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U.S. Month at a Glance

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January 5, 2018

Kip’s Commentaries

Read the latest commentaries by Kip Beckman, Principal Economist, World Outlook

Mexico: The Unluckiest Country of All

Mar 30, 2017
Kip Beckman
Principal Economist
World Outlook

The economist Raghuram Rajan, the former head of India’s central bank, after extensively researching economic development said “Development is a process of muddling through with no easy and well-trodden paths. It depends on a country taking advantage of fleeting opportunities, as well as enjoying considerable luck.”

This is certainly true, especially the luck part. Costa Rica, an oasis of calm in a part of the world trying to cope with vicious drug cartels and some of the highest murder rates in the world, has managed to escape most of the chaos, in part because of good fortune. Following a civil war in the late 1940s, successive governments on both the right and left decided to implement moderate economic policies and took steps to ensure fair elections. With one conservative government going so far as to disband the Costa Rican army—a decision that prevented future governments from using the military to retain power following electoral defeats. This occurred at the same time as their neighbours in Central America were shifting back and forth between radical governments on the far right and left, with frequent military coups becoming a part of life for citizens.

Unfortunately, Mexico hasn’t been as fortunate as Costa Rica. While poor policies have held the Mexican economy back over the past few decades, Morgan Stanley’s Ruchir Sharma notes that there is little doubt that bad luck has played a key role. Just as NAFTA was implemented in 1994, interest rates soared in the U.S., and this led investors to pull their money out of Mexico. The peso subsequently crashed in value in December of that year. At the time, the Mexican government was issuing bonds that it promised to pay back in U.S. dollars. When the peso plunged, Mexico required a bailout and slipped into a steep recession.

Mexico eventually recovered from the recession, and growth was accelerating just as the U.S. fell into recession following the high tech bust in 2001. The downturn in the U.S. dragged Mexico along with it. The economic difficulties were compounded by China’s entry into the World Trade Organization in 2001.

In the 2000s, economic growth in many emerging markets, such as China and Brazil, surged due to rising commodity prices, notably oil, and the easy availability of credit from Western banks. Mexico didn’t reap many of the benefits from rising oil prices due to a lack of investment and declining production from Pemex, the country’s national oil company. Then the 2008–09 financial crisis hit the global economy and Mexico was one of the first casualties.

Things started to look up for Mexico in 2012 when a reformer, Enrique Peña Nieto was elected president. He opened the energy sector to foreign investment and expected to generate a surge in government revenues by auctioning off oil-drilling rights to oil exploration companies, including many large American ones. However, in the middle of 2014, the price of oil collapsed and Mexico’s economic growth fell back to the low 2 per cent range.

The president persisted with his reform agenda, and in the early part of 2016 growth picked up to 3 per cent and the unemployment rate started to decline. Then came possibly the unluckiest development of all—the election of Donald Trump as president of the United States. His threats to build a wall along the border with Mexico and slap large tariffs on Mexican exports have led to tumbling investment spending. Currently, we expect Mexico’s real GDP to increase at an annual pace of less than 2 per cent over the near term, but a trade war could make the situation much worse.

Trump views the world as a zero-sum game. He feels that the US$60-billion trade deficit with Mexico means that the Mexican economy has been doing well due to NAFTA at the expense of American workers. But the benefits of trade are well documented—U.S. manufacturing losses have more to do with automation than free trade.

While NAFTA has resulted in a more modern Mexican economy, most Mexicans have hardly become rich. Annual real GDP growth has averaged only 2.5 per cent since 1994—in line with that of the United States and well below the gains recorded in many emerging markets in Asia. The average Mexican’s income is only 25 per cent of the average American’s—an income gap that hasn’t changed in 20 years.

It appears that Mexico’s long period of bad luck is set to continue. The popularity of Mexico’s current president has tumbled to 12 per cent, as Mexicans feel he has failed to stand up to Trump’s accusations and threats. Mexico has always had a heavy dose of anti-American feeling, but that had started to wane after the inception of NAFTA as the two economies became closely integrated. This is changing, as the popularity of fire-brand nationalist candidate Lopez Obrador has increased leading up to Mexico’s presidential elections in 2018. The combination of Trump’s trade policies and an ultra-nationalist leader in Mexico could lead to even weaker economic growth in Mexico and rising unemployment. This would be the worst-case scenario for Mexico. It is a scenario that needs to be avoided at all costs.


Francis Fukuyama, Political Order and Political Decay ( New York City: Farrar, Straus, and Giroux, 2014); Ruchir Sharma, “Mexico’s Bad Luck gets Even Worse,” The Wall Street Journal (January 31, 2017)

Related Webinar

Popular Populism: Geopolitical Risks in a Trump Era
The Conference Board of Canada, April 25, 2017 at 02:00 PM EDT

International Economics Team

Kip Beckman

Kip Beckman
Principal Economist