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. Walker's World: The dangerous border

For the past 20 years Mexico has been governed by moderate presidents who believed in free trade, open markets and close cooperation with the United States. But in the last election, Calderon won a hair's-breadth victory over the resurgent left, and a prolonged economic crisis is likely to bring to power a leftist Mexican government that will have more in common with Cuba's Castro brothers and the firebrand Hugo Chavez of Venezuela than with the pro-market moderates who took Mexico into NAFTA on the promise of prosperity that is turning hollow.
by Martin Walker
Mexico City (UPI) Feb 25, 2009
The Mexican border is becoming a dangerous place for its economy. This week the three state universities of Arizona warned their students not to go to Mexico for spring break.

This followed an earlier warning from the U.S. State Department, known as a Travel Advisory, that crime rates have increased sharply in the border towns of Tijuana, Juarez and Nogales, Mexican cities that have seen public shootouts in daytime in areas like shopping centers. The Advisory warned that criminals have followed and harassed Americans driving in border areas.

The wars between the Mexican drug cartels have been intensifying and making the country an increasingly problematic destination for tourism, one of the mainstays of the economy. But this is just the tip of a much larger and more menacing iceberg of economic disaster for Mexico, now one of the world's Top 20 economies as measured by gross domestic product.

Every indicator is turning bad at once for Mexico, a country that is heavily dependent on the good health of the gringo giant north of the border. An extraordinarily high proportion of the country's exports, 82 percent, goes to the United States, which also provides more than half of Mexico's imports and almost half of the foreign investment into the country.

The U.S. investment and the factories dedicated to the U.S. market are the result of the North American Free Trade Agreement that over the past 15 years has massively boosted trade between Mexico, Canada and the United States. But while NAFTA has given, it also can take away when the giant United States, locomotive of the NAFTA economy, starts to sputter.

The main feature of this dependence is the auto industry, and Mexico's output of vehicles fell by a jaw-dropping 51 percent in December, a figure that was boosted by extended Christmas vacations. But the overall crisis for Mexican industry is clear. Mexico's industrial production contracted by 6 percent year-on-year in December and by 4.9 percent over the fourth quarter as a whole.

That was the weakest quarterly performance for more than 13 years, and it affected whole swaths of the economy. The manufacture of transport equipment fell by 9 percent, mining output dropped by 6 percent, and construction output dropped by 4.4 percent. The first quarter of this year looks to be as bad if not worse, and after years of healthy growth the Mexican economy is going to shrink this year and is unlikely to recover until the United States does.

The Mexican peso, which was at 10 to the dollar last year, has fallen sharply and is currently trading at close to 15. This eventually may help by making Mexico's exports cheaper and by making it cheaper for U.S. companies to invest south of the border. But in the meantime it increases the import bill, and not many U.S. companies are looking to invest anytime soon.

The real question is how far the Mexican economy will shrink and for how long, and there is no relief in sight. Output from the country's huge Cantarell oil field is depleting at twice the expected rate, and oil production is falling at a 6 percent annual rate. And while Mexico cleverly pre-sold this year's oil output at a rate of $70 a barrel, that benefit will not be enjoyed next year. And oil provides 30 percent of government revenues.

Remittances from Mexicans working in the United States, usually worth some $24 billion a year, are falling sharply, and the usual flow of Mexicans heading north, legally or otherwise, is going into reverse as the U.S. economy stalls. And then there is the ominous impact of those Travel Advisories on tourism. There is simply no good news, with one exception.

The exception is the $54 billion economic recovery package, the stimulus plan proposed by the government of President Felipe Calderon and now endorsed by the Congress. Worth a total of 5 percent of the country's GDP, it is similar in proportion to the $787 billion stimulus plan of President Barack Obama in the United States. It is also similar in being a hodgepodge of measures, with subsidies for energy costs and for low-income housing, and much of the claimed spending on infrastructure going to the construction of a new refinery.

Still, the Mexican stimulus package adds to the tidal wave of government spending that is being unleashed onto the sinking global economy, with the Obama package in the United States, and China's $586 billion plan and more than $500 billion from various EU countries. That much spending would make a corpse sit up and look active, and these giant sums should spark some signs of recovery by the end of this year and early next year.

But there is no guarantee that this force-fed revival will become a healthy and self-sustained recovery. Ben Bernanke, head of the U.S. Federal Reserve, stressed this week that sustained recovery would require stabilization of the banking system -- which remains a pious hope rather than an immediate prospect.

In the meantime, as the factories along the U.S. border close or go on short time and remittances from migrant workers dry up, one of the few vibrant sectors of the Mexican economy is the drug trade and the shocking wave of violence and murder and killings of policemen that come with it. It is both a tragedy and a disgrace for Mexico, but it is also an economic disaster because it drives away the tourism that might otherwise be attracted by the cheap peso.

And on top of all the other damage inflicted on the United States by the drug trade, the weakness of its neighbor on the southern border carries deeper problems. For the past 20 years Mexico has been governed by moderate presidents who believed in free trade, open markets and close cooperation with the United States. But in the last election, Calderon won a hair's-breadth victory over the resurgent left, and a prolonged economic crisis is likely to bring to power a leftist Mexican government that will have more in common with Cuba's Castro brothers and the firebrand Hugo Chavez of Venezuela than with the pro-market moderates who took Mexico into NAFTA on the promise of prosperity that is turning hollow.

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