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Mexico - Economy (Notes)

Mexico is highly dependent on exports to the U.S., which account for almost a quarter of the country?s GDP. The result is that the Mexican economy is strongly linked to the U.S. business cycle. Real GDP grew by 3.0% in 2005 and was projected to grow by 4.5% for 2006.

Mexico?s trade regime is among the most open in the world, with free trade agreements with the U.S., Canada, the EU, and many other countries. Since the 1994 devaluation of the peso, successive Mexican governments have improved the country?s macroeconomic fundamentals. Inflation and public sector deficits are under control, while the current account balance and public debt profile have improved. As of September 2006, Moody?s, Standard & Poor?s, and Fitch Ratings had all issued investment-grade ratings for Mexico?s sovereign debt.

Mexico is among the world?s most open economies, but it is dependent on trade with the U.S., which bought 86% of its exports in 2005. Top U.S. exports to Mexico include electronic equipment, motor vehicle parts, and chemicals. Top Mexican exports to the U.S. include petroleum, cars, and electronic equipment. There is considerable intra-company trade.

Mexico is an active and constructive member of the World Trade Organization (WTO). It hosted the September 2003 WTO Ministerial Meeting in Cancun. The Mexican Government and many businesses support a Free Trade Area of the Americas.

Trade disputes between the U.S. and Mexico are generally settled through direct negotiations between the two countries or via WTO or North American Free Trade Agreement (NAFTA) panels. The most significant areas of friction involve agricultural products such as sugar, high fructose corn syrup, apples, and rice.

Mexico's agrarian reform program began in 1917, when the government began distribution of land to farmers. Extended further in the 1930s, delivery of land to peasants continued into the 1960s and 1970s at varying rates. This cooperative agrarian reform, which guaranteed small farmers a means of subsistence livelihood, also caused land fragmentation and lack of capital investment, since commonly held land could not be used as collateral. Additionally, only 12% of Mexico?s land area is arable, of which less than 3% is irrigated. This, coupled with a general lack of economic opportunity in rural areas, has made it difficult to raise the productivity and living standards of Mexico's subsistence farmers.

Agriculture accounted for 4% of GDP in 2005, yet agricultural employment accounted for over 16% of total employment. However, the number of Mexican farmers is steadily decreasing as they seek greater economic opportunities from off-farm employment.

Poor availability of credit continues to plague agriculture. Agricultural loans were hard hit by the 1994 peso crisis and many private banks view agricultural lending, particularly to smaller producers, as too risky. Several government entities provide public credit to the rural sector, including Financiera Rural, a development bank dedicated to supporting agriculture.

In an effort to raise rural productivity and living standards, Article 27 of the Mexican Constitution was amended in 1992 to allow for the transfer of communal land to the farmers cultivating it. They then could rent or sell the land, opening the way for larger farms and economies of scale. There have been few actual sales of communal land, and most have been limited primarily to suburban areas where land values are high. One inhibiting factor may be community opposition based on vested interests in maintaining the communal land system.

Mexico subsidizes agricultural production through various support programs, the most notable being the PROCAMPO initiative. Since the early 1990s, the availability of program payments has shifted from primarily grains and legumes to all commodities, provided a farmer was producing during a certain base period. Total support program funding for 2004 was approximately $2.4 billion, with PROCAMPO payments of $88 per hectare for producers with more than five hectares and $100 per hectare for producers with 1-5 hectares.

Manufacturing and Foreign Investment
The manufacturing sector, which accounts for about 18% of GDP, grew by 1.2% in 2005. Construction grew by 4% in real terms in 2005, fueled by a boom in housing finance.

According to Mexico's Ministry of Economy, foreign direct investment (FDI) in Mexico for 2005 was $18.8 billion, down slightly from the year before. The U.S. was once again the largest foreign investor in Mexico, accounting for 66% of reported FDI. The most recent numbers released by Mexico show FDI for January through June 2006 at $8.7 billion.

Oil and Gas
In 2005 Mexico was the world?s sixth-largest oil producer, its eighth-largest oil exporter, and the third-largest supplier of oil to the U.S. Oil and gas revenues provide more than one-third of all Mexican Government revenues.

Mexico?s state-owned oil company, Pemex, holds a constitutionally established monopoly for the exploration, production, transportation, and marketing of the nation?s oil. While private investment in natural gas transportation, distribution, and storage has been permitted, Pemex remains in sole control of natural gas exploration and production. Despite substantial reserves, Mexico is a net natural gas importer.

Transportation and Communications
Mexico?s land transportation network is one of the most extensive in Latin America with 117,000 kilometers (km.) of paved roads, including more than 10,000 kilometers of four-lane paved roads. The 26,622 kilometers (16,268 mi.) of government-owned railroads in Mexico have been privatized through the sale of 50-year operating concessions.

Mexico?s ports have experienced a boom in investment and traffic following a 1993 law that privatized the port system. Mexico?s ports moved nearly 1.7 million containers in 2003. A number of international airlines serve Mexico, with direct or connecting flights from most major cities in the United States, Canada, Europe, Japan, and Latin America. Most Mexican regional capitals and resorts have direct air services to Mexico City or the United States. In 2005, the Government of Mexico agreed to sell Mexicana, one of the two main national airlines, to a private investor. Airports are semi-privatized with the government still the majority shareholder, but with each regional airport group maintaining operational autonomy.

The telecommunications sector is dominated by Telmex, the former state-owned monopoly. Several international companies compete in the sector with limited success. The teledensity rate in Mexico (around 16%) is among the lowest in Latin America. Cellular penetration is much higher with over 33 million cellular customers in 2004. However, 31 million of these customers use pre-paid cards, and many use their phones to receive calls only. Mexico?s satellite service sector was opened to competition, including limited foreign direct investment, in 2001.

Facts at a Glance: Geography - People - Government - Economy - Communications - Transportation - Military - Climate - Current Time - Ranking Positions - Mexican Peso Exchange Rates
Notes and Commentary: People - Economy - Government and Political Conditions - Historical Highlights - Foreign Relations - Relations with U.S.

Facts at a Glance
Current Time
Ranking Positions
Mexican Peso Exchange Rates

Notes and Commentary
Government and Political Conditions
Historical Highlights
Foreign Relations
Relations with U.S.

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