Destinations > North America > Mexico

Mexico Economy

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Mexico is highly dependent on exports to the U.S., which represent more than a quarter of the country's GDP. The result is that the Mexican economy is strongly linked to the U.S. business cycle, and has suffered from the economic slowdown in the United States. Real GDP grew by 4.8% in 2006, 3.3% in 2007, and 1.4% in 2008, but government officials expect the economy to contract by up to 5% in 2009.

Mexico's trade regime is among the most open in the world, with free trade agreements with the U.S., Canada, the EU, and many other countries (44 total). Since the 1994 devaluation of the peso, successive Mexican governments have improved the country's macroeconomic fundamentals. Inflation and public sector deficits are under control, while the current account balance and public debt profile have improved. As of October 2008, Moody's, Standard & Poor's, and Fitch Ratings had all issued investment-grade ratings for Mexico's sovereign debt.

Trade

Mexico is among the world's most open economies, but it is dependent on trade with the U.S., which bought about 82% of its exports in 2007. Top U.S. exports to Mexico include electronic equipment, motor vehicle parts, and chemicals. Top Mexican exports to the U.S. include petroleum, cars, and electronic equipment. There is considerable intra-company trade.

Mexico is an active and constructive member of the World Trade Organization (WTO). It hosted the September 2003 WTO Ministerial Meeting in Cancun. The Mexican Government and many businesses support a Free Trade Area of the Americas.

Trade disputes between the United States and Mexico are generally settled through direct negotiations between the two countries or via WTO or North American Free Trade Agreement (NAFTA) panels. The most significant areas of friction involve agricultural products such as livestock and sweeteners. To address the issues that affect these industries in a manner consistent with the principles of free trade, the United States and Mexico have established technical working groups.

Agriculture

Only 13% of Mexico's land area is arable, of which less than 3% is irrigated. Top revenue-producing crops include corn, tomatoes, sugar cane, dry beans, and avocados. Mexico also generates significant revenue from the production of beef, poultry, pork, and dairy products. In total, agriculture accounted for 3.7% of GDP in 2008, yet agricultural employment accounted for over 14% of total employment. Most of the population is employed in the services sector (60% of total employment).

Implementation of NAFTA has opened Mexico's agricultural sector to the forces of globalization and competition, and some farmers have greatly benefited from greater market access. In particular, fruit and vegetable exports from Mexico have increased dramatically in recent years, exceeding $4 billion to the United States alone in 2007. However, structural inefficiencies that have existed for decades continue to limit improvements in productivity and living standards for many in the agricultural sector. These inefficiencies include a prevalence of small-scale producers, a lack of infrastructure, inadequate supplies of credit, a communal land structure for many producers, and a large subsistence rural population that is not part of the formal economy. It is estimated that half of Mexico's producers are subsistence farmers and over 60% produce corn or beans, with the majority of these farmers cultivating five hectares or less, although the number of Mexican farmers is steadily decreasing as they seek greater economic opportunities from off-farm employment.

Mexico subsidizes agricultural production through various support programs, the most notable being the PROCAMPO initiative.

Manufacturing and Foreign Investment

The manufacturing sector, which accounts for about 18% of GDP, grew by 1.5% in real terms in 2007. Construction grew by 2.6% in real terms in 2007.

Foreign direct investment (FDI) in Mexico for 2007 was $ 25 billion, up 22% over the previous year. The U.S. was once again the largest foreign investor in Mexico, accounting for 40% ($9.9 billion FDI from the U.S.) of reported FDI. The economic slowdown in the U.S. in 2008 and 2009 has caused a significant decline in this figure.

Oil and Gas

In 2007 Mexico was the world's eighth-largest crude exporter, and the third-largest supplier of oil to the U.S. Oil and gas revenues provided more than one-third of all Mexican Government revenues.

Mexico's state-owned oil company, Pemex, holds a constitutionally established monopoly for the exploration, production, transportation, and marketing of the nation's oil. With its primary known oil reserves already in serious decline, Mexico will have to determine in the near future how it wants to harvest its harder-to-exploit probable reserves in order to avoid very difficult economic choices. The Mexican Congress passed energy reform legislation in October 2008 that gives Pemex more budgetary autonomy and transparency. However, the reforms do not open the petroleum sector to investment and will do little to address declining production.

While private investment in natural gas transportation, distribution, and storage has been permitted, Pemex remains in sole control of natural gas exploration and production. Despite substantial reserves, Mexico is a net natural gas importer.

Transportation and Communications

Mexico's land transportation network is one of the most extensive in Latin America with 357,000 kilometers (km.) of paved roads, including more than 11,000 kilometers of four-lane paved roads. The 26,622 kilometers (16,268 mi.) of government-owned railroads in Mexico have been privatized through the sale of 50-year operating concessions.

Mexico's ports have experienced a boom in investment and traffic following a 1993 law that privatized the port system. Mexico's ports moved nearly 1.7 million containers in 2006. A number of international airlines serve Mexico, with direct or connecting flights from most major cities in the United States, Canada, Europe, Japan, and Latin America. Most Mexican regional capitals and resorts have direct air services to Mexico City or the United States. In 2005, the Government of Mexico agreed to sell Mexicana, one of the two main national airlines, to a private investor, and did the same with Aeromexico in 2007. Airports are semi-privatized with the government still the majority shareholder, but with each regional airport group maintaining operational autonomy.

The telecommunications sector is dominated by Telmex, the former state-owned monopoly. Several international companies compete in the sector with limited success. The teledensity rate in Mexico (around 19%) is below average in Latin America. Wireless penetration is much higher, with over 65 million wireless subscribers in the first quarter of 2008, although 31 million of these customers use prepaid cards, and many use their phones to receive calls only. Mexico's satellite service sector was opened to competition, including limited foreign direct investment, in 2001.


Information by U.S. Department of State


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