Steering the best course: With several competitive advantages, the government is working to tackle challenges to growth

Mexico is the second-largest economy in Latin America, a manufacturing giant that gets more competitive every year, a country with substantial natural resources and one of the most open economies in the world. It also suffers from a host of economic problems that contributed to growth nearly grinding to a halt in 2013, such as informal employment, inadequate government revenues and deficient domestic supply chains.

The current government of President Enrique Peña Nieto of the centre-left Institutional Revolutionary Party has set about to address some of these issues and improve Mexico’s competitiveness through a series of ambitious reforms. These reforms, based on a multiparty agreement known as the Pact for Mexico, address a number of issues, ranging from teachers’ unions and telecoms monopolies to tax laws regarding the state’s monopoly in the oil industry. These reforms are a remarkable legislative achievement that has the potential to modernise some of Mexico’s most feeble institutions and, in the process, the country’s economy. The reforms are liberal, pro-business and designed with the primary goal of enhancing competitiveness. What remains to be seen is how well they will be implemented and whether they can drive Mexico to consistent growth.

The Recession

Mexico suffered one of the worst downturns in the world following the financial crisis of 2008-09. Manufacturing and oil underpin the economy and both were hit hard by the global recession. Unlike previous periods, financial difficulties in the country’s northern neighbour had a greater affect as the North American Free Trade Agreement (NAFTA) meant greater economic dependence on the US, where low consumer spending had a negative affect on Mexican exports. Additionally, falling oil prices and several other factors saw Mexico plunge into deep recession in 2009, with GDP contracting almost 5%. In 2010 the economy started to rebound, growing 5.1% and by around 4% over the next two years.

Weak Growth

This steady recovery was interrupted in 2013 by growth of just 1.1%, a figure that fell far short of official projections of 3.1% at the beginning of that year. Weak exports and a contraction in the construction industry were the two main culprits of this slowdown. Overall export growth slowed from 6.1% in 2012 to 2.6% in 2013, shaving about three-quarters of a percentage point from GDP growth. This decelerated growth in exports was in large part due to the fall in oil prices in 2012, which dragged down the value of one of Mexico’s most important goods. Oil exports in 2013 were down 6.2% compared to 2012.

Construction also contracted, declining 4.5% in the first nine months of the year before making a modest recovery in the fourth quarter of 2013, closing the year with a 2% decline. The contraction hurt industry and reflected a general weakness in consumer demand. While the industry is thought to have lost some 150,000 jobs since 2012, some estimates have forecast the creation of 300,000 more jobs as new investments in infrastructure get under way.

Current Challenges

Economists regard 2013 as something of an aberration and not a sign of things to come. Nevertheless, robust growth in 2014 is not expected. The government’s official forecast for GDP growth is 3.9%, but this figure is widely considered optimistic especially after mixed indicators early in the year. Factory output increased 2.34% in January over the previous month, its biggest expansion since September 2012. However, construction remained weak, contracting 1.23% in January 2014. Monterrey-based Cemex, the biggest cement company in the Americas, lost $293m in the first quarter of 2013, compared to a loss of $281m for the same period the year before.

In March 2014, Agustín Carstens, the governor of the central bank, Banco de México (Banxico), characterised first-quarter growth as “slower than expected” in a speech in New York and said much of this was due to slower growth in the US. However, he avoided any talk of lowering official growth forecasts. Economists in the private sector did not hesitate to adjust their own estimates, as growth in the fourth quarter of 2013 did not prove as robust as had been hoped. Barclays lowered its forecast for 2014 to 3% from 3.7%, reflecting a trend among banks. Banco Mercantil del Norte also lowered its forecast from 3.3% to 2.7%, though the bank did maintain that it was optimistic for the latter part of 2014.

Competitive Factories

Manufacturing, which accounts for 17% of GDP, has been making a comeback in terms of competitiveness over the past few years, returning to its position as one of the most attractive destinations for low-cost manufacturing. This was a position it had consolidated in the 1990s thanks to NAFTA and the peso crisis of 1994-95. NAFTA opened up the borders between Mexico, the US and Canada to free trade. The peso crisis, which brought rapid currency depreciation, rendered Mexican labour and energy cheap for foreigners. Combined, these two factors saw Mexican exports, especially to the US, rise quickly year after year until 2001. That was the year China joined the World Trade Organisation, undermining Mexico’s position as a preferred location for the cheap manufacturing of goods to the US market.

However, over the past decade, Mexican manufacturing has been able to make a quite impressive comeback in terms of competitiveness. Two factors have played to its favour: the growing cost of Chinese labour and the rising price of oil. As Chinese labour costs have increased by double digits every year, Mexican wages have remained relatively stable. Meanwhile, fuel costs have soared, enhancing one of Mexican manufacturing’s primary advantages: proximity to the US. Mexican wages, when adjusted for productivity, which is higher in Mexico than in China, have been approaching parity with Chinese wages for years. There is some debate as to whether Mexican labour costs have already become lower than in China, but the trend towards cheaper Mexican labour relative to China is undeniable.

FTAs

Manufacturing competitiveness has been helped by Mexico’s numerous free trade agreements (FTAs). Since NAFTA, Mexico has been one of the most prolific countries in implementing FTAs, and today the country is as open as any in the world. This has contributed to manufacturing efficiency, giving factories the ability to import intermediate goods tariff-free from economies such as the US and EU. It also increases the markets to which Mexican-made goods can be competitively exported. Today, Mexico has preferential access to at least 45 economies and, according to the government, 60% of global GDP. These figures stand to increase if the ongoing talks on the Trans-Pacific Partnership, a proposed free trade zone around the Pacific rim, bear fruit (see analysis.) FDI: Higher freight costs and access to the US have led to a trend towards nearshoring manufacturing to Mexico, which has increased the country’s attractiveness as a target for foreign direct investment (FDI). Three-quarters of FDI in Mexico goes to the manufacturing sector, notably to the automotive and food and beverage segments. In 2013 FDI reached $35.2bn, nearly triple the 2012 FDI of $12.7bn. That was a low year, however, as FDI was $21.5bn in 2011, $17.7bn in 2010 and $16.6bn in 2009. The high point in 2013 was due to Belgian brewer Anheuser-Busch InBev’s purchase of Mexican beer giant Grupo Modelo in May 2013 for $13bn. The federal Ministry of Economy (Secretaría de Economía, MoE) said in February 2014 that FDI during the fourth quarter of 2013 was $5.42bn, and Banxico’s forecast estimated that FDI would be down somewhat from 2013, reaching $25bn in 2014.

Apart from its manufacturing competitiveness, Mexico is also an attractive target for FDI because of its intellectual property (IP) protection. Mexico’s IP protection is imperfect but still much better than many developing countries. The country has modern IP laws and the government has been ramping up enforcement. In 2012 Mexico joined the Madrid Protocol, the primary international system of trademark registration. However, as a result of rampant piracy and remaining gaps in IP protection enforcement, Mexico remained on the US Trade Representative’s (USTR) watch list for IP security in 2013. The watch list on which Mexico has been placed is the USTR’s lower-priority list. In contrast, some of Mexico’s low-cost competitors for FDI were placed on the priority watch list, signifying greater risk to IP. Countries placed on the priority list included Indonesia, India and China. China is generally perceived to have lax standards when it comes to IP protection and, indeed, in its 2013 report on IP security, the USTR reported “grave concerns about misappropriation of trade secrets in China”. This serves as a serious deterrent to FDI and provides a valuable differentiating factor and competitive advantage for Mexico.

Better Times To Come

The inflow of FDI should continue or accelerate in the coming years, as several reforms under the Pact for Mexico create new opportunities for investment. Most importantly, the energy reform will open up the energy market to private investment. This opening is expected to attract investment, much of it foreign, in pipelines, electricity plants, and oil exploration and production. The telecoms reform aims to break up monopolies in the telephone and television markets, while promoting competition in general. Ildefonso Guajardo Villarreal, the minister of economy, told OBG, “The structural reforms pushed forward by President Enrique Peña Nieto’s administration and approved by Congress are deep, ambitious and far-reaching and will trigger Mexico’s true potential for growth. Thus, in 2013 Mexico managed to lay the foundations for a better economic future, despite moderate expansion of the global economy.”

The MoE estimates the potential for annual growth to reach 5.3% by 2018. “Given the steps taken with the reforms, significant investment opportunities will rise in sectors such as infrastructure, energy, telecoms and manufacturing,” said Guajardo.

The National Infrastructure Programme 2014-18 estimates both public and private investments to reach MXN7.7trn ($598.29bn) over that period. “This is the most ambitious programme ever in Mexico,” Guajardo told OBG. “This plan aims to reduce transaction costs for all economic agents, enhancing Mexico’s connectivity to compete in both domestic and global markets.”

The country’s auto sector is among the top 10 exporters and producers of vehicles worldwide. In 2012 Mexico ranked as the fourth-largest vehicle exporter and the eighth-largest producer worldwide. From 2003 to 2013, the aerospace industry’s international trade expanded at an average rate of 15.9% and in 2013 reached nearly $10bn ($5.4bn exports and $4.4bn imports), 5.8% more than 2012. “Diversification is, however, a sound growth strategy for Mexico’s automotive and aerospace industries by looking for opportunities in Asian and Latin American markets,” said Guajardo.

Telecoms Reform

Carlos Slim, estimated to be one of the world’s richest businessmen, has had a stranglehold on telecoms in Mexico for more than two decades. The telecoms reform passed in 2013 aims to address this. Slim’s América Móvil and Mexican businessman Emilio Azcárraga’s Televisa, the television monopoly, are clearly the targets of the reform, which aims to introduce competition into these markets. The reform establishes a new regulatory body, the Federal Institute of Telecommunications (Instituto Federal de Telecomunicaciones, IFT), which will be allowed to apply regulation asymmetrically to break up monopolies. One of the measures may force América Móvil to give competitors more access to its network. Under the terms of the reform, Mexican telecoms and satellite communications companies may now be 100% foreign-owned. The reform also appears to give IFT sufficient independence to adequately streamline enforcement of regulations so that Slim and Azcárraga’s firms will not be able to resort to their usual tactics of delaying indefinitely any decisions taken against them by resorting to continuous legal actions.

Energy Reform

The energy reform passed late in 2013 tackles Mexico’s other great monopolised industry: oil. Since nationalisation in 1938, oil has been closed to foreign investment and run by state-owned oil company Petróleos Mexicanos (Pemex). This has created problems, especially in the past decade. Oil output in Mexico peaked in 2004 at 3.4m barrels per day (bpd), and since then it has declined by about a quarter to around 2.9m bpd in 2012. Due to the windfall of rising oil prices, there have been few negative consequences for the drop in production. But now oil prices are more stable, and output is continuing to fall.

The problem is capital. The Mexican state is highly dependent on revenue from Pemex, so a relatively small share of earnings has been reinvested in exploration and research and development. At the same time, Pemex has worked through much of the reserves that are easy to exploit. What remains untapped are deep-water fields and unconventional reserves, such as shale. The extraction potential of these sources is significant, but Pemex lacks the money and the technology to exploit them. Only oil majors have the resources to take on such projects. So, the energy reform takes the sensible, but politically unpopular step, of opening up oil production in Mexico to private and foreign firms. The reform will enable private companies to bid on licences and to explore and produce in fields that are not already developed by Pemex. Pemex, which will begin operating more like an independent company, will be able to bid on fields like anyone else. As of May 2014, the fields open to bidding had not yet been specified but were expected to be varied and include shale, onshore, shallow water and deepwater blocks.

The energy reform also consisted of constitutional reforms that would enable the structural changes to the industry to take place. As of May 2014, Congress had released its proposal for secondary laws that would be needed to support the implementation of the reform. These laws are expected to be passed in June 2014 and are consistent with the original terms and spirit of the constitutional reforms.

New Income

The reform will surely raise significant new revenues for the state through royalties paid by companies operating in Mexico. This will ease the burden on Pemex and make it more effective. However, these benefits are not the main goal of the reform. The objective of the energy reform, as is the case with all of the legislation related to the Pact for Mexico, is to boost Mexico’s competitiveness. As The Wall Street Journal has reported, this may make Mexico’s energy reform unique in the developing world, where liberalisation of oil industries is almost always focused primarily, if not exclusively, on raising revenue.

Mexico’s reform will do much more than that. For one thing, it is not only about oil. The reform will also liberalise the electricity and natural gas markets, which today are inefficient and holding back Mexican industry. Pemex has long prioritised oil production over natural gas production, a policy that makes financial sense in the current environment of low natural gas prices. However, the result has been tight supply of natural gas in Mexico, which has sometimes led to complete shortages. It has also forced the state electricity provider to import expensive liquefied natural gas (LNG) to fuel its plants, driving up electricity costs. Luis Robles, the president of Mexican bank BBVA Bancomer, said in December 2013 that the inadequate supply of natural gas in Mexico had cost the country 3.6% of GDP. The cost comes in the form of less efficiency for operations that use natural gas as an input, such as petrochemicals plants, and higher electricity costs for industry in general. The reform will address these problems by enabling private firms to build pipelines to import cheap LNG from the US and to produce and market electricity.

Infrastructure

In the World Economic Forum’s “Global Competitiveness Report 2013-14”, Mexico ranked 64th in the world for infrastructure. This placed it behind low-cost manufacturing countries such as China (48th), Malaysia (29th) and Indonesia (61st), but ahead of Brazil (71st). In Mexico, networks of roads, pipelines and fibre-optic cables do not meet the needs of industry. However, the energy and telecoms reforms, as well as a wide range of public-private partnerships, may raise the quality of Mexican infrastructure.

From 2014 to 2018 the government expects MXN7.7trn ($598.29bn) to be invested in infrastructure, with 40% coming from the private sector. This is an increase from the MXN4trn ($310.8bn) announced in 2013 for infrastructure investment between 2013 and 2018. The jump may be partially based on new projections for investment due to the reforms in the energy sector. Based on the government’s 2014-18 infrastructure plan, energy projects will account for the biggest share of the total, with MXN3.9trn ($303.03bn) of investment. The government plans on investment of MXN1.32trn ($102.5bn) in highways, railways, ports, broadband networks, and other transport and communications projects. The government is also counting on MXN415bn ($32.2bn) worth of investment in water management infrastructure, which should improve supplies for both consumers and agricultural producers. These projects, if they are all completed, could significantly boost Mexican competitiveness. Luis Videgaray Caso, the head of the Secretariat of Finance and Public Credit (Secretaría de Hacienda y Crédito Público, SHCP), has said that by 2018 they may add 1.8-2 percentage points to GDP growth rates.

Fiscal Reform

The inadequate infrastructure is partially the result of Mexico’s low tax intake. Tax revenue in Mexico is usually less than 20% of GDP, compared to an OECD average that is typically around 35%. As a result, the state has largely relied on revenue from Pemex to fill public coffers, with oil revenues covering about a third of the federal budget. The burden has hamstrung Pemex, contributing to the decline in its output. As a result, relying on royalties from Pemex is not a sustainable solution.

Instead, Mexico must broaden and deepen its tax base. The government set out to do this with a fiscal reform passed in 2013 that increased income taxes on high earners, ended many exemptions for corporations and established capital gains and dividends taxes. Despite these new or expanded taxes, the reform fell short of its legislative goals. A proposed value-added tax on food and medicine did not make the law’s final cut. These taxes would have been among the most effective in raising new revenue, so their exclusion was seen as watering down the reform. The original fiscal reform proposal would have initially increased tax revenue by 1.4% of GDP; the passed version will raise it 1%. This figure is projected to rise to 2.9% of GDP by 2018, according to a report published by Fitch Ratings.

Success Or Flop

The reform has been criticised for increasing taxes for people and corporations that are already paying and doing little to broaden the base of taxpayers to include workers in the vast informal economy. Fausto Muñiz Patiño, president of human resources firm PAE de México, told OBG, “The fiscal reform has been a blow to many smaller businesses because instead of aiming to confront informality, it has opted for the easy road of increasing taxes on those already paying them. Companies who were planning to expand their operations will now have to stall their growth due to new fiscal obligations.”

Ratings agencies were also generally unimpressed by the reform. Lisa Schineller, head of sovereign ratings at Standard & Poor’s (S&P’s), said it was unclear if the proposed changes would significantly raise revenue and added that the reform would have been “bolder” if the food and medicine tax had been included. Alfredo Coutino, Latin America director for Moody’s Analytics, said that it was “a reform with a political sense of urgency”. This reflects a widely held belief that the government sacrificed some of its fiscal goals to earn the political capital it needed to pass the energy reform at the end of the year.

Victor Herrera, managing director at S&P’s México, told OBG, “This was not the reform that was needed to address the state’s problems. The energy reform will make up for some of that, but don’t be surprised if this topic comes up again in a couple of years.” In its 2013 Article IV consultation, the IMF said the fiscal reform did not do enough to lessen the government’s reliance on oil revenues from Pemex and that “further efforts are likely to be needed” to increase non-oil income. The IMF added, “With the prospect of declining oil production over the next decade, the federal government needs to beef up its collection on non-oil revenues.”

Informality

The fiscal reform included several programmes that incentivise workers and companies to formalise. The government says these programmes will decrease informality from an estimated 60% of Mexican workers to 50% by the end of the current administration in 2018. However, the reform is generally believed not to have done enough to address informality, a scourge of Mexico’s economy.

Workers in the informal sector are less productive, which has undermined Mexico’s competitive advantage. Growth in productivity has been only slightly better than flat for decades, and as a result, economic growth has come almost exclusively from demographic expansion. Mexico’s economically active population will continue growing for the next decade, but if Mexico is to sustain growth afterwards or if it is to raise GDP per capita, productivity will have to increase.

Productivity

In terms of productivity, Mexico’s economy can be divided into three segments: the modern part dominated by multinationals and large Mexican firms, medium-sized companies with domestic operations and the informal sector. According to a McKinsey & Company study titled “A tale of two Mexicos: Growth and prosperity in a two-speed economy,” productivity at large modern enterprises has increased 5.8% per year on average since 1999. At mid-sized companies, productivity has been flat at about 1% per year.

For what McKinsey calls “small traditional firms,” which are informal, productivity has fallen 6.5% per year. As a result, from 1990 to the first quarter of 2014, productivity grew at 0.8% per year with the gains from large companies offset by declines in the informal sector, according to McKinsey.

The Financial Times reported a slightly different figure: an annual decline in productivity of 0.4% between 1990 and 2011. Abraham Zamora, a senior official at the SHCP, is heading a task force established in 2014 for the purpose of boosting productivity and told The Financial Times that his office had set the goal of boosting productivity growth to 1% per year.

However, this may not be enough to compensate for a slowing rate of growth of Mexico’s labour force. In its report, McKinsey said, “To reach GDP growth of 3.5% a year as labour-force growth slows, the productivity growth rate would have to rise almost three-fold from the 0.8% per year average since 1990.”

Unemployment

Unemployment data in Mexico are something of an abstraction, as they grossly understate the true number of unemployed. This is because of the way Mexico tallies unemployment rolls: a person is only included if he or she is actively looking for work and has not engaged in compensated work of any kind during the reference period. Simply working for one paid hour is enough to disqualify someone from being counted as unemployed. In light of this, Mexico’s unemployment data are better viewed as indicators of trends in the labour market. In March 2014 unemployment stood at 4.8%, up slightly from 4.6% in the fourth quarter of 2013. Unemployment dipped to a low of 2.2% in 2000 and has climbed steadily since then, with the exception of a spike in 2009, when it reached 5.3%.

No Safety Net

The underemployed and those working in the informal sector face many of the same problems as the relatively small percentage of officially unemployed Mexicans. Mexico has a limited social safety net. It is the only OECD member with no federal unemployment insurance and social security is limited. Around half of Mexicans do not have access to social security and 66% of adults over the age of 65 have never paid into it. The government has proposed legislation to Congress that would create a universal pension funded by taxes, not contributions. The proposed law also includes unemployment insurance.

Both of these measures are designed to alleviate poverty and encourage formalisation of workers and companies. Unemployment insurance would help workers seek employment in the formal sector and add an incentive to formalise, because only workers in the formal sector would be eligible for it. A universal pension programme would ease the burden of formalising on companies by saving them the cost of providing pensions. However, this programme would be expensive and it is not clear that the fiscal reform will raise enough revenue in order to pay for it.

SMEs

One of the main factors contributing to informality is the difficulty of starting a business in Mexico, especially when it comes to financing. Many small and medium-sized enterprises (SME) struggle to secure bank loans in Mexico and must be financed by friends and family, or by credit at rates that are practically extortionate by most standards. The lack of access to suitable financing eliminates what would otherwise be a compelling incentive for formalisation.

The difficulty of setting up SMEs also contributes to one of the great challenges facing Mexican manufacturing: gaps in the supply chain. Multinational firms in industries such as aerospace, automotive and electronics report that gaps in supply chains compel them to import intermediate goods from abroad at heightened expense. This represents China’s most important advantage over Mexico in manufacturing. However, other difficulties, including access to finance, are being recognised by the administration. Guajardo described the creation of the National Institute for Entrepreneurship (Instituto Nacional del Emprendedor, INADEM) as a bet on the talent of entrepreneurs from all over the country. “INADEM is an institution that specialises in addressing SMEs’ financial needs and strengthening their capabilities as a means to consolidate their growth and productivity,” Guajardo told OBG.

INADEM’s four main pillars are to broaden access to financing, improve the organisational and leadership skills of entrepreneurs, promote access to information technology and communications, and create more cooperation between public and private programmes so that entrepreneurs have adequate information to put their ideas into practice.

Guajardo also said INADEM was encouraging entrepreneurship from early stages, fostering interest among students through specific activities that have curricular value, involving all federal dependencies, state governments, municipalities and universities in both the private and public sectors.

The results of such government support for SMEs will clearly take time, but a successful campaign will help plug in the gaps in the supply chain and gradually bite into the high level of informality in the economy. Guajardo told OBG, “These concrete policy actions are encouraging a stronger entrepreneurial culture in SMEs, which is central to foster competitiveness in modern economies in the context of an open economy to trade and investment for promoting the integration of more SMEs into global value chains.”

Balance Of Trade

The gaps in Mexican supply chains also contribute to the country’s trade deficit, which was $1bn in 2013 and $45m in 2012. Foreign value added in Mexico’s exports – the share of value in Mexican exports that was created abroad – is 32%. This compares to the developing economies average of 25% and 30% in China. While Mexico’s number appears to be in line with China’s, the figure in Mexico is, in fact, somewhat depressed by oil exports. Oil exports have very low foreign value added.

On the other hand, the foreign content in Mexican exports is a testament to the economy’s openness. Foreign value added as a percentage of gross exports is a scant 9% in Russia and 13% in Brazil. These countries’ oil exports bring the numbers down, but the figures are also low because of protectionism. If Brazil and Russia’s economies were more open, their manufacturing sectors would be able to source some intermediate goods and inputs from abroad at lower cost.

Monetary Policy

Banxico cut interest rates three times in 2013 to a record low of 3.5%. On April 25, 2014, the bank said it would maintain the 3.5% rate, citing ongoing downside risks in the economy. The bank is widely considered to be competent and effective.

The IMF’s executive directors, in a November 2013 press release, praised the bank’s “skilful macroeconomic management” which it added has “allowed Mexico to deal with global volatility exceptionally well in recent months”. Since 1994, when the peso was allowed to float, precipitating the financial crisis of that year, the currency has generally been well managed and stable despite market volatility.

Carstens said in November 2013 that outflows of capital from emerging markets due to the US Federal Reserve’s tapering was one of the greatest external financial risks Mexico faced. Tapering refers to the Federal Reserve’s decreasing the amount it spends buying bonds every month as it winds down its quantitative easing programme. However, as Carstens said, Mexico has a natural hedge against the negative consequences of tapering. Tapering will continue as a function of recovery in the US economy, which directly benefits Mexico, so any effects of tapering could be negated.

Inflation

Banxico has a target band for inflation of between 2% and 4%. In 2013 inflation was 3.97%, following inflation of 4.11% in 2012 and 3.41% in 2011. As of late 2013, headline inflation had returned to about 3.5% from a climb to more than 4.5% mid-year due to a spike in agricultural inflation. Core inflation was at a historic low of about 2.5% due to weak demand.

Based on minutes from Banxico’s figures, first-quarter 2014 inflation was 3.76% and the year-end forecast was 3.8%, despite expectations of economic recovery for 2014, inflation was not expected to rise since demand remained low. In its first quarterly inflation report of 2014, the bank said that inflation rates would remain slightly above 4% into the second half of 2014 before dropping to the middle of the 2-4% range in 2015.

The report added that inflation would be “slightly” higher than 3% in 2015. The previous report had forecast inflation of about 3.5% for 2014. Through 2014, the Federal Reserve’s tapering will exert upward pressure on inflation in Mexico by decreasing demand for assets from developing economies, further pushing down the peso and, thus, increasing the cost of baskets of goods that include imports.

Outlook

Today two convincing stories can be told about the future of Mexico’s economy. In one, the reforms implemented by the Peña Nieto administration succeed in modernising the economy and significantly increasing its competitiveness. Large quantities of FDI flow into the energy sector, decreasing energy costs for industry. Mexico’s revenue from taxes and from oil royalties will increase to the point that it can sustain adequate levels of investment in infrastructure, research and development, and education. An increasingly competitive economy will entice workers out of the informal sector with the prospect of higher earnings. As a result, productivity will increase and Mexico will be able to maintain GDP growth of 4-5% per year.

However, there is another story that can be told just as convincingly. In this version of events, politics and populism will interfere with the implementation of reforms, and monopolies will be left in place. National interests will be protected to the detriment of foreign investment. If informality remains the predominant type of employment, productivity may remain flat or even fall, with an average growth rate of around 2%. These are, in many ways, the stories of two Mexicos that already exist. The question that remains to be answered is which one of Mexico will actually choose to become.