mexico. Born in Mexico to Canadian parents, Mr. Heath is one of the most respected macroeconomists in the country.

Inside México: Recent reports predict that by 2050 Mexico’s economy could be the world’s sixth largest. What do you think?

Jonathan Heath: Well, there is no simple answer. Recently I was reviewing a report I gave in 1986. Back then we were at the peak of the hyperinflation. The 80s was a no-growth decade. We call it the lost decade. The debt burden was high. People were crying that there was no hope. It was a doomsday scenario.

Today, inflation is at 4 percent. Back then inflation was over 100 percent and the margin of error was 10 percent! Now we’re arguing about half-a-percent margin of error. Who cares!?

Mexican economic history is one of external debt and chaos. The few times we’ve had low levels of external debt we’ve been able to make real economic progress and achieve economic stability.

If you don’t have macroeconomic stability, you can’t address poverty, unequal income distribution, or employment.

IM: Where should Mexico focus for economic success?

JH: What’s the way forward? Well, I think we need a very flexible economy. If you’re not continuously investing in technology you’re falling behind.

We are living in a competitive global economy. It’s not good enough to just grow. Right now, if China is growing at 200-300 kilometers an hour and we’re moving at 30-40 KM/H, it seems we’re doing great. But we’re actually losing ground.

If our grandfathers had a factory, they could do the same thing every day for thirty or forty years. That’s an obsolete formula now.

IM: In terms of economic strategy does Mexico have to choose between an educated work force and cheap labor?

JH: The ideal labor force would be like Germany’s or Switzerland’s. Those are the most productive economies in the world. If you can have high productivity and better wages, it’s a win-win.

Cheap labor means competing with China. I would never compete with China. The average Chinese laborer is screwed! The wage differential between China and Mexico is ten-to-one. Imagine if we were to pay Mexican workers one tenth of what they’re earning now.

We do have one advantage over China: we are close to the US and can deliver just-in-time production in a way they can’t.