An Economic Tie, in Sickness and in Health

President Vicente Fox has finally admitted that the Mexican economy is a victim of U.S. economic woes. Whereas Mexico’s growth was 6.9% in 2000, this year’s growth is expected to hover around 3%. This is not surprising. Remember the saying: “When the U.S. sneezes, the rest of the world gets a cold”? Well, Mexico definitely has a bad case of the sniffles.

Is this a crisis? Not yet. For now, the situation is not as bad as the 1994 Mexican meltdown, when the U.S. made available $20 billion for Mexico to borrow against. There has been no major devaluation, and the peso has regained its value against the dollar. With the announcement that Citibank will purchase Banamex, Mexico’s largest independent bank, the peso increased by 10% against the dollar.

The bad news is that the peso regaining value contributes to the problem. Simply stated, an overvalued peso prevents Mexican products from competing in the international markets, including the U.S. In the near future, some experts predict that there may be a devaluation of the peso to better reflect its true value. The question is, can this be done gradually, so not to kindle a future crisis?

A more worrisome warning sign on the Mexican economy is unemployment. In this year alone, more than 200,000 workers have been laid off. The Mexican border czar, Ernesto Ruffo Appel, stated that, with the increasing unemployment in southern Mexico, people would head toward the more prosperous states in northern Mexico. This could become an explosive situation in the border states because the maquila industries are facing hard times due to the economic troubles in the U.S.

Meanwhile, in the hopes of keeping the government budget deficit from skyrocketing, the Fox team has announced short-term austerity measures--cutting the federal budget across the board, reducing by 10% the government work force and canceling or postponing new construction and investments. And in April, Fox introduced an unpopular fiscal reform packet that includes a proposal to extend a 15% value-added tax to medicine, food and books, which now are exempt. Fox and the business sector are betting on this package as a way to collect more taxes and “accelerate development.” The package remains in Congress and some lawmakers have promised to oppose it, arguing that Fox’s remedy unfairly burdens the poor.

Effects of the Mexican slowdown will be felt in the U.S., and both nations need to anticipate a couple of trends in the next months:

* As Mexican unemployment rises, there will be a surge of workers heading north for jobs.

* Towns on both sides of the border will feel the crunch of the economic difficulties. On the U.S. side, wholesale and retail purchases by Mexicans will dramatically decrease. And on the Mexican side, the increased immigrant population will bring a surge of unemployment and place a strain on public services.

Mexico is the United States’ second-largest trading partner, after Canada. And the U.S. buys more than 85% of Mexico’s exports. Mexico’s recovery will depend on the performance of the U.S. economy. Both governments need programs that will address the potential surge of immigration toward the U.S. and economic packages targeting border towns. The North American Free Trade Agreement is like a marriage vow; the economies of both nations are stuck with each other, in sickness and in health.