The Mexican economy has grown robustly following the worst recession since the peso crisis of 1994. Gross domestic product (GDP) growth surged 5.4 percent in 2010, surpassing expectations. Though the pace of expansion slowed in early 2011 as the U.S. engine sputtered, forecasts call for a slight pickup in the second half. ; The recovery is the product of primarily three factors: first, a rebound in manufacturing exports, mostly to the U.S. but also to other markets; second, a strengthening internal market fueled by a healthy domestic financial sector; and third, significant capital inflows from advanced economies seeking higher rates of return in emerging markets such as Mexico. ; In spite of the recovery, the country faces significant challenges both in the short and long run, including the worst violence since the Mexican Revolution.Economic conditions - Mexico ; Exports ; Employment ; Investments, Foreign

Jesus Cañas

Robert W. Gilmer

Roberto Coronado

English

Research Papers in Economics

	 FEDERAL	RESERVE	BANK	OF	DALLAS	•	THIRD	QUARTER	2011 SouthwestEconomy 11
Mexico Rides Global Recovery  
but Still Faces Hurdles
By Jesus Cañas, Roberto Coronado and Robert W. Gilmer
The Mexican economy has grown robustly 
following the worst recession since the 
peso crisis of 1994. Gross domestic product 
(GDP) growth surged 5.4 percent in 2010, 
surpassing expectations. Though the pace 
of expansion slowed in early 2011 as the 
U.S. engine sputtered, forecasts call for a 
slight pickup in the second half.1
The recovery is the product of primari-
ly three factors: first, a rebound in manufac-
turing exports, mostly to the U.S. but also to 
other markets; second, a strengthening in-
ternal market fueled by a healthy domestic 
financial sector; and third, significant capital 
inflows from advanced economies seeking 
higher rates of return in emerging markets 
such as Mexico.
In spite of the recovery, the country 
faces significant challenges both in the short 
and long run, including the worst violence 
since the Mexican Revolution.
Export-Led Recovery
Mexico’s rebound began in summer 
2009, led by manufactured goods exports to 
the U.S., where the recession had ended that 
June. Factory production accounted for 82 
percent of Mexican exports in 2010, with oil 
representing 14 percent and mining and agri-
culture 4 percent. The U.S. took in 80 percent 
of all Mexican exports.2 
Mexico has increasingly looked glob-
ally, especially to fast-growing developing 
countries such as China, Brazil and Colombia, 
to offset its largest trading partner’s rela-
tively slow growth. Activity with the rest of 
the world jumped 152 percent from 2000 to 
2010, while exports to the U.S. expanded 28 
percent (Chart 1). Though non-U.S. exports 
accounted for just 20 percent of the Mexican 
total in 2010, sales to developing nations 
bounced back from the recession further and 
faster than exports to the U.S.
Domestic Demand Rises
Rapid revival of internal markets is an 
important part of Mexico’s recovery. Both 
bank lending and employment are driving 
personal consumption higher.
Damage to the domestic banking indus-
try was limited, and unlike in the U.S., there 
was no housing crisis or excessive consumer 
debt. These factors allowed the quick resto-
ration of broad-based bank lending that now 
exceeds precrisis levels (Chart 2). Mortgage 
lending barely paused during the global cri-
sis, while commercial lending slowed before 
expanding in 2010 and early 2011. 
Consumer lending, mostly involving 
credit cards, contracted significantly dur-
ing the crisis. It began to rebound in early 
2010 but remains roughly 20 percent below 
prerecession peaks. One positive: Lending 
for consumer durables has recovered to 
precrisis levels.
The job market quickly responded to 
the recovery. Formal employment—jobs with 
government protections and pensions—grew 
The central question is not 
if Mexico can expand, but 
whether it can do so fast 
enough to significantly 
improve living standards.
Chart 1
Mexico’s Non-U.S. Exports Take Off
Index, January 2000 = 100*
Exports to rest of world (20%)
Total exports
0
50
100
150
200
250
300
350
400
2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
Exports to U.S. (80%)
* Real, seasonally adjusted. 
NOTE: Percentages reflect share of Mexican exports.
SOURCES: Banco de México; authors’ calculations.	 FEDERAL	RESERVE	BANK	OF	DALLAS	•	THIRD	QUARTER	2011 SouthwestEconomy 12
Chart 3
Recovery Marked by Strong Job Growth
Percent  Index, January 2002 = 100*
–12
–10
–8
–6
–4
–2
0
2
4
6
8
10
2011 2010 2009 2008 2007
103
104
105
106
107
108
109
110
Average wage index*
Employment (annual change)
* Real.
SOURCES: Instituto Mexicano del Seguro Social; authors’ calculations.
Chart 2
Bank Lending Surpasses Precrisis Levels
Index, 2007 = 100*
Mortgage (17%)
40
60
80
100
120
140
160
2011 2010 2009 2008 2007 2006 2005
Commercial (22%)
Total
Consumer (19%)
* Real. 
NOTE: Percentages reflect share of lending; industrial, government and other lending categories not shown.
SOURCES: Banco de México; authors’ calculations.
by 700,000 positions in 2010, the best year 
since 1998. Mexico added another 280,000 
jobs from December 2010 through June, and 
formal-sector average wages neared precrisis 
levels (Chart 3).
Led by consumer lending and em-
ployment growth, real (inflation-adjusted) 
personal consumption moved upward be-
ginning in first quarter 2010, expanding at 
an average rate of 5 percent per quarter. 
Additionally, retail sales, which fell 7.8 per-
cent during the downturn, are now within 2 
percentage points of the prior peak.
Investment Resilient Despite Violence 
Mexico’s higher rates of return vis-
à-vis advanced economies have attracted 
significant flows of foreign direct and port-
folio investment.3 Portfolio investment such 
as publicly traded debt and stock reached 
$24 billion in 2010, surpassing foreign 
direct investment (FDI) for the first time 
since 1993. Partly as a result, the peso has 
appreciated 10 percent against the dollar 
since December 2009. 
The relatively strong currency helped 
mitigate inflation pressures from high com-
modity prices, allowing Banco de México 
to keep its benchmark lending rate at a 
record low 4.5 percent for two years. The 
accommodative monetary policy permit-
ted quick restoration of domestic business 
investment, with spending in construction 
and machinery and equipment growing 
for almost two years. A recent central bank 
survey of Mexican business executives 
indicated that the current environment is 
likely to encourage further investment in 
coming months. 
FDI has also contributed to the recov-
ery, bouncing back in 2010 after falling 
in 2008 and 2009. It totaled $19 billion 
in 2010, up 20 percent from the previous 
year, but is still 40 percent below 2007 
levels. Despite unprecedented, drug cartel-
related violence, particularly along the 
northern border, 42 percent of FDI was 
channeled to states adjacent to the U.S. 
Five of the most violent states, Baja Cali-
fornia, Chihuahua, Durango, Nuevo León 
and Tamaulipas, were among the country’s 
top 10 FDI recipients in 2010 (Chart 4). 
Maquiladoras, or offshore manufactur-
ing plants, have a strong presence along 
the U.S.–Mexico border and, consequently, 
are responsible for a significant share of 
FDI.4 More than 140,000 jobs have re-
turned in these export-oriented facilities 
along the border since December 2009. 
The auto and electronics sectors account 
for the majority of maquiladora activity in 
northern Mexico. After China joined the 
World Trade Organization in 2001, several 
maquiladoras closed as China’s lower wag-
es lured away production. However, recent 
anecdotal evidence suggests that some 
plants have returned to northern Mexico. 
There are several explanations for this 
emerging trend. First, higher energy prices 
raise transportation costs for products 
headed to the American market. Second, 
consistent Chinese worker pay increases 
have narrowed the wage gap between 
China and Mexico. Third, while the peso 
has recently appreciated against the dollar, 
China’s currency has retained its strength 
against its U.S. counterpart. Finally, anec-
dotal evidence suggests that China hasn’t 
consistently delivered the quality standards 
of Mexico, especially within the transporta-
tion and high-tech electronics sectors.	 FEDERAL	RESERVE	BANK	OF	DALLAS	•	THIRD	QUARTER	2011 SouthwestEconomy 13
Chart 4
Foreign Direct Investment Flowing Despite Violence
(Mexico’s top 10 state recipients in 2010)
Millions of dollars
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Durango Tamaulipas San Luis
Potosí
Querétaro Baja
California
Estado de
México
Jalisco Chihuahua Nuevo
León
Distrito
Federal
SOURCE: Secretaria de Economía.
Immediate Obstacles
Potential challenges confront the 
Mexican recovery, five of them in the near 
term.
Significantly, Mexico’s economy re-
mains coupled to the U.S., which still suf-
fers from uncomfortably slow growth even 
though demand for durable goods such 
as autos, home appliances, televisions and 
other consumer electronics led the Mexican 
manufacturing export rebound. The U.S. 
faces the combined effects of the Japanese 
earthquake on global manufacturing, the 
housing market’s inability to find a defini-
tive bottom and spillover from the Euro-
pean sovereign debt crisis. This soft patch 
has quickly extended into Mexico, where 
private-sector analysts have revised down 
their forecasts for 2011 GDP growth. 
Second, developing nations that buff-
ered Mexico from U.S. sluggishness now 
face their own threats. Rapid growth, capital 
inflows and higher commodity prices have 
bred inflation in several countries. As these 
nations tighten monetary policy and rein in 
bank lending to slow their economies, they 
risk overshooting and reducing growth too 
much. Conversely, policymakers may not be 
sufficiently vigilant in controlling inflation 
and risk harming development and longer-
term growth. A potential emerging-market 
cooldown would, in turn, slow Mexican 
exports.
Third, while it appears escalating vio-
lence hasn’t yet significantly slowed invest-
ment, it may take a toll on the economy in 
the near future, particularly among small 
businesses. Mexico’s central bank recently 
published its first regional economic re-
port.5 It highlights northern Mexico as the 
fastest-growing region and one where more 
than 68 percent of companies have been 
touched by organized crime. Extortion, 
which local media as well as anecdotal evi-
dence suggest has accelerated, has caused 
small-business closures.
Fourth, to the extent Mexico confronts 
the rising inflationary pressures noted 
in other emerging-market economies, its 
central bank will need to step in, possibly 
slowing the recovery and braking growth in 
the short run. The country’s comfortable fis-
cal position—a budget deficit of around 2.5 
percent of GDP and public debt at about 35 
percent of GDP—will facilitate central bank 
movement toward monetary tightening, if 
needed.
Fifth, capital flows could potentially 
reverse amid global investor fickleness, 
weakening the peso, driving up interest 
rates, depressing asset prices and reduc-
ing funding availability. Policymakers have 
two main weapons to combat capital flight: 
international reserves and an International 
Monetary Fund contingent credit line. By 
combining the two, Mexico’s central bank 
has around $200 billion in reserves to de-
fend the peso, if needed.
Longer-Term Challenges
The development of oil production, 
which is critical to government finances, 
and the implementation of structural eco-
nomic reforms lead the list of medium- to 
long-term challenges confronting Mexico.
The country is the world’s seventh-
largest oil producer, though output has de-
clined about 24 percent from its 2004 peak. 
Production is contracting twice as fast as 
expected at Cantarell, national oil company 
Pemex’s largest field. Oil exports account 
for about 40 percent of public revenue, 
with higher prices offsetting tumbling pro-
duction. Nevertheless, the combined effects 
of falling prices and accelerating oil output 
declines could significantly depress govern-
ment finances. Mexico may need to open 
its energy sector and expand production by 
allowing foreign capital.
Mexico successfully implemented sev-
eral economic reforms during the second 
half of the 1980s and the early 1990s, most 
notably privatization of some government 
enterprises, trade liberalization and deregu-
lation. Mexico has enjoyed macroeconomic 
stability, thanks largely to an independent 
central bank and fiscal discipline.6 However, 
a large informal sector (characterized by 
off-the-books businesses outside govern-
ment regulation), tax loopholes and weak 
competition in key industries such as tele-
communications must be addressed in a 
new round of structural reforms if Mexico 
is to achieve greater economic growth and, 
ultimately, a higher living standard.
Mexico’s informal sector is a drag on 
the country’s economic development. By 
some estimates, it accounts for as much as 
one-third of Mexico’s $1 trillion economy. 
Informal-sector firms lack access to credit 
and legal protections—limiting their abil-
ity to innovate and grow. Labor informality 
also suppresses the accumulation of human 
capital required for sustainable economic 
growth.7 Finally, the informal sector pays 
no taxes. Mexico’s tax revenue totals only 
20 percent of GDP. That figure drops to 12 
percent when oil revenues are excluded 
from the calculation.8 To secure medium-
term sustainability of public finances, fiscal 
reform must achieve a more efficient tax 
system less dependent on oil.
In addition to the challenge posed by 
a large informal sector, key industries lack 
meaningful competition. Mexico started 
privatization of its public sector during the 
’90s. Unfortunately, the effort was flawed 
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Mexico Rides Global Recovery but Still Faces Hurdles
(Continued from page 13)
and public monopolies were replaced by 
private ones. As a result, consumers still 
face expensive and outdated electricity, 
telecommunications and Internet services.9 
Enhancing competition and lowering mar-
ket entry barriers would promote a higher 
quality and greater variety of consumer-
related services.
Mexico joined the global recovery 
not only via the external sector but also 
through a healthy domestic market. The 
current U.S. slowdown is diminishing 
growth prospects. The central question is 
not if Mexico can expand, but whether it 
can do so fast enough to significantly im-
prove living standards. This can be accom-
plished by building on structural reforms 
principally aimed at reducing informality, 
promoting business competition and boost-
ing public finances.
Cañas is an associate economist at the Federal 
Reserve Bank of Dallas, Coronado is a senior busi-
ness economist in the Bank’s El Paso Branch and 
Gilmer is vice president in charge of the El Paso 
Branch.
Notes
The authors thank Pia Orrenius, Ed Skelton and Eduardo 
Saucedo for their comments. 
1 The Mexico GDP growth rate is calculated year over year. 
Measured quarter over quarter, Mexico GDP growth slowed 
to a 2.4 percent annual rate in first quarter 2011 but bounced 
back in the second quarter, growing at a 4.4 percent rate. Year 
over year, GDP growth slowed to a 3.3 percent rate in second 
quarter 2011 from 4.6 percent in the first quarter.
2 For more details behind the strong trade ties between both 
nations and the recent trade recovery, see “Trade Conference 
Explores U.S.–Mexico ‘Common Bonds,’” by Jesus Cañas, 
Roberto Coronado and Robert W. Gilmer, Federal Reserve 
Bank of Dallas Southwest Economy, First Quarter, 2011.
3 In 2010, Mexico was included in the World Government 
Bond Index, which further spurred capital inflows.
4 For more details on maquiladoras, see “Maquiladora 
Recovery: Lessons for the Future,” by Jesus Cañas, Roberto 
Coronado and Robert W. Gilmer, Federal Reserve Bank of 
Dallas Southwest Economy, no. 2, 2007, and “Maquiladora 
Industry: Past, Present and Future,” by Jesus Cañas and 
Roberto Coronado, Federal Reserve Bank of Dallas Business 
Frontier, no. 2, 2002.
5 The Banco de México report on the regional economy can be 
found at www.banxico.org.mx/publicaciones-y-discursos/
publicaciones/informes-periodicos/reportes-sobre-las-
economias-regionales/reportes-economias-regionales.html.
6 For more details, see comments by Banco de México’s 
Governor Agustin Carstens in “Mexico’s Economic Reforms 
Propel Postrecession Rebound,” Federal Reserve Bank of 
Dallas Southwest Economy, Second Quarter, 2011.
7 See La Era de la Productividad, by Carmen Pagés, 
Washington, D.C.: Inter-American Development Bank, 2010.
8 See “Economic Survey of Mexico 2011,” Organization for 
Economic Cooperation and Development, May 2011,  
www.oecd.org/document/34/0,3746,en_2649_34569_ 
47781730_1_1_1_1,00.htm. 
9 See No Growth Without Equity? Inequality, Interests, and 
Competition in Mexico, Santiago Levy and Michael Walton, 
ed., Washington, D.C.: World Bank, and Houndmills, U.K., 
and New York: Palgrave Macmillan.

Mexico rides global recovery but still faces hurdles

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Mexico rides global recovery but still faces hurdles

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