The key task for congress in the current session, which opens on 1 September, will be to agree a budget. The debate on economic priorities is certain to be dominated by the need to create jobs. The biggest party in congress, the Partido Revolucionario Institucional, has already proposed its action plan to create more jobs.
The official statistical agency, Inegi, reported that urban unemployment in July was 3.52%. This was the highest rate for five years. The open unemployment rate is defined as people, over the age of 12, who are looking for work but have not had even one hour of paid employment in the past week. The unemployment black spot is Chihuahua City, in the north of the country, where the open unemployment rate is 6%. The areas with the lowest unemployment rates are Campeche, which is one of the centres for the offshore oil industry, and the tourist resorts of Cancún and Acapulco.
The labour ministry reported that 22,300 jobs in the formal sector of the economy went in the first half of July. This was the biggest fortnightly reduction seen in 2003. So far this year, there has been a loss of 42,662 in the number of formal (ie, tax- and pension-paying) jobs. Since President Fox took over in December 2000, 592,205 formal jobs have gone.
Labour analysts point out that the number of formal jobs lost is approaching the level of 1995, when 611,000 such jobs went. In 1995, the economy contracted by almost 7% as the currency collapsed after a botched devaluation at the end of 1994. The government's response to the rise in unemployment has been sluggish. Initially, it said that it would spend M$100m pesos (US$9.4m) on providing training for unemployed people. Labour economists sniff that it costs around M$30,000 to create a job for a year in the formal economy. The government has subsequently announced a programme that is 10 times bigger.
Services are by far the most important source of jobs in the economy, providing 38% of the total. Industry and construction provides 26%; retailing 23%, transport and communications 6%, and other 7%.
Far from being alarmed by the figures, the government is doing its best to ignore them. The economy minister, Fernando Canales Clariond, said, apparently in all seriousness, that the best families in Mexico did not mind about unemployment. He has, however, been made to understand that jobs are a major issue for most people. That Canales could be so inept is no surprise. He was a spectacularly disastrous Partido Acción Nacional governor of Nuevo León. His tenure was so calamitous that, even though the PAN passed him on to the federal government earlier this year, the party was still smashed in the recent elections in the state in July.
Canales is, belatedly, launching a pretty modest programme designed to create more jobs by the end of the year. He said that the government will target spending at those states which have seen the biggest rise in unemployment since 2000. The main element in the programme will be federal support for new businesses. Whether the money will be spent wisely and widely must be doubtful: the government is prepared to give up to M$4m (US$366,000) to any new businesses, yet the total budget for the whole national programme is just M$1.11bn.
Out of touch
Canales is not the only senior politician who appears to be badly out of touch. President Fox himself appears not to believe the story the official statistics tell. He claimed recently that employment in the construction industry was 6% higher than when he took office in December 2000. In fact, it is 17% lower. Fox then claimed that fixed investment was increasing: in fact, it is 7.4% lower than when he took office.
Finally, Fox claimed that the domestic market was strengthening: in fact, Inegi reported that retail sales are falling. In July they were down by 0.4%. This was the second consecutive month of year-on-year falls in retail sales. To be fair, the Antad falls in retail sales do not give the whole picture: Mexico's biggest retailer, Wal-Mart de México, which accounts for about a third of retail sales, saw a year-on-year rise of 3.5% in July. Indeed, even Antad notes that specialist store sales (ie, shops serving the richer classes) are doing well: they were up by 10.5% in July, year-on-year. The problem is that supermarkets and self-service stores account for about half the country's total retail sales.
To be fair, not all the economic indicators are pointing down: agriculture is doing well, jumping 10% year-on-year in June, and mining, which is dominated by the oil industry, was up 3.5% in the same month. Overall, the flash economic activity indicator for June, again from Inegi, found that activity was 1.6% greater than in June 2002. The problem, however, is that manufacturing is still contracting (down 3.1% year-on-year).
Too lonely at the top?
Fox's skewed view of what is happening in the economy is prompting him to clutch at straws. When businessmen told him that the government must do more for business, and lower energy prices, cut red tape and uphold the rule of law, Fox startled them by saying that none of these measures were necessary because of the rise of self-employment. He claimed that 1m people had become self-employed since he took office and that this sector was the most buoyant in the economy. Yet self-employment in Mexico is the last resort of the desperate, since the jobs do not carry benefits nor do they pay pensions.
The failure of the government's economic policy, and the possibility of lower oil prices next year, means that it has few cards to play in congress. Oil supplies 33% of the government's revenues. Higher-than-budgeted oil prices (the average has been US$25.7 a barrel this year rather than the budgeted US$18.35) has allowed the government to preserve its public works projects and thus keep the construction industry going. Construction in June was 2.4% up on June 2002.
It is noticeable that the two main opposition parties in congress, the Partido Revolucionario Institucional (PRI) and the Partido de la Revolución Democrática (PRD), are making the running on the agenda for the new congress. Fox's PAN is acting as a supplicant to them, rather than making the running. The highly controversial PRI leader in the lower chamber of congress, Elba Esther Gordillo, (who was the object of a dirty trick in late August when someone published authentic transcripts of her conversations with other politicians in which she bad-mouthed rivals and colleagues) seems to have a shaky command of the 224 priístas in congress. Despite this, she is making deals with the President about reforms. Whether she can deliver what she has promised must be doubtful.
Dismal GDP
The poor performance by the economy is weakening the government's bargaining position in congress. Although the economy is growing (feebly), this growth is not creating enough jobs. Around 1.2m Mexicans join the labour market each year. If oil prices were to weaken next year, as production from Iraq picks up, the Mexican government would find itself in a tight spot. The government has made a virtue of its fiscal orthodoxy: this year it is trying to keep the deficit down to 0.5% of GDP. It is only achieving this because of the oil price windfall.
The failure of the economy to generate jobs, or more worryingly, to stop jobs being lost, is alarming policymakers. The influential Centro de Estudios Económicos del Sector Privado (Ceesp) argues that the government must give a lead and push though structural reforms that will open up what remains of the public sector to foreign investment. The Ceesp noted that the consensus forecast for growth, compiled by the Banco de México, from 30 independent economists, had, by the end of July, fallen for 10 consecutive months. The consensus growth figure is now 2%. The government had been hoping for 3% growth this year. The government was hinting that it would cut its forecast in the Informe (State of the Union address) to match the Banco de México. The central bank is forecasting 2.1% growth in 2003.
The latest GDP figures, for the second quarter, show that the economy is at a standstill. Year-on-year growth was just 0.2%. This meant that during the first two-and-a-half years of the Fox administration the economy has managed net growth of just 1.3%. In the year before Fox took over, growth was 6.9%.
The worry is that industrial production dipped by 1.7% in June as manufacturing contracted by 3.1%. Non-maquiladora manufacturing was down by 3.4% in the month (compared with June 2002) while maquiladora manufacturing grew by 0.3%.
Investment
One reason why so few jobs have been created is that investment has tailed off. This is odd because under President Vicente Fox interest rates have fallen consistently, thanks to the prudent fiscal policy, and are now at the lowest level, both in nominal and real terms, for a generation.
The latest data, however, show that fixed investment is running at the same level as it was in 1999. In the first quarter, gross saving (which is the same as gross investment) was 19.2% of GDP. This was the lowest for years, and well down on the 28.8% registered in 1997. Domestic savings (ie, excluding changes in inventories) is now down to the dismal levels of 1995. Paradoxically, Mexico's use of foreign savings has also fallen and is now the lowest since 1997. Usually, internal and external savings act as seesaw: when one rises the other falls.
If spending on equipment and spare parts are excluded, capital spending is down to the levels of 1998. To be fair, capital spending is (and arguably should be) volatile. Companies invest heavily when they feel confident but slash capital spending to the bone when they think the economy is heading for tricky times.
The problem, economists say, is that although banks are ready to lend, they are not lending much to small companies. Over three-quarters (77%) of the small companies in the country which have credit are borrowing from non-bank credit providers such as suppliers.
Another problem is that the strength of the peso since 2000 has meant that manufacturers have found it more profitable to import their inputs rather than buy them locally. Indeed, some manufacturers have given up producing and become importers and agents for foreign manufacturers. It is noticeable that investment started to fall heavily at the beginning of 2001 when the peso strengthened: since then investment has been running at about 90% of what it had been in 2000.
Fobaproa
The country's commercial banks are bracing themselves for a US$5bn bill from the government over the controversial bank rescue in 1994 and 1995. The government, led by former central banker President Ernesto Zedillo, decided, without congressional approval, to rescue the banking system following the panic caused by the botched devaluation at the end of 1994. Banks were allowed to swap any loans they were doubtful about for (high-yielding) government bonds. The government has paid off some of these bonds, to the annoyance of the banks, and is coming under pressure from congress to refuse to pay or roll-over the principal on US$19bn worth of other loans because the banks had slipped in loans that were not eligible. The congressional auditor reckons that the four remaining banks (the others were liquidated) slipped in loans worth US$4.7bn.
The government argues that congress does not have the right to insist on this: the issue is now before the supreme court. The supreme court's record of refusing to give the executive the benefits of any constitutional doubts suggests that it is likely to find for congress rather than the government.
The big problem is that there has never been a proper, public audit of the loans that were transferred from the banks to the government. The banks say that the audit cannot be public because of client confidentiality: the politicians argue that the banks are sheltering behind this excuse because they have ripped off the taxpayer. In mid-August, the banks did say that they would welcome an audit of the US$90bn in loans transferred to the bank rescue agency (initially Fobaproa, now IPAB), though the terms on which the audit could take place met neither the demands of the politicians or IPAB itself.
End of preview - This article contains approximately 2193 words.
Subscribers: Log in now to read the full article
Not a Subscriber?
Choose from one of the following options
