Emerging Markets: Analyzing Mexico's GDP

Mexico is a classic example of a two-sided economy. While one part shines bright with a trillion-dollar gross domestic product, the other is gripped in darkness with more than 50% of its population living below the poverty line. Mexico has the second highest degree of socioeconomic disparity amongst the 34 member nations of the Organisation for Economic Co-operation and Development (OECD). The World Economic Forum says about Mexico, “the bottom 10% on the income rung disposes of 1.36% of the country’s resources, whereas the upper 10% dispose of almost 36%.”

The country has managed to move ahead despite poverty, corruption, income disparity and the presence of large informal economic sector. According to the International Monetary Fund (IMF) an informal economic sector is comprised of money-making "activities, both legal and illegal, that add up to trillions of dollars a year that take place 'off the books,' out of the gaze of taxmen and government statisticians." The World Bank categorizes Mexico as an “upper middle income” nation. Mexico’s $1.283 trillion gross domestic product (GDP) makes it the fifteenth largest economy in the world in terms of nominal gross domestic product while placing it on the eleventh spot in terms of purchasing power parity. Mexico is the second largest economy in Latin America after Brazil and is also an oil exporting nation. The graph below, from the World Bank, shows the annual percentage growth rate of GDP at market prices based on constant local currency.

As you can see in the graph above showing annual GDP growth in Mexico from 1980 to 2014, the Mexican economy has weathered many challenges over the years. In 2009, the GDP took a a massive negative dip. This was synchronized with the financial crisis of 2008-09 that affected almost all global economies. Mexico recovered and since 2010 has shown positive growth. However, the modest growth of the last two years (at 1.4% and 2.1% in 2013 and 2014, respectively) shows that the economy is struggling through some issues. Chief among these is the end of the so-called commodity super-cycle--the period from the late 1990s until the financial crisis of 2008 . During this time, most commodities experienced double-digit annual real price growth fuelled by rising demand from Brazil, Russia, India and China (sometimes called the BRIC economies), the United States and Eastern Europe. 

The composition of the gross domestic product is broadly split into the primary sector (agriculture), the secondary sector (industry), and the tertiary sector (services). According to 2014 data by the World Bank, agriculture accounted for 3.5% of the GDP, while industry and services accounted for 33.8% and 62.7% of the GDP, respectively.

Agriculture, which includes forestry, fishing, hunting, livestock production and cultivation of crops, contributes a mere 3.5% to Mexico’s GDP. The share has remained below 4% for the last 15 years. Nevertheless, agriculture, or the primary sector, plays a crucial role in indirect ways for the Mexican economy. The primary sector has helped in strengthening trade ties with United States as well as in alleviating poverty alleviation and creating jobs. Agriculture provides employment to about 14% of the nation’s labor force. However, in rural areas, more than half of the population might be involved in agricultural activities. Mexico’s agricultural sector can be split into two parts: 1) subsistence farming dependent on unskilled laborers in the rural areas and 2) highly-competitive export-oriented farming. While agricultural exports farms have helped to lift the earnings and standard of living of some employees, they have also intensified the income inequality among agricultural workers. The World Bank graph below shows the contribution of the agricultural sector since 1980 to Mexico's gross domestic product.

Mexico has a diverse topography with varying climates and geographical features. This helps produce of a wide variety of agricultural products. Mexico produces over 300 distinct varieties of farm products according to the data from SAGARPA (Mexico’s Secretariat of Agriculture, Livestock, Rural Development, Fisheries and Food).

Mexico’s production and consumption pattern point out the country’s dependence on food imports. Agricultural exports may have risen significantly over the years, but imports have risen even more. Mexico’s imports 10% more food than it exports.  Over the years, the export of beverages, fruits and vegetables has increased while the import of corn, wheat, meat and oil has also risen. According to the U.S. Foreign Agricultural Service (UNDA), “Under the North American Free Trade Agreement (NAFTA), Mexico and the U.S. have eliminated all tariffs and quantitative restrictions on agricultural goods”. This has substantially increased the volume of agricultural trade between the two nations. Mexico is the third largest destination for U.S. agricultural products. Mexico is also the second largest source of agricultural imports in the United States—the United States receives 80 percent of Mexico’s agricultural exports. (For related reading, see Top 3 Mexico ETFs.)

The industrial sector, which includes manufacturing, mining, oil and gas, has contributed 28-38% of Mexico’s GDP. The numbers have hovered around the same percentage for the past 35 years. From 2000 to 2014, industry averaged about 35% of Mexico’s GDP. Currently, industry employs about one-quarter of the nation’s labor force. The graph below shows the contribution of the industrial sector since 1980 to Mexico's gross domestic product based on World Bank data. 

The most well-known and developed industries in Mexico are the automotive, electronics and oil industries. Although it serves mainly as an assembly manufacturer, in recent years the automotive industry has advanced to conducting independent research and development. Some of the most well-known car manufacturers like General Motors Co (GM), Ford Motor Co (F), Chrysler Group LLC, BMW AG, Toyota Motor Corp (TM), Mercedes Benz (subsidiary of Daimler AG), Honda Motor LTD (HMC) and Volkswagen Group have set up operations in Mexico. 

Mexico also has the oil to power these cars. According to a report by the Congressional Reserve Service from July 2015, “Mexico is the world’s tenth largest producer of oil and holds approximately 11.1 billion barrels of oil reserves - the eighteenth largest in the world. Mexico may also have the eighth largest tight oil resources globally, about another 13 billion barrels. With these reserves, Mexico has the potential to halt its decade-long decline in oil production.” The state-owned Petroleos Mexicanos (PEMEX) has been solely responsible for exploration, research and sale of oil in Mexico. However, inefficient infrastructure, corruption and bureaucracy have been cited as reasons for the under performance of PEMEX in the last few years. This has led Mexico to open up the sector for foreign players for the first time in 80 years through an auction to encourage private investment and revive its oil and gas production. Cheaper energy will help general industry and manufacturing in Mexico by lowering input costs.

The electronics industry has also grown tremendously, especially with the Mexican government’s initiative Program for the Electronics and High Technology Industry Competitiveness (PCIEAT). The goal is to make Mexico a top exporter of electronic goods. Other than manufacturing, mining is also an important component of industrial activity and contributes 5-8% of the nation’s GDP. Mexico has the largest reserves of silver in the world and is rich in other natural resources like gold, zinc and copper.

In manufacturing, Mexico has the advantage of high labor productivity and free trade agreements with multiple nations. Rising wages in China also makes Mexico a more attractive destination for manufacturing. And natural gas prices (tied to the U.S.) are helping the country boost its manufacturing. Manufacturing currently contributes 18% to the country’s GDP. (Related reading, see The Reasons for the Mexican-U.S. Oil Swap.)

Through the twentieth century, Mexico transformed from an agrarian to an industrial economy. By the 1960s, manufacturing was at the center stage and had become the engine of growth. However, the services sector slowly started to assume a more important role and has now became a dominant force for the Mexican economy. The services sector, or tertiary sector, employs 61% of the nation’s labor force and contributes a significant 63% to the GDP. The graph below shows the contribution of services sector since 1980 to Mexico's gross domestic product based on the World Bank data. 

Financial service is one of the major components of Mexico’s services sector and has attracted the most foreign investment. The financial sector in Mexico is largely foreign owned. For example, Banamex is a part of Citigroup Inc. (C), Bancomer is a unit of Spain’s BBVA, SERFIN is part of Santander, Canada’s Scotiabank owns Inverlat and Bital operates as part of HSBC (HSBC). According to International Banker, “Of the 45 banks currently operating in the private sector, the two biggest institutions—Banamex and Bancomer—hold 38% of the industry’s total assets; while the top five hold a sizeable 72%.” Other than financial services, tourism is another important segment of the service industry. Mexico has huge scope for its tourism industry with 31 sites on UNESCO’s list of cultural or natural world heritage. (Related reading, see How Much Money Do You Need To Retire In Mexico?)

Mexico has greatly benefited from its international treaties of free trade, most notably the North American Free Trade Agreement (NAFTA). The treaty not only created the largest free trade zone in the world, but also lay a foundation for the growth and prosperity of the United States, Mexico and Canada. Since its introduction in 1994, the U.S. and Mexican economy has become increasingly integrated with strong trade and supply chain links. Today, Mexico has a large, diversified and strong economy with its oil sector, remittances from United States, exports, agriculture, mining, tourism and industrial activity playing the most significant roles in its growth. However, the country also suffers from problems like corruption, a huge informal economy, drug cartels and income inequality which need to be tackled to ensure sustainable growth.