Mexico

This is a guest post by Stephanie Leutert, a research associate here at the Council on Foreign Relations, who works with me in the Latin America Studies program. Secretary John Kerry and Vice President Joe Biden recently announced the new State Department directed 100,000 Strong in the Americas Innovation Fund. It ambitiously aims to have 100,000 U.S. students in Latin America and 100,000 Latin American students in the United States by 2020. This initiative builds on the increasing interest in the region; during the 2011-2012 school year over 44,000 U.S. students headed south. Still these growing numbers hide the changing geographic interests, including the increasing popularity of Brazil and Costa Rica and the steep declines in semesters abroad in Mexico. At the turn of the twenty-first century, over a third of Americans studying in Latin America went to Mexico, with over 8,000 students enrolled in classes in Mexico City, Monterrey, Puebla, and the country’s many other cities. Then the fifth most popular country in the world for U.S. study abroad, it placed well ahead of other Latin American countries, as well as popular destinations such as Germany, Ireland, and Australia. Today fewer than 4,000 Americans venture to their southern neighbor to study, a number surpassed by regional peers Costa Rica, Argentina, and Brazil, and on par with much smaller countries such as Ecuador. One reason for students’ disinterest is the well-documented violence in many parts of the country, as shown in the graph below. Gruesome media headlines paired with travel advisories from the U.S. State Department led many universities to shutter their Mexico-based programs and even restrict professors’ academic research. Many commentators often note the economic and social costs of Mexico’s violence and crime, including shaving off over a percentage point of GDP growth, holding back micro-enterprises, and making more Mexicans feel unsafe walking alone at night in their cities. The decline in the number of American students choosing to study in Mexico adds yet another layer to the negative effects. Beyond the direct economic losses that come when thousands of foreign students forego studying in Mexican universities—with effects for job creation and local economies—both Mexican and American students also lose out on less tangible benefits. Foreign exchange programs broaden both basic knowledge of places as well as mutual understanding (one of the primary goals of the 100,000 Strong program). For Mexico, this avenue for promoting people-to-people bilateral ties is just one more casualty of the violence.

Yesterday I spoke with A Martínez from KPCC’s “Take Two” about Secretary Pritzker’s trip to Mexico and the country’s outlook more broadly. You can listen in here. I look forward to your hearing your thoughts on Twitter, Facebook, or in the comments section.

Alan Berube and Joseph Parilla at the Brookings Institution recently published a report on the impressive amount of North American regional trade (with a great interactive that traces exports and imports across the continent). U.S. cities send and receive over $500 billion in goods from Mexican and Canadian cities—out of a total $1.1 trillion in intra-regional trade in 2012. The vast majority (some 69 percent) of this trade is in advanced industries (aerospace, automotive, electronics, machinery, pharmaceuticals, and precision instruments), an economic bright spot in the recovering U.S. economy. Here is a quick look at just how vital the United States’ regional trading ties are for its economic strength and competitiveness. When many Americans think of U.S.-Mexico and U.S.-Canada trade, border states are often what come to mind first. While it is true that Texas, Michigan, and California pulled in some of the biggest trading numbers (with combined regional exports and imports of $463 billion), this is only part of the story. Some forty-one U.S. states have Mexico or Canada as their number one export destination, stretching far across the American heartland (all of the green states in the map below) and supporting some 14 million jobs. Only the nine yellow states have a primary export destination somewhere outside of the region. U.S. Census Bureau Much of the trade moves along the region’s robust supply chains, which stretch from Querétaro to Detroit to Windsor. On average 40 percent of the value of U.S. imports from Mexico and 25 percent of those from Canada actually come from the United States, compared to imports from the rest of the world where U.S. input is closer to 4 percent. This means that of the $277 billion in goods that the United States imported from Mexico in 2012, some $111 billion of the value was created in the United States. This is compared to U.S. imports from China where—despite being a much larger sum of $425 billion—only $17 billion worth of value was made in the United States. In addition, data from the World Trade Organization database reveals that 72 percent of automotive part exports, 71 percent of clothing exports, 55 percent of textile exports, and 58 percent of telecommunications equipment exports stay in the region—meaning the three countries are both making and consuming these products together. Still, this intra-regional trade as a percent of total trade has been on the decline over the past decade. Though absolute numbers are growing, they are growing more slowly than trade with the rest of the world—reflecting both internal factors, such as U.S. border inefficiencies and higher security costs and external issues, including China’s emergence as a major trading player and Canada and Mexico’s trade diversification. As we look forward, efforts to reverse this trend and re-strengthen continental supply chains will be crucial for pushing the United States’ economy back on its feet, as these numbers show how important the United States neighbors are and will be for its prosperity.

Tacked onto the bipartisan budget, the U.S. Congress passed the long-awaited Transboundary Hydrocarbon Agreement with Mexico. Signed in 2012 by then Secretary of State Hillary Clinton and Foreign Minister Patricia Espinosa, it lays the groundwork for U.S. and Mexican cooperation across some 1.5 million acres of shared oil and natural gas resources in the Gulf of Mexico. The agreement creates guidelines for determining the scope of the deep-water fields and how companies acting on behalf of each country can work together to access these reserves, and creates mechanisms for dispute resolution and for safety and environmental protection. The treaty’s ratification comes right on the heels of Mexico’s historic energy reform—which had been another stumbling block to the exploration and production of natural resources in the Gulf, as Pemex lacks the capacity and expertise to exploit deep-water finds. Though the secondary legislation is still to be defined, the combination of these two changes opens up the real possibility of exploration and production in the foreseeable future. Still, the Transboundary Hydrocarbon Agreement isn’t a game-changer for U.S. oil production—given the enormous investments necessary for deep-water exploration and development and the fact that opening these proven and possible reserves adds less than a percentage point to total U.S. reserves. What the agreement does represent, however, is a step forward in bilateral relations, showing that the two North American neighbors can work together on what has long been a politically sensitive topic.

President Enrique Peña Nieto’s administration finished off an ambitious first-year reform agenda this past week, pushing historic energy and political reforms through Mexico’s Congress. These reforms—and the earlier labor, education, fiscal, and telecommunication reforms—aim to boost economic growth (which slowed to 1 percent over the past year) and entice foreign investment in once closed-off sectors. Here is a piece that I wrote for the January/February 2014 edition of Foreign Affairs on why, especially given the recent changes, Mexico is a hot market that investors will want to watch. Just over a year ago, as President Enrique Peña Nieto started his administration, the domestic and international press were touting “Mexico’s moment” and the rise of “the Aztec tiger.” Now, the naysayers have returned. Their pessimism stems in part from disappointing economic results: Mexico’s GDP growth has fallen, from nearly four percent in 2012 to around an estimated one percent in 2013. The negativity also reflects the impatience of pundits and markets, as the economic dividends from Peña Nieto’s ambitious economic reform agenda have yet to appear. Today’s vocal disappointment discounts the positive changes Mexico has undergone and continues to make. Over the last three decades, Mexico has made the transition from a commodity- and agricultural-based economy to one dominated by manufacturing and services. It is also finally moving forward on a host of overdue domestic reforms. Internationally, the country is firmly situated within North American supply chains, augmenting its global competitiveness. And these advantages should only grow with Mexico’s involvement in both the Trans-Pacific Partnership (TPP) and the Pacific Alliance, two of the most dynamic free-trade negotiations of this century. If Mexico is able to make its legislative changes stick and harness its geostrategic potential, the country will excel over the next five years, benefiting its people and making it a good bet for investors. You can read the rest of the article here.

Listening to the fireworks for the Virgen de Guadalupe last night from my hotel room in Mexico City, one could have mistaken them for the tumult occurring at the same time in the House of Representatives. Right before midnight, the representatives passed, by a two-thirds majority, the principles of energy reform (following the Senate’s approval earlier in the day). Today they hammered out the final details, making a historic change to Mexico’s energy sector, a political sacred cow, by opening it up to the broader world of investment. The constitutional reforms still need to be approved by seventeen of Mexico’s thirty-two state Congresses, but with twenty-five PRI or PAN governors this seems very likely to occur smoothly. The reform does many things: It establishes different types of possible contracts: service contracts, profit sharing, production sharing, and licensing (where a firm would pay taxes and royalties in exchange for exploration and drilling rights). It allows companies to post reserves, though they must specify that the oil and gas belongs to Mexico. It creates a sovereign fund, the Mexican Petroleum Fund, which will manage the country’s oil revenues. The Fund will allocate the appropriate amount of money to cover the national budget and invest the rest in long term savings. The Bank of Mexico will oversee the fund. The reform calls for increased transparency and mechanisms to reduce corruption. It also removes Pemex union members from the state-owned company’s board, reducing their role (and power). It splits the remaining ten board members between five government appointees and five independent consultants. The changes are profound, even if the reform stops short of giving private companies ownership over subsoil oil (e.g. directly booking reserves). What happens now will largely depend on the secondary legislation—which is yet to be written (or at least introduced and passed). These rules, for example, will determine which oil and gas blocs will be developed and under what terms, and will be presented next year. If implemented, energy experts predict that oil production would steadily increase in the coming years, and natural gas (given Mexico’s significant reserves) could expand rapidly. This increase in production would likely benefit the Mexican Treasury, as even though taxes collected might be lower, the base will surely be larger. But it will also benefit the Mexican people, lowering consumer gas prices, increasing stability of supply, and making Mexico a more attractive place for foreign investment dollars.

I had the great honor of participating in a fundraiser in El Paso last week—organized by the Somos Fund—to support after school programs and scholarships for kids affected by violence in Ciudad Juárez. It has now been almost four years since the Villas de Salvárcar massacre, where gunmen burst into a birthday party and gunned down fifteen young people in what was a case of horrifying mistaken identity. Since then, the families have channeled their grief into improving Ciudad Juárez for the many youths still living there, and the funds raised at the event will go toward supporting their work. (You can also donate here by typing Somos Fund under the project name). Here is a video of the evening. The event began with a discussion between the moderator, Angela Kocherga, a border journalist for Belo Television, Ricardo Ainslie, an educational psychology professor at the University of Texas at Austin, Alfredo Corchado, the Mexico Bureau Chief at the Dallas Morning News, and myself, on how and why we were all drawn to Ciudad Juárez during the process of writing our recent books. To me, the most moving part of the night were the words (in Spanish) of two people whose worlds changed the day of the massacre. The first is Fernando Gallegos, the coach of the football team on which two of the slain boys played (you can hear him at the 41:30 mark). The second is Maria Guadalupe Dávila Pérez, the mother of Rodrigo Cadena Dávila, one of the boys who was killed that night (at the 49:20 mark). Their courage and even hope in the face of such a terrible tragedy is truly inspiring. And their sustained focus on the city’s surviving youth is already beginning to change their community, with Gallegos’s football team winning the 2013 championship against the much better funded, larger Monterrey Tec team. As we in the United States begin our holiday season, please remember those that are trying to make a difference against such odds. Happy Thanksgiving!

This past Sunday I was in Austin, Texas at the Texas Book Festival. I had the honor of moderating a panel about two great books on Mexico, Ricardo Ainslie’s The Fight to Save Juárez – Life in the Heart of Mexico’s Drug War and Alfredo Corchado’s Midnight in Mexico: A Reporter’s Journey Through a Country’s Descent into Darkness. You can watch a video of our conversation here (starting at 5:15), courtesy of C-SPAN2.

Vianovo, a strategy consultancy, recently released a poll looking at Mexican impressions of the Peña Nieto government’s economic reform agenda. Interviewing 1,000 people in late August, they found that education reform is the public’s biggest priority—likely due to the teachers’ union protests (which snarled traffic around the capital for weeks) and to the heavy press as the Congress debated secondary legislation (passed in early September). Coming in second is energy reform, with nearly a fourth of Mexicans considering it to be the most important issue at the moment (electoral, tax, and telecommunication reforms all garnered less than 10 percent of responses). Though the poll finds that not that many Mexicans have seen or read much about the current energy initiatives in front of Congress (just 50 percent), a slight majority are in favor of the reform. Woodrow Wilson Center, Mexico Institute The poll shows that while Mexicans are open to reform, they are wary of privatization. This finding dovetails with the more extensive research on political behavior done by Andy Baker, a professor of political science at the University of Colorado at Boulder. In his great book, The Market and the Masses in Latin America: Policy Reform and Consumption in Liberalizing Economies, Baker shows that while Latin Americans are generally in favor of economic opening (feeling the benefits of lower priced, higher quality goods), they are more wary of privatization—as in many cases it raised the price of services such as electricity and telecommunications. Mexico’s government is arguing that one of the most important benefits of the reform will be lowering consumer prices of gasoline and electricity (as well as increasing jobs). This may well happen (both the government and independent analysts estimate that the reform could boost the economy by some 1.5 to 2 percent a year, increasing GDP growth by some 50 percent). But to gain greater support, the government will have to better explain why private investment in energy will differ from that of other sectors, where costs did not recede.

One of the potentially biggest economic initiatives for Obama’s second term is the Trans-Pacific Partnership (TPP). Started some seven years ago by four Pacific nations—Brunei Darussalam, Chile, New Zealand, and Singapore—to spur trade by eliminating tariffs, the agreement has now expanded to encompass twelve nations, including the United States, Australia, Canada, Japan, Malaysia, Mexico, Peru, and Vietnam. The block’s combined GDP reaches some $28 trillion, with member countries conducting roughly a third of all global trade. The TPP aspires to move beyond the current free trade agreements between many of these nations. When working groups meet this weekend in Washington D.C. tariffs will be the main focus. But also on the docket are intellectual property rights, services, foreign investment, rules of origin, competition, labor, and environmental standards, and these and future discussions will touch on unprecedented topics such as regulatory coherence, e-commerce, small- and medium-sized businesses, and state owned enterprises. Not only does the TPP cover an ambitious agenda, but its time-frame is impressive, as representatives hope to finish the discussions by the end of the year. Challenges abound though, given myriad issues and agendas. Even if a draft is agreed upon, it will then have to get through various congresses to be ratified. But if successful, it could be a global game changer. The agreement would tie together a combination of mature and developing economies, of Asian and Western Hemisphere nations, likely transforming trade flows, supply chains, foreign investment, and global trade regulations. There is the potential for igniting a new global dynamism after years of trade stagnation. For Latin America, the TPP could mean developing and expanding economic ties and importantly supply chains from Chile up through Canada. Binding themselves to one another, these Western Hemisphere nations can strengthen their global position and influence.

In 2012 Latin America received its largest amount of foreign direct investment (FDI) to date: $170 billion or 12 percent of global flows. These flows went into a range of sectors from mining and petroleum production to high skilled and low skilled manufacturing to telecommunications and electricity. In absolute terms Brazil came out the winner—receiving some $65 billion, followed by Chile, Colombia, and Mexico—totaling roughly $55 billion combined. Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of preliminary figures and official estimates at 25 April March 2013. But in measuring the effects of FDI on the host economy, the receiving sector or industry can be as important as the sheer dollar amount. A big difference can be seen in job creation. Investments in construction, commerce, and certain types of manufacturing in Latin America create the most jobs, on average some seven for every US$1 million invested. Investment in engineering intensive manufacturing (such as the automobile industry) and the food industry creates a lesser but still respectable four jobs for every US$1 million invested. The employment benefits of mining and petroleum FDI, however, are much lower, creating just one job for every US$2 million invested on average. On these measures, the biggest winners are the Caribbean (group one in the chart below), where the concentration of investment in tourism and call centers created over seventy jobs for every US$1 million invested. Mexico and Central America come next, due to the heavy investment in manufacturing. In South America much of the foreign investment went into mining and petroleum, diminishing its benefits for the broader population. This suggests, for instance, that though Colombia received a fifth more in FDI in 2012 than Mexico, it created some 9,000 (15 percent) fewer jobs, as Colombia’s investment went largely into natural resources while Mexico’s headed to its manufacturing sector. Source: Economic Commission for Latin America and the Caribbean (ECLAC), based on FDI markets investment announcements. There are other benefits of course, many harder to quantify. One is the “quality” of the jobs created. Most scholars agree that foreign direct investment creates “good jobs” for both workers and host countries. Studies show that foreign firms pay on average 10 to 70 percent more than domestically owned firms (especially true in developing countries and for highly educated workers). And foreign-owned firms are more likely to provide training for employees compared to their domestic counterparts. Surveys show that multinational companies spend some 28 percent of their R&D budgets abroad, beefing up technology and skills along the way. And foreign-owned firms on average are more productive. Though largely benefiting the companies and their bottom lines, there are channels through which this can “spill over” into the domestic market—as these business link up with others in the economy through supply chains and as trained workers switch jobs (one study shows workers trained by foreign firms contribute 20 percent more to the productivity of their new plant than those who lacked the multinational training). Foreign direct investment is not an unencumbered good—stories abound about foreign-owned companies flouting domestic laws, exploiting labor, and degrading the environment. But it remains an important and sought after tool for economic expansion. What these studies show is that when focusing on economic development more broadly, not all money is created equal.

As everyone heads back to school this week, here are the teaching notes for my new book, Two Nations Indivisible: Mexico, the United States, and the Road Ahead. You can check them out here. Happy reading!

My CFR colleague Julia Sweig just published a policy innovation memorandum outlining “A Strategy to Reduce Gun Trafficking and Violence in the Americas,” where she argues that lax U.S. gun laws contribute to Latin America’s high rates of gun-related homicide and violence. The recommendations take domestic political challenges into consideration and offer a path for the Obama administration—in line with the Second Amendment—to both diminish the flow of guns and ammo to the south and to enhance the United States’ diplomatic standing in the region. You can read the full report here.  

Follow Mexico’s headlines and you will see an uptick in high-level corruption cases. In this piece for Huffington Post, I discuss how Mexico has gotten better at exposing corruption but also why it still falls short in prosecuting the accused and convicting perpetrators of these types of crimes. To read Mexico’s papers recently has been a study in corruption. The exposés involve every political party and level of government. Governors—including those from the states of Tabasco, Coahuila, Aguascalientes, Tamaulipas, Baja California Sur, Chiapas, and Quintana Roo—have been some of the most covered offenders, with allegations involving missing public funds (reaching the hundreds of millions of dollars), collaboration with drug traffickers, murder, and money laundering. Public figures once considered untouchable, such as the former head of Mexico’s Teachers Union, Elba Esther Gordillo, were publicly pilloried (as well as arrested). Corruption in Mexico is of course nothing new, but it is hard to remember a time when there were so many cases unveiled in such close temporal proximity. The influx has led many casual observers to bemoan an increase in corruption, and indeed Mexico’s perceived corruption ranking by Transparency International fell from 57 in 2002 to 105 in 2012). But look beyond the headlines, and it would be hard to argue that Mexico is that much more corrupt today than in decades past. The more likely explanation is that what has changed is Mexico’s ability to expose bad behavior. One of the biggest changes has occurred in the press. During the PRI years the major media outlets were largely propaganda arms for the ruling party, and if displeased with reporting, the government could literally stop the presses (since it held the monopoly on newsprint). Since then, Mexico’s press has come a long way. Led by publications such as El Universal, Reforma, and La Jornada, it has become fiercely independent and dedicated to holding Mexico’s leaders accountable. Also important for exposing corruption are the tools this now free press can brandish. One of the most important has been the 2002 Transparency Act (which enables reporters and citizens more generally to petition the government for information on public affairs), helping interested parties obtain documents revealing misbehavior. And alongside reporters are an increasing number of watchdog and other civil society groups pushing for transparency. The alternation of power at all governmental levels has also helped expose corruption. In the past, new (always PRI) officials would cover for their predecessors and expect those coming after to do the same. But with fierce electoral competition, incoming governments, especially those from opposing political parties, have a strong incentive to publicize the misdeeds (and particularly the overspending) of previous administrations. Technological changes too have made revelations of corruption and abuse of power more common. Social media has jumped in—providing many corrupt officials with their own mocking hashtags. For instance Andrea Benítez (the daughter of Humberto Benítez, the head of Mexico’s Office for Consumer Protection) became #LadyProfeco when she threatened to shut down a trendy bistro in Mexico City, after being denied her preferred table. Diners filmed and live tweeted the arrival of Consumer Protection officials, forcing the government to eventually fire her father and suspend several other officials. Perhaps Mexico’s biggest challenge is the follow through on these revelations. Mexico’s Attorney General’s office has won few convictions on corruption charges. And in some of the highest profile cases, such as that against Tijuana’s former mayor Jorge Hank Rhon, the prosecutor’s bungling achieved something many thought hard to do—making the PRI scion look like a victim. Until Mexico is able to do more than name and shame corrupt public officials, the incentives for them to desist from favoring their friends and lining their pockets remain limited. The current government and Attorney General’s office now have numerous potential cases from which to choose—all opportunities to set an example and begin changing the current dynamic by holding elected officials accountable.