Despite crippling violence Mexico thrives

COMMENT

Big New Zealand companies such as Fisher and Paykel and Gallagher have been operating in Mexico for some time because cheap manufacturing costs and proximity to the United States are huge drawcards for technology brands.

Yet reforms are needed, especially in energy and labour, to attract more foreign investment.

President-elect Enrique Pena Nieto has outlined important measures his government intends to take to bring Mexico’s economy further up the development line.

Mexican labour costs could soon be at a stage to challenge China, where prices are rising. Labour laws in Mexico still make it expensive for companies to operate, but these are being debated.

The Mexican Senate has been considering a bill to make important changes to the law. They will stop short of altering the convoluted labour strictures, focusing instead on the more malleable legislation.

Attracting foreign investment will become even easier as these reforms will roll back the stifling labour monopolies.

Foreign trade, according to a 2011 PwC study, is extremely important for Mexico to service its large external debt, which is significant, amounting to $US56 billion in 2008.

The country has sufficient mineral resources to cover this but analysts point to legal obstacles that need to be overcome in order to streamline mineral extraction.

The constitution forbids foreign ownership of mineral resources so fee-based contracts are issued instead. This is in stark contrast to many other countries and is an obstacle to foreign investment the new government hopes to rectify.

A free-trade agreement with the US is attractive to foreign companies considering investment. Mexico shares a long and porous border with the world’s largest economy and co-operation between the two nations is increasing.

50,000 drug war victims

But the drug war in Mexico that has killed more than 50,000 people in the past 10 years. Few conflicts even in the third world can claim such statistics.

Most of the killings are a result of battles between rival drug cartels which are growing more brutal and vicious – in 2011 some 16,000 people died.

The lucrative market for drugs in the US feeds cartel ambition, and control over the land routes traversing the long and mountainous Mexican highland is brutally contested. A cat-and-mouse game behind the scenes plays out with US and Mexican law enforcement officials.

Huge drugs profits can also be made in the Asia Pacific region, with Mexican trafficking organisations established in Australia and Asia.

A kilogram of cocaine can fetch $US250,000 in Australia and New Zealand but just $US30,000 in America.

13th largest world economy

What happens in Mexico is not yet as significant as perhaps the politics of Japan or Saudi Arabia. But Mexico it the 13th largest economy in the world by GDP this year and in spite of the violence the  strong economy continues to expand.

Mr Nieto understands the economy could be doing even better if it weren’t for the crippling violence in almost every corner of the nation. One of his campaign promises was to halve the murder rate in the next six years, the length of his term as president.

Jorge G. Castañeda, Mexico’s Foreign Minister from 2000-03, outlined in a recent foreign affairs article the direction Mr Nieto intends to take Mexico must signal to the world a credible narrative about its future.

“The country is less than a generation away from becoming the full-fledged middle-class society it aspires to be,” he says. And with a new government in Mexico City ready to focus on reform, the next few years should see a significant shift towards further economic expansion.

In the last 17 years, the Mexican economy has become one of the world’s most transparent. And business development has been stable despite the financial troubles of some of the country’s main trading partners, such as the US and Europe.

Despite the persistent drug violence, there is a robust and strong economy which investors are eyeing with interest.

Nathan Smith has a Bachelor of Communications in Journalism from Massey University and has studied international relations and conflict.