One strange thing about the upcoming Mexican election is how little the economy seems to matter. I don’t mean questions of long-term growth or distribution; those are very much an issue. I mean short-term business cycle stuff. Manufacturing output is up. The peso is down, but the central bank seems relaxed. Judging from the results on inflation-linked bonds, so are the markets. Consumer confidence has followed suit. Nobody is running a campaign like the ones in the United States or Europe. Growth since the 2008 shock is slow, but steady, as the below chart of GDP (in millions of 2003 pesos) shows.
To be frank, I was worried three years ago. But the bad economy dog did not bark. Why not?
Well, I was worried that Mexico was going the austerity route. But it didn’t! Mexico was no paragon of countercyclical fiscal policy, but it avoided anything that could be called austerity. I wrote the above entry in the third quarter of 2009 ... during which government spending was essentially flat, much less than the programmed 0.7% drop. (See below chart, which shows growth in GDP expenditures between government purchases of goods and services and everything else.) In short, my fear didn’t materialize because the PAN government never followed through with its own austerity rhetoric.
Still, simply not being stupid isn’t really enough to explain Mexico’s quick recovery. Lots of countries failed to implement sufficiently large stimulus packages and suffered for it. To explain Mexico we need to turn to two other Mexican strengths and a bit of good luck.
The first strength is, paradoxically, also a weakness: Mexico had a terrible terrible financial system going into the Lesser Depression. But from the point of view of protection from the effects of a worldwide financial freezeup, it was a great thing to go in with banks that did not lend and firms that did not borrow. (I do not recommend this as a long-term growth strategy.)
That meant that the Lesser Depression hit Mexico as a good old-fashioned trade shock. The below graph measures quarterly percentage changes in the final demand for Mexican production. (It is not the same as GDP, since GDP nets out imports.) You can watch exports plummet in the last quarter of 2008. Net exports barely budged (in fact, they grew) but all those unemployed export workers dragged down private consumption and all those hurting export manufacturers stopped investing. Thus the vertiginous decline in GDP in the first quarter of 2009 that you can see in the above two charts. (Demand continued to fall in the second quarter of 2009, but manifested as a drop in imports, leaving GDP flat.)
But this brings us to Mexico’s second strength: a flexible exchange rate. The peso plunged from a little under a dime to a low of 7¢ before recovering. (In point of fact, the Banco de México intervened to stop the fall, too soon in my opinion.) By the third quarter of 2009, exports had started growing again. By the second quarter of 2010, they surpassed their previous peak. In point of fact, Mexico became even more export oriented than before: exports grew from 26% in the middle of 2008 of GDP to 35% by the middle of 2012.
And that brings us to the good luck. Any guesses before I post? It seems to have been in the news lately.