Mexico has achieved a remarkable feat in the global economy, rising to the 12th place in terms of nominal GDP and purchasing power parity according to the International Monetary Fund (IMF). The country’s economy grew by 1.1% in the first quarter of 2023, surpassing analysts’ expectations and showing resilience amid the COVID-19 pandemic and the war in Ukraine.
Mexico is the second largest economy in Latin America, after Brazil, and has a population of almost 130 million. The country has a rich cultural history and diversity, and abundant natural resources. It also has solid macroeconomic institutions, is open to trade, and has a diversified manufacturing base connected to global value chains.
Mexico’s economy has outperformed its peers in the region, as it has recovered from the COVID-19 crisis faster and stronger than expected. The country’s GDP grew by 3.1% in 2022, after a bounce back of 4.7% in 2021, and a 8.0% fall in 2020. The growth was driven by a rebound in domestic demand, especially consumption, supported by government transfers and remittances from abroad. Mexico also benefited from the dynamism of its main trading partner, the United States, which accounts for about 80% of its exports.
Mexico’s economic performance has earned it recognition from international organizations and media outlets. The World Bank praised the country’s development solutions adapted to its context, and its integral package of financial, knowledge and convening services. The British magazine The Economist ranked Mexico sixth on a list of “2022’s Unlikely Winners”, an accolade boasted of repeatedly by President López Obrador. The Morena Party leader Mario Delgado celebrated the success of the “superpeso” against the U.S. dollar, which reached its strongest value since 2018.
Mexico Faces Structural Challenges and Risks
Despite its impressive achievements, Mexico faces several structural challenges and risks that could limit its potential for sustainable and inclusive growth. Some of these challenges include:
- Limited access to finance: Mexico has one of the lowest levels of credit to the private sector as a share of GDP in the region, which hampers investment and productivity. The country also suffers from a high degree of informality, which reduces tax revenues and social protection.
- Insecurity and violence: Mexico ranks among the most violent countries in the world, with high rates of homicide, extortion, kidnapping, and organized crime. The insecurity affects the quality of life of the population, the business environment, and the rule of law.
- Regulatory burdens and infrastructure bottlenecks: Mexico ranks low in the ease of doing business indicators, especially in areas such as starting a business, enforcing contracts, and dealing with construction permits. The country also needs to improve its infrastructure quality and coverage, especially in transport, energy, and telecommunications.
- High inflation and external shocks: Mexico has faced a surge in inflation, which reached 9.5% in March 2023, well above the central bank’s target of 3%. The high inflation has eroded the purchasing power of consumers and prompted the Bank of Mexico (Banxico) to raise its interest rate to 9.25%, the highest in the region. Mexico is also vulnerable to external shocks, such as the war in Ukraine, which could affect the global economy and trade.
Mexico Needs to Address its Constraints and Seize its Opportunities
To accelerate its economic growth and poverty reduction over the medium term, Mexico needs to address its constraints and seize its opportunities. Some of the actions that the country could take include:
- Expanding access to finance and formalizing the economy: Mexico could implement policies and reforms to increase the availability and affordability of credit for small and medium enterprises, as well as for households. The country could also promote the formalization of workers and businesses, by simplifying the tax system, reducing the costs of compliance, and enhancing the benefits of formality.
- Strengthening security and the rule of law: Mexico could enhance its efforts to combat crime and violence, by improving the coordination and capacity of its security and justice institutions, strengthening the prevention and social reintegration programs, and addressing the root causes of insecurity, such as inequality, corruption, and impunity.
- Improving the business environment and the infrastructure: Mexico could streamline its regulations and procedures to facilitate the entry and operation of firms, especially in sectors with high potential for growth and innovation. The country could also invest more and better in its infrastructure, by prioritizing the projects with the highest social and economic returns, and leveraging the private sector participation and financing.
- Controlling inflation and diversifying the economy: Mexico could adopt a prudent and credible fiscal and monetary policy to anchor inflation expectations and preserve macroeconomic stability. The country could also diversify its economy, by expanding its trade and investment relations with other regions and countries, and by developing new and emerging sectors, such as green and digital economy.
Mexico has shown that it has the capacity and the will to overcome the challenges and risks that it faces, and to achieve its aspirations of becoming a more prosperous, inclusive, and sustainable country. By addressing its structural constraints and seizing its opportunities, Mexico could consolidate its position as one of the leading economies in the world.
