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August 14, 2008
The Pinch
At the Perspectivas Económicas 2008 seminar held in January, Guillermo Ortiz, the head of Banxico, the federal bank of Mexico, reassured Mexicans that the country would be resistant to the economic crisis that seemed to be developing in the United States. He went on to predict that inflation in Mexico would peak during the second third of the year at around 3.1%, then decrease to 3.0%, Banxico's stated goal for inflation in 2008, by the end of the year.
He put forth a few reasons to justify his confidence: high oil revenues, continuing remittances from Mexicans working in the United States, and a new business tax (the Impuesto Empresarial a Tasa Unica) expected to raise an extra MXN $110 billion for the government.
Just months before, Banxico had projected that this new tax would cause inflation to hit 4% as businesses passed on the cost to consumers. Yet by January, they had changed their minds; Ortiz announced at the seminar that the impact of the new tax would be less than previously expected. He did not give any further clarification for the federal bank's change of thinking.
He also skirted discussion of issues that make the recent record-high oil prices less helpful for the country than they might seem. Nearly 40% of the government's revenues come from Pemex, the government-run oil monopoly. Since Mexico is the world's fifth-largest producer of crude, this has provided a considerable contribution toward the government's annual budget, but since 2005, oil production in Mexico has dropped by 10%. It is predicted to fall to 50% of current total by 2021 if nothing is done to somehow increase production.
Fortunately, sitting just off the coast, some 30 billion barrels are believed to rest under the ocean in deep-water reserves. Unfortunately, Pemex lacks the equipment and technology to develop these reserves, although businesses in other countries such as the United States, have it and are willing to share it - for a share of the profits in return. Many in the government, including President Calderón, want to reform the laws prohibiting foreign involvment in the Mexican oil industry in order to get Mexico the tools it needs to access these reserves, but they are meeting substantial resistance from political opponents that are using the issue as a political wedge and fanning populist fears that the administration is "giving our oil away to foreigners."
Mexico finds another big revenue stream in remittances from Mexicans working abroad, totalling a record USD $24 billion last year. However, the economic slowdown in the United States has had a serious impact on the money flowing into Mexico. Remittances are down 2.9% from 2007, and quarterly measures indicate the fall to be worsening. The drop in remittances has been so serious that Mexico's Secretary of the Interior, Juan Camilo Mourino, recently pleaded with Mexicans living in the United States to keep sending money back home. He seems to be under the impression that Mexicans working abroad are just being selfish and hoarding their money, instead of suffering alongside US citizens in a sluggish economy.
Now, in addition to the hit these pillars of the Mexican economy have taken this year, eight months after Guillermo Ortiz told Mexico that it had nothing to fear, inflation has hit 5.39%. Despite the assurances made at the Perspectivas Económicas 2008 seminar, this is only slightly better than the United States is doing, where 5.6% inflation is the highest it has been since 1991.
It seems like a lot of predictions about the economy (in both countries) have been way off lately: Banxico misses wide on inflation in Mexico, Fannie Mae and Freddie Mac's losses were three times greater than estimated earlier in the year. The experts really seem to be off their game lately. What I want to know is, were these discrepancies caused by being overly optimistic, or outright errors in interpreting the indicators. Were economists disappointed, or actually surprised by the real numbers?
We have noticed a distinct trend in Mexico in the two-and-a-half years we have lived here: people do not like to tell you anything that will disappoint you. They would rather lie and be found out later than to be honest and tell you something you do not want to hear in the here and now. I know, I know - nobody likes to give people bad news in any culture, but in Mexico, very much like in Japan, the lengths to which people will go to avoid telling you something negative can be shocking. Is Guillermo Ortiz just acting in accordance with cultural norms and letting Mexicans feel hopeful about the economy for six months before reality smacks them down again?
Inflation sucks everywhere, but in poorer countries, the impact is felt more, because a greater percentage of the household income is spent on things like food and energy. In developing countries, the poor put at least 30% of their money toward food (in the United States, the USDA says that amount is closer to 6%). A small increase in the cost of bread, milk, eggs and other staples can result in people having to decide between eating and heating their homes or getting important medical care.
Unfortunately, poor Mexicans cannot feed their families with rosy predictions or good intentions. Granted, dire news will hardly put food on the table, but it can raise public awareness that there is a looming problem and it can put pressure on government officials to take steps to aleviate some of the pains that a worsening economy can bring to those that are already hurting. I know a government cannot just sit down and fix a bad economy, but in a country where 50% live at or below the poverty level, it would be prudent to have a plan for something akin to disaster relief if inflation continues or even climbs higher. If 50% of your country cannot afford to eat, it is a disaster.
Even in the United States, where fewer people are making that little, I do not think it would not be a bad idea to have such contingency plans. Having lived in Mexico for these two-and-a-half years, this is another trend I have noticed: Mexicans can take any disappointment, from minor to colossal, with a smile and a laugh. They probably already have an existing joke that they would tell you to explain it all away. Having lived in the United States for much longer than I have lived here, I have seen this trend too: Americans do not react well to disappointment.
Posted by crispy at August 14, 2008 03:53 PM
Comments
and in bad times, we seem to take what we need to survive.
Posted by: brett at August 19, 2008 12:26 PM