The Economy of Mexico

[Music] this is Mexico what is actually a pretty spectacular nation that is blessed with natural resources and natural beauty but of course it is not without its issues both real and perceived despite its many many critics though the nation has surprisingly strong economic characteristics a great export market a thriving manufacturing industry natural resources a young and productive workforce and even things like geography are on their side but the thing is it still has critics and some of that criticism isn't entirely unfair things like crime are an issue and as strong as Mexico's legitimate economy and export market is well we still all know deep down the other export market that Mexico is home to now a huge disclaimer with this is that we will today only be looking at Mexico's legitimate industries and I know I know there is a lot to be said about that other domestic industry but that is not a topic entirely taking place within Mexico and probably deserves a video all of its own but this perception alone has had huge economic ramifications on the nation as it is often overlooked by international investors as the next major developing economy because of this bad press weirdly enough a lot of these issues can actually be explained not by headline news articles but rather the nation's relationship with credit Mexico is not a rich nation it may have the 15th largest economy in the world but it also has a lot of people so that wealth is spread very very thin on top of this it is also spread very very unevenly wealth inequality in Mexico is not as bad as say inequality in South Africa but it is not far behind and it's also very very regional outside the regions bordering the USA in Mexico City itself the country's population is even poorer than you would determine from nationwide figures you see it has a typical developing economy dynamic the major cities and centres of infrastructure reap the rewards of Trade and Industry while predominantly farming populations in regional areas are left behind now we have explored issues of wealth inequality before on this channel and certainly a lot of the same issues are true in Mexico but an interesting side effect of all of this is that the country is said to be under banked under banking is the lack of access to typical financial services in developed and even most developing countries people take things like bank accounts internet banking and even home loans or credit cards for granted and these things exist in Mexico it's just a lot of people don't have access to it this causes issues of course there is a lot of good things that come from having a well-regulated financial industry things like safely storing and investing money ease of doing business getting paid and also extending credit our credit is good and bad normally we look at things like home loans or business loans or things of that nature and we see these as good things they allow people that would not have otherwise been able to to buy their own home or start their own business or whatever and this also has knock-on effects paying off a home in most advanced nations is a strong determinant of individual wealth and by extension national wealth the same goes with allowing people the ability to start their own business it all helps social mobility which is basically the ability for poor people to work hard to build up well to improve their own quality of life social mobility may become one of the nation's key determinants of success in coming years at the moment it is very very hard for poor individuals from the nation to get access to education and employment to build up a middle-class lifestyle and due to a lot of issues within the nations things like crime and lack of ability to make that much money as a regular worker and a lot of people especially will educated people are moving out people are actually one of the nation's largest exports Mexico now has over 13 million of its citizens living abroad most notably of course in the United States which is the highest rate of any country in the world I mean it's over ten percent of their total population a lot of this has to do with access to opportunity which is a function of social mobility on a base level people working in the United States and sending money back home is actually a good thing for the local economy but it's when people especially skilled workers pack up and leave the country for good that it will start to have a negative impact and it's kind of easy to see why on paper Mexico does not have inequality as bad as a nation state like say South Africa that is more so because the nation is universally a little bit poorer but it does have the really really bad type of inequality extreme disparities between the super rich and the poor Carlos Slim Helu a Mexican citizen was once the richest man in the world and claimed a personal fortune that was over ten percent of Mexico's GDP now net worth and GDP measures are different so take that figure with a grain of salt but this was still the highest ratio of net worth to GDP of any individual in any nation in recorded history now people are often quick to point at the social or political failings within a nation and look that may have played a part here but in reality a lot of this has more to do with debt than it does with policy Mexico has a very very low household debt to GDP ratio one of the lowest in the developing world and this all has to do with the under banking issue we saw earlier people who get paid in cash and probably don't pay taxes are very very hard to give a loan to but this isn't all bad news though Mexico has actually been praised for its stability in recent years it weather the storm of the South American economic crisis relatively unscathed and its growth has been very consistent at around two percent a year year-on-year and that has a lot to do with its leverage you see a two percent growth rate isn't great it's not bad for a developed country and any growth is good growth but Mexico is a developing country when you look at nations like China India the Philippines and even Japan back in the day we saw that they would go through a short period of rapid industrial growth with leads and jumps of around seven or eight percent in year-on-year GDP figures but that hasn't really been the case in Mexico sure it's building factories and transitioning to a primarily industrial nation but it is not doing it nearly as fast and a lot of that has to do with that debt problem or rather lack thereof debt problem GDP is a function of how much money is trading hands between a nation's government its companies and its citizens when we explore the modern-day United States we found that a lot of this was fuelled by dead people buy things on credit cards or car loans or personal loans even home lines and this facilitates a lot more money trading hands and by extension more overall prosperity at least according to GDP figures but this hasn't been the case in Mexico and a lot of that has to do with people's willingness to invest in the nation itself Mexico as a nation is heavily dependent on its relationship with the United States as a strong export economy all of the factories and farms of the nation are there to feed the largest consumer market in the world just to the north of their border so it comes as no surprise that Mexico's main export partner is the United States which claims over 80 percent of their exports the next largest trading partner is Canada which accounts for less than 3 percent so to say that Mexico is heavily dependent on the United States for a lot of its industries is pretty fair this relationship has actually been quite good for both nations American businesses have set up factories in Mexico as part of their global supply chain now of course a lot of that has to do with workers in Mexico demanding lower wages than workers in the USA but it's also a more convenient supply partner than let's say China which requires loading things like cars under ships in order to get them to mainland USA when companies like GM Ford Toyota and the like set up factories this is all foreign investment and foreign investment is basically broken down into two parts foreign direct investment and foreign indirect investment now the first one foreign direct investment is probably the one that you have heard of more often and this is where individuals or or more likely companies set up specific investments within the country if a wealthy American family buys a house in New Zealand as a holiday home that is foreign direct investment or if a car company like Ford sets up a factory in Mexico that is foreign direct investment and this is normally seen as really really beneficial for an economy because it boosts local markets and provides jobs foreign indirect investment or normally just called foreign investment is still investing into a foreign market but it is done through financial instruments that is normally facilitated by a local financial institution if I as an Australian want to invest into American stocks I don't have to book a flight to New York I can just talk to an Australian stock brokering firm and buy american shares through them i am still exposed to the American market but it goes through a financial instrument the same is true for things like foreign government bonds or securities or or even things like a foreign currency exchange with all that understood though the foreign direct investment into Mexico has been really really fantastic and it's not just like American companies are setting up shop in the nation purely to take advantage of the cheaper to employ local population either major research and development facilities and high-tech manufacturing now take place in Mexico meaning that actual good paying jobs have been created here and the nation is developing a reputation as a quality supplier of manufactured goods rather than just a cheap one a vast majority of this has been facilitated through the North American Free Trade Agreement which was basically an agreement between the United States Mexico and Canada to not restrict trade between each other the hope of this deal was that he would allow nations to trade freely which does increase the wealth of the overall group in general terms and also makes the North American continent more independent as a cohesive unit now this deal like all deals had its good parts and its bad parts the good was of course that businesses were able to allocate resources to countries in the deal that were best able to facilitate this type of business a lot of farming was done in Canada general administrations grew in America and of course a lot of manufacturing moved to Mexico because companies wouldn't have to pay tariffs to move products across borders it just made sense to do things where it was most cost-effective to do them which led us onto the bad parts the central linchpin in the North American Free Trade Agreement was the United States both geographically and economically Mexico trades almost exclusively back and forth with the United States and Canada basically trades exclusively back and forth with the United States there is some trade between Mexico and Canada directly but it is very very minimal the United States also has a large motor vehicle industry and typically all of the companies that we have mentioned earlier would do their manufacturing within the United States now because Mexico does not have to pay tariffs to import cars it makes it cheaper for these companies to just assemble these cars across the border which means that car plants within the United States employing citizens of the United States get moved displacing workers and this is a major drawback the reason that things like tariffs and import quotas exist in the first place is not because they are great economically but instead they are there to protect local industries and workers the North American Free Trade Agreement was a fantastic economic concept but it was a terrible protection airy step which caused it to be branded has the worst trade deal in the history of trade deals which has among other things caused a lot of uncertainty for Mexico the renegotiation of the North American Free Trade Agreement and the openly hostile US President as well as new incentives for American companies to come back onshore has caused issues in the Mexican economy most prominently that of confidence companies are apprehensive to do things like build new factories or invest in R&D in a country they are not sure if they are even going to be able to trade with into the future what this means is that the crucial investment that was the lifeblood of the growing Mexican economy has been limited over the past few years we have seen before that the nation doesn't really borrow that much money to fuel growth itself so if foreign investment falters so too does Mexico investors actually knew this and during the 2016 presidential election campaign the value of the pesos swung heavily upwards and downwards with speculative news on who the presidential candidate would be and of course who would win in 2016 which was one of these strongest correlations that the price of a currency has had to an election which wasn't even its election all of this has compounded to mean that throughout the last three years Mexico's economy has started to slow down which for a developing economy is actually quite bad development economies need that period of strong sustained growth to develop the infrastructure required to become a proper first world nation but it may not be as bad from Mexico as it would be for any other nation out there you see the issue that Mexico had was not borrowing enough money may have been a saving grace during these more turbulent times Mexico was the equivalent of a person who started making a lot of money but held off buying that fancy new five-bedroom three-bathroom McMansion in the suburbs and continued to rent out their small apartment a little bit closer to work sure during the good times he was not able to grow his wealth quite as fast as his colleagues who benefited off their leveraged real estate investments but during the bad times if his work slowed down and not as much money was being taken home he would have been just fine without the fear of needing to make his latest debt repayment but all of this may be starting to turn around throughout this video we have explored the benefits and problems that have arisen in Mexico because of their relationship with not wanting to take out loans but it actually looks like this is all starting to turn around anyway as of 2016 access to technology has been noted as a driving force behind access to financial services and looking at the household and small business sector things like home loans are growing in volume at a rate five times that of GDP growth which means potentially they will soon catch up with the rest of the developing world the nation is still weary of the issues that this can cause and the memory of 2008 are not easily forgotten but policymakers in the nation are also seen that the benefits outweigh the costs [Music] Mexico is a nation with a lot of potential it has the same opportunities to go through rapid growth like so many other nations have in Southeast Asia and abroad it's kind of already halfway there and as the nation grows it will have the resources to address the social and political issues within the nation wealth baguettes wealth and if Mexico can move beyond its dependence on foreign direct investment and invest directly into itself there is every chance that it will become a modern economic superpower everything in national finance feeds off each other as the nation becomes wealthier citizens will get access to more technology which means that they can get access to things like banking which means that they can get access to things like home and business loans which means that they have the ability to improve their quality of life which means that they are less likely to move abroad which means that the skills and expertise of the citizens of the nation will work to benefit the nation which means it will have the ability to grow and develop and pass that wealth back to the people that made it possible hi guys thanks for watching if you enjoy this video please consider liking and subscribing as always a huge thank you to a new patrons over on patreon your support continues to make these videos on these slightly dicey or topics possible we will be hosting the Q&A session live streaming on the second channel linked in the video description if you want to be involved in that come on over there to participate directly or you can join our discord server thanks guys bye

Channel: Economics Explained

Views: 385,859

Rating: 4.8972397 out of 5

Keywords: mexico economy, mexican economy, the economy of mexico, the economics of mexico, the economics of mexico explained, the economy of mexico explained, mexican economy explained, what makes a modern economy work, mexico economics explained, mexico economy explained, mexican economics explained, what is the economy of mexico like, mexico economy economics explained, economics explained mexico, what is mexicos economy like, how does mexicos economy work, economics explained

Id: LDxhlyg0YFs

Length: 18min 12sec (1092 seconds)

Published: Sun Mar 08 2020