I will admit that I am becoming somewhat obsessed with trying to get to the bottom of Mexico’s growth problem. I have been spending too many hours reading dozens of analyses and reviewing hundreds of slides by leading economists. The documents tend to dedicate most of their attention to the many things in Mexico that are not going well, and what the country can and should be doing better to help grow its economy. Of everything I read, two statistics in particular really caught my attention.
The first is regarding per capita productivity. I have written at length about Mexico’s productivity problem before. Having been in business for many years, one quickly learns about the importance of productivity. Increased productivity brings increased profits, which allows the business to invest more in its people. There is more money for employee training, salary increases, bonuses and hiring new employees. Without an increase in productivity, the opposite happens: Training is cut, salary increases don’t keep up with inflation, and employee headcount is often reduced. As Ken Griffin, the CEO of Citadel (a leading multinational hedge fund and financial services company), said just a few weeks ago at the Milken Conference in Los Angeles: “Productivity brings prosperity.”
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If Mexico is going to get out of its growth slump, grow its economy, and improve the prosperity of its citizens, it must figure out how to increase the productivity of its workforce. That hasn’t been happening, and in fact, the data shows that productivity has actually decreased over the past decade. Even worse, according to recent research presented by Santiago Levy, a very well-respected Mexican economist, at the BBVA conference in Mexico City, per capita productivity has not increased in Mexico for 25 years! For some perspective, in that same time period, per capita productivity has increased over 50% in the United States and 25% in Canada.
The second statistic is regarding per capita GDP levels of Mexican citizens. According to the government statistics agency INEGI, the average Mexican today has a lower per capita GDP (adjusted for inflation) than they did in 2018. Said differently, the amount of wealth per person in Mexico is lower than it was 7 years ago! For some perspective, per capita GDP levels in the United States have increased by about 10% in that same time period and have been relatively unchanged in Canada.
And hence, my attempt to better understand these two important trends. How can it be that Mexico is not becoming more productive or wealthier on a per person basis? That just doesn’t make sense to me and doesn’t seem to reflect the reality on the ground that I see. I must admit that I am struggling to understand it myself.
For example, even when adjusted for inflation, Mexico has more than doubled its minimum wage in the past 6 years. This is relevant as a significant number of people (much more than in the United States and Canada) actually make the minimum wage. Over that time period, the poverty rate in Mexico has gone from approximately 42% of the population to under 30% — bringing over 13 million people out of poverty. As a direct consequence, Mexico’s middle class grew by a similar number of people during that time period.
Everywhere I look, I see examples of Mexicans clearly having more spending power. Think of it this way: Mexico’s population has increased by about 10% over the past decade. So how did spending by Mexicans on big-ticket items change in the past decade? I did some research, and here are some important numbers and observations:
- The number of domestic light vehicle sales in Mexico has increased by roughly 13% over the past decade.
- The number of both domestic and international flights taken by Mexicans has increased over 40% in that time period.
- New housing inventory is being built throughout the country for buyers of all income levels.
- New private hospitals and private schools catering to Mexico’s middle and upper classes are being built nationwide.
So the lower class has had significant increases in inflation-adjusted wages, formal unemployment levels are near historic lows, and labor informality rates have been ticking down. Furthermore, here are signs throughout the country that point to increased spending power of the middle and upper classes. So why is it not showing up in the data?
Another growth statistic that seems to defy logic is regarding exports. As we reported earlier in the week, Mexico’s exports were up a whopping 32.6% in the month of April — the highest level of export revenue ever reported. The year-to-date export revenue growth rate through April was 21.8%. Given Mexico’s export-heavy economy, one would think that the economy is booming. But in fact, GDP in the first quarter of this year was down by 0.6%! How can that be?
To begin with, Mexico’s imports are also rapidly increasing by nearly 20%, meaning that the net growth to the economy of exports when subtracting imports is about 2%. Said differently, Mexico imports about 20 cents of goods to export a good worth 22 cents. That tells us that Mexico is actually providing relatively little “value add” to its exports.
So if the economy contracted in Q1, there are clearly other factors at play. International tourism arrival numbers are up double digits, but total spending is up only slightly. Remittances from abroad have had a small rebound but have been trending down. Government infrastructure spending, after the AMLO binge-spending boom, is down. Pemex continues to bleed money instead of contributing profits to the economy. Government outlays from social programs have been increasing significantly with little to no short term impact on productivity or growth.
It’s a confusing time. It’s hard to predict where we go from here. “Experts” are telling contrasting narratives on what the data tells us and what it means for the future of Mexico’s economy. As one would expect, many Mexican citizens, as well as many MND readers, are confused as to the true direction of things. The fast-moving and constantly evolving global macroeconomic and political environment is becoming increasingly complex to understand. Most people in the United States and Canada would not agree with where their countries are headed. Mexico is no exception. Stay tuned to MND and our new series of MND Intelligence articles as we try to navigate and understand this brave new world.
Travis Bembenek is the CEO of Mexico News Daily and has been living, working or playing in Mexico for nearly 30 years.
