Mexico's economic recovery

A one-two punch

May 27th 2010 | MONTERREY

From The Economist print edition

Just as business perks up after the recession, it is threatened by crime

FOR over a century Monterrey, in Mexico’s rocky and seemingly inhospitable north, has prided itself on being the country’s industrial capital and economic motor. It got rich making beer, steel, glass and cement. Today its quick access to both coasts of the United States enables it to export car parts, home appliances and aerospace components. At $16,000 per head, average income in the city of 3.7m people is twice the national average.

Last year this closeness to the United States did not seem like such a blessing. Mexico’s economy fared worse than any other in the Americas during the recession—it shrank by 9.7% in the year to June 2009—and its export-oriented north was the most affected area. In Nuevo León, the border state in which Monterrey lies, some 40,000 manufacturing jobs were lost in nine grim months from September 2008.

Now that the American economy has stirred back to life, Mexico’s factories are whirring into action as well. The country’s GDP grew by 4.3% year-on-year in the first quarter of 2010, beating forecasts. Industrial production rose by 7.6% in the year to March—the largest annual increase in nearly four years. In Nuevo León, manufacturing jobs are returning to pre-recession levels. Across all sectors, nearly twice as many jobs have been created there this year as were lost in 2009. Mexico’s car exports are at their highest since 1994.

Yet despite such encouraging figures, expectations are restrained. The Economist Intelligence Unit, our sister company, predicts that the economy will grow by 4.3% this year but just 2.7% in 2011. Domestic demand has been depressed by lay-offs and declining remittances. Car sales within Mexico, for example, are at their lowest in over a decade. Once consumers’ appetites do recover, inflation is expected to rise. That would force the central bank to raise interest rates, which would reduce growth.

This leaves exporters in places like Monterrey to lead the rebound, as they did after Mexico’s last recession in 1995. But those businesses have a new hurdle to surmount: the country’s raging drug “war”.

Territorial squabbles between traffickers are now affecting city life. Since last year, main roads in Monterrey have regularly been blockaded by members of the Gulf “cartel” or its estranged former enforcers, the Zetas, to prevent police from reaching crime scenes. In March, two students were killed in a shoot-out at the city’s leading university between the army and suspected gangsters. The following month, gunmen kidnapped five people from a downtown Holiday Inn.

Foreign investment in Nuevo León held steady last year, at $1.4 billion. But visitors are staying away. Hotels are less than half full: almost every week a business conference or international sporting event is cancelled. Among the missing visitors are the certifiers and auditors companies need to conduct their operations.
Medical tourism, an important new industry in Monterrey, held up well during the recession. But the fear of violence is now keeping patients away. At Christus Muguerza, a gleaming chain of hospitals where a new knee costs barely half what it would in the United States, business is down by a quarter on last year.

For now most firms are sticking it out, but they are anxious. A survey published in March by the American Chamber of Commerce of Mexico found that over a quarter of its members were reconsidering investments in the country as a result of safety worries. Some 16% had suffered extortion and 13% kidnappings. Companies based in the northern border region, and near Mexico City, felt least safe. Unless security improves, Mexico’s nascent economic recovery will be held back.

• An interview with Javier Treviño, the secretary general of Nuevo León:
http://audiovideo.economist.com/?fr_story=73dc875cf722677631dc66ae455992beea1d9729&rf=bm

Mexico and the United States

An unappetising menu

May 20th 2010 | MEXICO CITY
From The Economist print edition

Mr Calderón goes to Washington

WHEN Barack Obama invited his Mexican counterpart, Felipe Calderón, to be his guest in Washington for only the second state visit of his presidency, he was underlining that the two neighbours have become friends. Yet the timing of the trip, on May 19th, has turned out to be unfortunate. It comes amid a furious row on both sides of the border over a law approved in Arizona last month, which requires state police to check the immigration status of any “suspicious” individuals, apparently meaning Mexicans. And on May 14th a senior member of Mr Calderón’s conservative National Action Party (PAN), Diego Fernández de Cevallos, went missing from his ranch. It seems he had been abducted.

At least Mr Calderón and Mr Obama had plenty to talk about over dinner at the White House, even if the issues—migration and the drug “war”—are depressingly familiar. When Mr Calderón visited Washington shortly before Mr Obama’s inauguration, the two leaders proclaimed a new era of partnership. But relations between their two countries often seem stuck in a pattern of flare-ups and make-ups: over American protectionism, human-rights abuses by Mexico’s army, drug violence spilling over the border and the southward flows of guns and cash.

The Arizona law marks a new nadir. Mr Calderón called the measure “backward” and “discriminatory”. His government issued a travel alert, which will discourage citizens from visiting the state. The governors of Mexico’s border states said they would boycott a routine meeting with their American counterparts in Phoenix.

Will the state visit break the pattern? Diplomats from both countries note that their daily collaboration has improved. Co-operation on security is probably closer than it has ever been. American officials have begun searching southbound traffic and seizing illicit cargo. The Mérida initiative, a scheme under which the United States has offered Mexico modest anti-drug aid, has been extended and tweaked to emphasise strengthening institutions, such as the judiciary. Mexico has extradited suspected narcos in unprecedented numbers. Mr Obama shares Mr Calderón’s opposition to the Arizona law, calling it “misguided”. He would like to enact a comprehensive immigration reform.

As so often, the main obstacle to further progress is domestic politics in both countries. Many Americans in border states support cracking down on illegal migrants, and Mr Obama’s Democratic Party faces difficult mid-term elections in November. If Mexico protests too much, it risks galvanising the law’s backers, which could lead other states to copy Arizona’s policies.

Meanwhile, Mr Calderón’s party was routed in Mexico’s mid-terms last July, and will have to confront voters again in local elections this summer. He has almost no chance of obtaining the big policy reforms needed to address the country’s economic and security troubles.

Polls suggest that Mexicans are becoming sceptical of Mr Calderón’s insistence that he is beating the drug gangs. They may not be reassured by the recent leaking of an internal government estimate that 23,000 people have been killed in the violence since 2006. That is well above the 18,000 previously reckoned by the press.

The traffickers are getting ever more brazen. In March they gunned down three people with ties to the American consulate in Ciudad Juárez. Although several local politicians have been killed by the mafias, Mr Fernández de Cevallos is a far more prominent figure. He was a former presidential candidate, highly influential in the pan and close to Mexico’s security establishment. If he has indeed been murdered—or if he were to be held hostage for months—the pressure on Mr Calderón to rethink the intensity of his assault on the drug gangs might well grow. And so might the concern in Washington.

Costa Rica's new president

After Arias

May 6th 2010 | SAN JOSÉ
From The Economist print edition

Tax increases, trade deals and antidisestablishmentarianism

SHE may be the first presidenta in a long line of Costa Rican presidentes, but when Laura Chinchilla is sworn in on May 8th she is liable to disappoint advocates of women’s rights. She supports her country’s restrictions on abortion and the morning-after pill, and opposes other liberal causes such as gay marriage and the disestablishment of the church.

Instead, her uncuddly passion is fighting crime. Although Costa Rica is relatively safe, a recent increase in violence has led to panic. The outbreak has been caused by growing inequality (says the left) and the spread of drug-trafficking gangs (says the right). Mrs Chinchilla promises to fight on both fronts, strengthening the police and getting more youths into classrooms.

To do this will cost money and there isn’t much. The government collects just 14.8% of national income in taxes, and its deficit is 4% of GDP. Mrs Chinchilla says she hopes to increase revenues by taxing casinos and online gambling, which her officials hope would bring in an extra 1% of GDP. Deeper fiscal reforms will have to wait a year or two for the economy to regain strength.

Even then, to get her policies through, the new president will need to handle the legislature deftly. Mrs Chinchilla, of the centrist National Liberation Party, was elected with a thumping 47% of the vote in a crowded field of candidates, thanks in part to the popularity of her mentor and predecessor, Óscar Arias. Her party is the biggest in congress, but holds only 24 of the 57 seats.

She will be reliant on a pact with the right-wing Libertarian Movement, whose leader, Otto Guevara, won 21% of the vote in this year’s presidential election, compared with just 2% in 2002. “The door to negotiation has opened,” says the confident Mr Guevara, flanked by portraits of his free-market heroes, Friedrich Hayek and Milton Friedman. But in return for supporting the government, he wants tougher sentences for petty criminals and the publication on the internet of the names of all those who receive state benefits. He vows to filibuster tax increases.

Costa Rica is richer, more democratic and more stable than its Central American neighbours. But it faces a choice between a bigger state and more reliance on the market. That dilemma was symbolised by the battle to approve the Central American Free-Trade Agreement (CAFTA) with the United States. Mr Arias campaigned hard for the accord, but only narrowly won a referendum on it in 2007. He also signed similar agreements with China and Singapore. Central America has also concluded free-trade talks with the European Union.

“We are inserting [Costa Rica] into the world economy,” Mr Arias says. His chief opponent, Otton Solís, accuses him of selling the national interest short both with CAFTA, which obliges Costa Rica to open up the state-controlled telecoms and electricity industries, and in cuddling up to China. Mrs Chinchilla seems keen to change the subject. She plans closer ties in South America, and has toured Central America, patching up relations with awkward neighbours such as Nicaragua’s leftist autocrat, Daniel Ortega, with whom Mr Arias was publicly frustrated. One way and another, she may find her predecessor a hard act to follow.