That was Mexican Economics 101 in action. The country has a long history of boom turning to bust and dissolving into chaos as incompetent governors make a bad situation worse. So when the economy started to falter again a year ago, Mexicans expected disaster, only to be pleasantly surprised. Growth stalled, layoffs hit hard, but the descent into crime and currency crisis never came. This time, growing trade and financial ties to the United States, competently managed by a new president and central-bank chief, helped Mexico weather a global recession that once would have spelled disaster. From Wall Street to Mexico City, financial experts are quietly celebrating. Mexican economist Jonathan Heath says, “Our recession is now a First World recession, as opposed to a typical Third World recession where the country falls apart.” As a result, Mexico is no longer victim to the financial pathos still afflicting other parts of Latin America, says Heath. “Right now we look at the crisis in Argentina and we say, ‘Poor guys’.”
To be clear, this view is not widely shared by the Mexican in the street, by unemployed autoworkers or by farmers squeezed by rising costs and falling crop prices. After the economy contracted last year and President Vicente Fox failed to deliver on campaign promises to provide 1.3 million new jobs, his popularity rating dropped below 50 percent. Yet something is positively different.
Downturns had hit Mexico roughly every six years for the past three decades, following a devastatingly familiar pattern. Investors lost confidence and fled; the government rapidly spent its hard currency to finance a ballooning trade deficit but finally had to devalue the peso, spurring inflation and economic collapse. This time the peso is strong, inflation is at a record low and foreign investment continues to flow at a record high. In January Standard & Poor’s promoted Mexico’s credit rating to “investment grade.” This recession just feels different, less cataclysmic. “My life is divided into two parts: before 1994 and after 1994,” says Estrada, who went into market research after closing his grocery, and expects his new business to survive the new recession. “We have learned from the past.”
One man deserving at least part of the credit is 53-year-old Guillermo Ortiz, who has been called the Alan Greenspan of Mexico. As assistant Finance minister, he predicted the 1994 crash but was ignored by his colleagues. Then he was put in charge of piecing together the rubble, first as Finance minister, and since 1997 as head of the central bank. After the crisis, Mexico followed a strict plan: make the peso the first free-floating currency in the developing world, use interest rates to control inflation and continue to expand trade with the United States. “This has helped us weather external shocks–the Asian crisis in 1998 and now the current recession,” says Ortiz, who is well aware that average citizens aren’t cheering. “People say the macro economy is going OK, but what about us? What about the people?”
Ironically, the most important sector of the Mexican economy is the one hardest hit by recession. Since 1999 the peso has been gaining on the dollar for the first time since World War II, undercutting Mexican exports. Nearly a third of everything produced in Mexico is exported, 90 percent of it to the United States. “Mexico is in trouble. Nobody on the outside seems to see it or feel it like we do here,” says Abel Jacob, who has seen the profit margins of his jewelry-export business steadily decline since the peso started rising. Ortiz’s answer: better to be buffeted by the currency market than by the whims of financial bureaucrats.
Mexicans can now expect less-wrenching booms and busts. “This is the first real business cycle in the Mexican economy,” says Gray Newman, the Latin America economist at Morgan Stanley. “Mexico should recover with the United States.” As the U.S. economy improves, analysts expect the peso to drop at least 10 percent. That is not enough to cause either an Argentine-style catastrophe or a dramatic recovery. In the past, when the peso collapsed it set the stage for a sharp export-led boom. This time economists expect a milder fall in the peso, and a much smaller boom in exports. In other words, Mexico’s First World recession will likely be followed by a First World recovery. And that calls for a toast.
