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 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.
Industrial production in the first half of the year fell by 0.7%, compared with the same period of 2002, the finance ministry reported. The construction industry is doing satisfactorily, up 3.5%; mining, which includes the oil industry, was up by 2.8%, and utilities were up by 1.9%. The big problem is manufacturing: it contracted by 1.9%.
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%.
Employment
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. It has said that it will spend M$100m (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 is being frugal because it is fearful about the prospects for oil prices: Francisco Gil Díaz, the finance minister, said that the country could lose up to M$80bn because of lower oil prices in 2004. So far this year, Mexican oil has fetched 43% more than the US$18.35bn budgeted. This windfall has meant that the government could maintain public spending.
Gil Díaz said that overall, in the next three years, government revenues could be M$120bn shy of what they are now. These scary figures are clearly designed to encourage congress to approve fiscal and other reforms (such as ending government monopolies in the energy industry). Businessmen and the government argue that such reforms will reduce government spending and boost the economy and thus tax revenues.
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 is 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. That said, lower interest rates, especially the historically low rates currently on offer in Mexico, should encourage businesses to invest.
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.
Reforms
The government and its supporters argue that the investment position would be transformed if congress passes its reforms. The government wants to open up the energy and electricity industries to foreign investment. The first, tentative step in doing this is taking place this month. The government is inviting foreign energy companies to bid for multiple service contracts to develop the Burgos gas field in Tamaulipas. Unfortunately, the government has failed to clarify the legal position: the constitution is unclear whether natural gas exploration, development and production are activities reserved specifically for the state. Politicians opposed to the idea of opening up the gas industry to foreign companies are preparing to take the issue to the supreme court.
The Fox government's form on liberalisation has been poor. Its attempt to open up the electricity generation industry by the back door was thrown out by the supreme court. The government wanted to stretch the loophole through which private companies could commission their own power stations to serve their own factories provided they sold any surplus electricity to the state electricity company, CFE. The government's idea, thrown out by the supreme court, was to invert the concession: provided a token amount of power went to an industrial company, the rest could be sold to the CFE on long-term contracts. The supreme court ruled that this sort of change needed a new law, rather than a presidential decree.
President Fox says that he will still push for a greater private sector role in electricity generation. He hopes that he can cobble together a majority in congress to back this reform, despite the statement from Elba Esther Gordillo, the leader of the Partido Revolucionario Institucional in the lower chamber of congress, that infrastructure reform was not a priority for the PRI. The PRI is the biggest party in the new congress with 224 seats.
Fox and the government argue that the country will need to spend US$50bn on building new generating capacity over the next 10 years. The government is expecting, optimistically, the demand for power to increase by 65% over the next decade. Fox argues that the government cannot afford to make this investment on its own, though he stressed that he was not advocating the privatisation of the industry. Leonardo Rodríguez Alcaine, the leader of the Sindicato Unico de Trabajadores Eléctricos de la República Mexicana, said that he and his union were not opposed to reform but were firmly opposed to privatisation.
The latest economic growth figure, for the second quarter, was dismal. Growth in the quarter was just 0.2% (year-on-year). This means that growth in the first two-and-a-half years of President Fox's government has been just 1.3%. The big problem in the second quarter was industry: it was down by 3% (year-on-year) and manufacturing was down by 4.5%. This poor performance was offset by agriculture (up 4.9%) and services (up 1.3%).
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