Thursday, August 06, 2009

U.S.-Centric Economic Strategy Presents Obstacles for Mexico amid Recession

Sources: Mexico recession shows downside of close U.S. links

As Mexico struggles to recover from one of the most severe recessions in its history, the drawbacks of the country’s dependence on U.S. consumers are laid bare. This year, the Mexican economy is expected to diminish at least 6.5 percent, its greatest reduction since the Great Depression and one of the most severe in Latin America as a whole.

Mexico’s single-market development strategy, as well as its failure to pursue broad-based economic progress through investments in education and infrastructure, produced the weakness in the economy. Large Asian economies such as China, India, and Korea—the growth rates of which have significantly exceeded those encountered in Latin America—have enjoyed the benefits of an emphasis on jobs and education.

The North American Free Trade Agreement, or NAFTA, which became effective in 1994, firmly established Mexico’s one-sided economic strategy. The commercial agreement did not give rise to the sort of explosive growth fitting an emerging economic steam engine, though it produced a quantity of factory jobs in the north. While Chile and Brazil, which are less reliant on the U.S. consumer, have experienced rapid growth, such development continues to evade Mexico’s grasp. Over the last ten years, the United States’ restrained 1.8 growth rate even exceeded Mexico’s percent rate.

Due to Mexico’s dependence on exports to the U.S., its growth rate falls on the shoulders of U.S. consumers. While data released on Friday about the U.S. gross domestic product revealed that the speed of contraction has slowed greatly, it also informed on a reduction in consumer spending. The Federal Reserve, the central bank of the U.S., has also indicated that the U.S. economy will not reach its former “potential” growth rate for five or six more years.

Discussion Questions:
1) What steps can Mexico take to improve its growth rate while consumer spending remains low in the United States?
2) How can Mexico guard against future international financial earthquakes?

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