Endeavour Silver Corp. is an AMEX listed security that has been trading in a range between $3.19 and $5.48 over the past year. With 44,839,150 shares outstanding, a recent price of $5.21 gives a total market capitalization of $226,886,096. While there are certainly larger companies, Endeavour Silver Corp. has definitely earned its place in the pack. Last year, Endeavour Silver Corp. created $-0.12 in earnings for every share outstanding.
Endeavour Silver Corp. is currently priced by the market at 0.00 times last year’s earnings. Many trading multiples around the world are quite attractive these days, but don’t be fooled. A Price to Earnings ratio of 0 simply means that the security didn’t make any money last year.
With a share price under $50 a share and earnings per share below $1 a share, Endeavour Silver Corp. is unlikely to be an interesting value proposition.
Showing posts with label Mexico. Show all posts
Showing posts with label Mexico. Show all posts
Monday, July 16, 2007
Tuesday, June 5, 2007
A Promising Future (With Big Obstacles to Fruition)
Several factors that contributed to the success of the Asian tigers may not be possible to reproduce. For instance, the savings rates they achieved may not be attainable or even desirable for most emerging nations. Nevertheless, Mexico can learn from the experience of the Asian tigers. The Asian tigers provided several conditions conducive to the accumulation of physical resources. In most cases, they committed early on to monetary and fiscal discipline and provided predictable macroeconomic conditions for investors. They also provided fairly efficient, stable institutions, such as well-functioning legal systems. As for human capital, they made a major effort to supply basic education and health services during early stages of their catch-up period. Mexico has a long way to go in all of these areas.
Since its 1994 financial crisis, Mexico has made progress in macroeconomic discipline, bringing inflation down to its lowest level in 30 years and fiscal deficits to below 1 percent of GDP. But the government continues to depend on unpredictable oil sales for more than a third of its revenues. The government has been able to trim spending recently, but in the long run, a credible commitment to fiscal and monetary discipline demands that Mexico reduce its dependence on oil revenues. Although tax rates are not low by international standards, many individuals and corporations avoid income taxes altogether, making the tax base small. In Mexico, the informal sector accounts for an amazing 50 percent of employment. As a result, Mexico's tax-to-GDP ratio is markedly below China's and the United States'. In fact, it's low even by Latin American standards.
Ill-functioning institutions add to the unpredictability of Mexico's business environment. The biggest problem is that property rights are not effectively enforced because of an inefficient legal system. According to recent estimates, collecting on a bad check takes five times longer in Mexico than in the United States. Resolving more complicated contractual disputes can take several years.
This poor legal environment has many negative consequences. Maybe the most detrimental for growth, and a key reason investment has stagnated, is the impact on the financial sector. Mexican banks are very hesitant to lend in an environment where contracts are not properly enforced. Mexico's financial sector is very small and, if anything, getting smaller. In a World Bank survey, over half of Mexican firms described their access to financing as severely limited, compared with 15 percent of U.S. firms. In Singapore, only 10 percent of
firms reported that they face the same situation.
To make matters worse, even when they can secure financing, Mexican entrepreneurs face burdensome regulations and a notoriously inefficient bureaucracy. For example, it takes more than 65 days on average to register a firm in Mexico, compared with four days in the United States.
With regard to education, Mexico's poor performance is not due to low spending but rather its failure to emphasize basic education. South Korea made an early commitment to basic education, and in 1970, two-thirds of the country's educational spending was allocated to preprimary and primary education. As recently as 1992, only a third of Mexico's education budget was allocated to preprimary and primary education. This share has increased to one half in recent years, but it will take a generation for these efforts to begin paying off.
At the end of the day, Mexico’s progress in the past quarter century has certainly not lived up to expectations. Nonetheless, the example of the Asian tigers provides a clear path forward. Mexico needs to move past easy neo-liberal dogma toward a comprehensive concentration on developing its unique strengths. While there remains a great deal of work to be done, the potential payback is enormous.
Since its 1994 financial crisis, Mexico has made progress in macroeconomic discipline, bringing inflation down to its lowest level in 30 years and fiscal deficits to below 1 percent of GDP. But the government continues to depend on unpredictable oil sales for more than a third of its revenues. The government has been able to trim spending recently, but in the long run, a credible commitment to fiscal and monetary discipline demands that Mexico reduce its dependence on oil revenues. Although tax rates are not low by international standards, many individuals and corporations avoid income taxes altogether, making the tax base small. In Mexico, the informal sector accounts for an amazing 50 percent of employment. As a result, Mexico's tax-to-GDP ratio is markedly below China's and the United States'. In fact, it's low even by Latin American standards.
Ill-functioning institutions add to the unpredictability of Mexico's business environment. The biggest problem is that property rights are not effectively enforced because of an inefficient legal system. According to recent estimates, collecting on a bad check takes five times longer in Mexico than in the United States. Resolving more complicated contractual disputes can take several years.
This poor legal environment has many negative consequences. Maybe the most detrimental for growth, and a key reason investment has stagnated, is the impact on the financial sector. Mexican banks are very hesitant to lend in an environment where contracts are not properly enforced. Mexico's financial sector is very small and, if anything, getting smaller. In a World Bank survey, over half of Mexican firms described their access to financing as severely limited, compared with 15 percent of U.S. firms. In Singapore, only 10 percent of
firms reported that they face the same situation.
To make matters worse, even when they can secure financing, Mexican entrepreneurs face burdensome regulations and a notoriously inefficient bureaucracy. For example, it takes more than 65 days on average to register a firm in Mexico, compared with four days in the United States.
With regard to education, Mexico's poor performance is not due to low spending but rather its failure to emphasize basic education. South Korea made an early commitment to basic education, and in 1970, two-thirds of the country's educational spending was allocated to preprimary and primary education. As recently as 1992, only a third of Mexico's education budget was allocated to preprimary and primary education. This share has increased to one half in recent years, but it will take a generation for these efforts to begin paying off.
At the end of the day, Mexico’s progress in the past quarter century has certainly not lived up to expectations. Nonetheless, the example of the Asian tigers provides a clear path forward. Mexico needs to move past easy neo-liberal dogma toward a comprehensive concentration on developing its unique strengths. While there remains a great deal of work to be done, the potential payback is enormous.
Competition with China
Mexico appears to be losing ground in U.S. markets. Its share of U.S. imports peaked at 11.5 percent in 2001 and has slipped since then. Meanwhile, China’s share of U.S. imports has grown steadily and now exceeds Mexico’s. To Mexican officials and producers this is no mere coincidence, China’s gains are being made at Mexico’s expense. China’s exports-to-GDP ratio has risen from 2 percent to 25 percent since 1970. While China’s GDP has grown at about 10 percent a year in real terms over the past 20 years, exports have grown twice as fast. Not only is China producing more than ever for export, its ability to access U.S. markets is improving with the expansion of free trade. China is making strides in many areas important to Mexico. However, there is little correlation between China’s gains and Mexico’s losses. There are many markets in which China is gaining a lot of ground but Mexico is not losing any. In such areas as computers and electrical machinery, China’s gains are being made at other countries’ expense. There are also many industries in which China is making no gains. Whatever is happening to Mexico in those areas cannot be explained by China. Among these commodities are vehicles, vehicle engines and parts, agricultural goods and oil products.
There are, of course, industries in which China’s gains are associated with Mexico’s losses. These at-risk sectors, which include TV sets and textiles and apparel, have several characteristics in common. First, they are unskilled and labor-intensive, which makes China a very attractive place to produce. Second, commodities in these sectors tend to have a high value-to-weight ratio, which makes transportation costs reasonable. Third, many products in these at-risk areas are standardized and can be mass produced. But notwithstanding these sectors in which Mexico is most exposed to Chinese competition, there is overall little correlation between China’s gains and Mexico’s losses.
The countries that appear to be bearing the brunt of China’s competition are other Asian exporters. Japan, Korea, Taiwan, Singapore, Malaysia and Thailand have lost market share in many sectors since 1999, and the losses experienced by that group of countries have been highly correlated with China’s gains. This correlation between China and the Asian tigers is exactly what we would see for Mexico if China’s advance were happening at Mexico’s expense. Instead, Mexico’s recent export difficulties are best explained by Mexico’s dependence on U.S. manufacturing activity. When a deep manufacturing recession began in the United States in 2000, no other country was hit harder than Mexico. Intermediate and capital goods account for almost 80 percent of Mexico’s exports. Mexico is a key supplier for the U.S. manufacturing sector. China, on the other hand, remains predominantly a consumption goods exporter. This greatly mitigated the impact of the recent U.S. recession on China’s export sector and largely explains China’s and Mexico’s differing fortunes since 2000.
The real problem facing Mexico is that Mexico has yet to find a way to accumulate physical and human resources the way fast-growing countries do. Its educational attainments continue to markedly lag those of industrialized nations. Its institutions do not function well, which discourages investment. Mexico’s tax system raises little revenue, which makes needed infrastructure and education investments impossible.
Mexico’s failure to marshal its physical and human resources effectively is most dramatic when compared to the Asian tigers. South Korea’s investment-to-GDP ratio reached almost 40 percent in the late '80s, very high by international standards. Interestingly, foreign investment did not play a big role in this. The investment surge was financed through exceptionally high private and public domestic savings. By contrast, Mexico's investment rate, in spite of the recent influx of foreign money, has hovered around 20 percent for most of the past 30 years. South Korea's fastest growing resource has been human capital. In 1960, almost half the working population lacked a primary school education. Today, 70 percent of working Koreans have at least some secondary education. Mexico's achievements in this area remain dismal. A third of the working population has not completed primary school, and the country today stands roughly where Korea did 40 years ago.
There are, of course, industries in which China’s gains are associated with Mexico’s losses. These at-risk sectors, which include TV sets and textiles and apparel, have several characteristics in common. First, they are unskilled and labor-intensive, which makes China a very attractive place to produce. Second, commodities in these sectors tend to have a high value-to-weight ratio, which makes transportation costs reasonable. Third, many products in these at-risk areas are standardized and can be mass produced. But notwithstanding these sectors in which Mexico is most exposed to Chinese competition, there is overall little correlation between China’s gains and Mexico’s losses.
The countries that appear to be bearing the brunt of China’s competition are other Asian exporters. Japan, Korea, Taiwan, Singapore, Malaysia and Thailand have lost market share in many sectors since 1999, and the losses experienced by that group of countries have been highly correlated with China’s gains. This correlation between China and the Asian tigers is exactly what we would see for Mexico if China’s advance were happening at Mexico’s expense. Instead, Mexico’s recent export difficulties are best explained by Mexico’s dependence on U.S. manufacturing activity. When a deep manufacturing recession began in the United States in 2000, no other country was hit harder than Mexico. Intermediate and capital goods account for almost 80 percent of Mexico’s exports. Mexico is a key supplier for the U.S. manufacturing sector. China, on the other hand, remains predominantly a consumption goods exporter. This greatly mitigated the impact of the recent U.S. recession on China’s export sector and largely explains China’s and Mexico’s differing fortunes since 2000.
The real problem facing Mexico is that Mexico has yet to find a way to accumulate physical and human resources the way fast-growing countries do. Its educational attainments continue to markedly lag those of industrialized nations. Its institutions do not function well, which discourages investment. Mexico’s tax system raises little revenue, which makes needed infrastructure and education investments impossible.
Mexico’s failure to marshal its physical and human resources effectively is most dramatic when compared to the Asian tigers. South Korea’s investment-to-GDP ratio reached almost 40 percent in the late '80s, very high by international standards. Interestingly, foreign investment did not play a big role in this. The investment surge was financed through exceptionally high private and public domestic savings. By contrast, Mexico's investment rate, in spite of the recent influx of foreign money, has hovered around 20 percent for most of the past 30 years. South Korea's fastest growing resource has been human capital. In 1960, almost half the working population lacked a primary school education. Today, 70 percent of working Koreans have at least some secondary education. Mexico's achievements in this area remain dismal. A third of the working population has not completed primary school, and the country today stands roughly where Korea did 40 years ago.
Monday, June 4, 2007
Trade Liberalization and NAFTA
Following the crisis of 1982, the Mexican economy received praise for having “adjusted well”, but failed to achieve any significant momentum due to renewed struggles in 1985-86. Mexico’s response has been to implement a policy of labor “flexibilizacion”, or weakening collective labor bargaining, and widespread trade liberalization to take advantage of newly awakened international competitiveness. Since the 1994 implementation of NAFTA or the North American Free Trade Agreement, Mexico has signed twelve free trade agreements with such diverse nations as Japan, Israel, and Chile.
NAFTA is by far the most important trade agreement Mexico has signed both in the magnitude of reciprocal trade with its partners as well as in its scope. Unlike the rest of the free trade agreements that Mexico has signed, NAFTA is more comprehensive in its scope and was complemented by the North American Agreement for Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC). Given the overall size of trade between Mexico and the United States, there are remarkably few trade disputes, and even those few involve relatively small dollar amounts. These disputes are generally settled in World Trade Organization (WTO) or NAFTA panels or through negotiations between the two countries.
While the trade agreement has not synchronized employment or productivity across North America, it has resulted in an enormous interdependence between Mexico and the United States. Even as the United States has been shifting much of its dependence for imports to other nations such as China, Mexico remains firmly dependent on the state of the United States’ economy. Exports now represent 30 percent of Mexico’s GDP, up from 10 percent 20 years ago. The great majority of Mexico’s exports are manufactured goods, and almost 90 percent of them are shipped to the United States.
While Mexico has undoubtedly benefited from trade liberalization, a history of bilateral trade agreements which Mexico has historically been able to join that other nations have been unable to access has resulted in a preferential place in world trade. Unfortunately for Mexico, the entrance of many nations such as China into the WTO and the United States’ aggressive moves to increase free trade worldwide is already working to erode that preferential trade status. While the economic case for free trade suggests that Mexico will ultimately benefit from reduced trade restrictions with other nations, Mexico is already beginning to suffer the early price of dislocation of many of its people. In particular, Mexico’s maquiladora industries face competition from China and Mexico’s rural poor face stiff competition from American agri-business.
One disturbing impact of increased integration into the global economy has been Mexico’s increasing wage inequality. The new economic reality of globalization has resulted in a substantial increase in the wage premium for skilled labor, which when coupled with an unequal distribution of skills has created higher inequality in the distribution of labor incomes that is closely associated to disparities in schooling.
As each of the Asian tigers achieves greater market penetration in the United States, Mexico’s export-dependent growth becomes more threatened. In particular, as tariffs against textiles from China expire, Mexico can expect to suffer financially. Yet Mexico’s real problem with trade liberalization is that it exposes an uncomfortable truth – that Mexico is no longer a relatively “poor” nation, but its institutions and human capital nonetheless remain unable to compete with “wealthy” nations.
NAFTA is by far the most important trade agreement Mexico has signed both in the magnitude of reciprocal trade with its partners as well as in its scope. Unlike the rest of the free trade agreements that Mexico has signed, NAFTA is more comprehensive in its scope and was complemented by the North American Agreement for Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC). Given the overall size of trade between Mexico and the United States, there are remarkably few trade disputes, and even those few involve relatively small dollar amounts. These disputes are generally settled in World Trade Organization (WTO) or NAFTA panels or through negotiations between the two countries.
While the trade agreement has not synchronized employment or productivity across North America, it has resulted in an enormous interdependence between Mexico and the United States. Even as the United States has been shifting much of its dependence for imports to other nations such as China, Mexico remains firmly dependent on the state of the United States’ economy. Exports now represent 30 percent of Mexico’s GDP, up from 10 percent 20 years ago. The great majority of Mexico’s exports are manufactured goods, and almost 90 percent of them are shipped to the United States.
While Mexico has undoubtedly benefited from trade liberalization, a history of bilateral trade agreements which Mexico has historically been able to join that other nations have been unable to access has resulted in a preferential place in world trade. Unfortunately for Mexico, the entrance of many nations such as China into the WTO and the United States’ aggressive moves to increase free trade worldwide is already working to erode that preferential trade status. While the economic case for free trade suggests that Mexico will ultimately benefit from reduced trade restrictions with other nations, Mexico is already beginning to suffer the early price of dislocation of many of its people. In particular, Mexico’s maquiladora industries face competition from China and Mexico’s rural poor face stiff competition from American agri-business.
One disturbing impact of increased integration into the global economy has been Mexico’s increasing wage inequality. The new economic reality of globalization has resulted in a substantial increase in the wage premium for skilled labor, which when coupled with an unequal distribution of skills has created higher inequality in the distribution of labor incomes that is closely associated to disparities in schooling.
As each of the Asian tigers achieves greater market penetration in the United States, Mexico’s export-dependent growth becomes more threatened. In particular, as tariffs against textiles from China expire, Mexico can expect to suffer financially. Yet Mexico’s real problem with trade liberalization is that it exposes an uncomfortable truth – that Mexico is no longer a relatively “poor” nation, but its institutions and human capital nonetheless remain unable to compete with “wealthy” nations.
The Washington Consensus and Asymmetric Growth
According to the program of economic reform known as the “Washington Consensus”, one of the expected effects of trade liberalization is a rapid expansion of exports from lesser developed countries (LDCs), including labor-intensive manufactures. The idea is that this will improve micro- and macroeconomic performance and stimulate overall growth, since the economy-wide behavior in LDCs tends to depend quite critically on what happens in the export sector. Yet for Mexico from 1981 to 2004 a remarkably dynamic growth of exports—non-oil exports grew, on average, at 13.4% per year—has been associated with a surprisingly poor growth performance of gross domestic product (GDP)—an annual average rate of just 2.1%. Furthermore, as population grew at 1.6% during this period, GDP growth became negligible in per capita terms. The resulting "asymmetric" or "unbalanced" growth has relegated the economic masterminds behind the Washington Consensus to the popular status of "peddlers of dreams".
The failure of Mexico to cultivate widespread economic growth in an environment of explosive export growth is the most unexpected outcome of the reform process begun by President De la Madrid. This failure is best explained by the growth of the “maquiladora” industry. The term "maquiladora" is used for firms that are highly labor intensive and end-of-value chain assembly-type operations. Proximity to the US and trade liberalization opened up opportunities to develop these type of activities, particularly in the frontier states with the US. The maquiladora industry is so dangerous as a model of economic development because there is no incentive to invest in increased labor productivity. By virtue of the nature of the industry itself and the characteristics of the labor market, capital can grow by simply adding more cheap labor. Between 1982 and 2000, the sector was able to absorb more than 1 million workers while not only successfully resisting upward pressure on wages, but actually pulling off a significant cut in real wages. Indeed, the industry also seems designed to minimize the creation of production linkages (forward and backward) with the rest of the economy. Since so many maquiladora companies are owned by foreign corporations, a large degree of “transfer pricing” or pricing with the intent of producing no profit for the local company probably occurs in spite of substantial tax concessions from the state. The lack of domestic linkages ensures easy international mobility, and anecdotal evidence abounds suggesting that Mexico has lost hundreds of thousands of maquiladora industry jobs to China in the past decade.
In 2000, South Korea had a manufacturing industry with a level of exports similar to that of Mexico ("maquiladora" and "non-maquiladora" manufacturing exports together)—about $150 billion; however, Korea had a manufacturing industry generating twice the level of value added and only using half the level of imports of Mexico. Furthermore, Korea had relatively low levels of manufacturing imports despite a substantially higher level of investment in machinery and equipment, which traditionally have a high import component. Considering South Korea’s disadvantages to Mexico with regard to the Washington Consensus Model, this is a startling outcome. Yet it is also explicable in terms of the comparative absence of the maquiladora industry in South Korea. Because capital in South Korea can only consistently grow in an environment of rising productivity, significant investments in worker productivity are encouraged. In contrast, Mexico provides the paradigm case for the failure of the neoliberal model advocated by the Washington Consensus.
One of the main reasons why investment performed badly after the reforms is precisely that capital could easily end up having little incentive to invest. In this new investor framework, as capital (domestic or foreign) can increase its accumulation rate (at least for a long period of time) either via stagnant wages (in sectors with productivity growth) or via shrinking ones (where there is none), why should it make a significant investment effort? Furthermore, if in the new equilibrium of the labor market, labor loses the property rights it had over the benefits that may derive from the use of this additional capital (increased productivity), labor also can end up having little incentive to acquire human capital. If all the benefits that might accrue from human capital accumulation go to capital, workers actually have a lesser incentive to invest in themselves.
The failure of Mexico to cultivate widespread economic growth in an environment of explosive export growth is the most unexpected outcome of the reform process begun by President De la Madrid. This failure is best explained by the growth of the “maquiladora” industry. The term "maquiladora" is used for firms that are highly labor intensive and end-of-value chain assembly-type operations. Proximity to the US and trade liberalization opened up opportunities to develop these type of activities, particularly in the frontier states with the US. The maquiladora industry is so dangerous as a model of economic development because there is no incentive to invest in increased labor productivity. By virtue of the nature of the industry itself and the characteristics of the labor market, capital can grow by simply adding more cheap labor. Between 1982 and 2000, the sector was able to absorb more than 1 million workers while not only successfully resisting upward pressure on wages, but actually pulling off a significant cut in real wages. Indeed, the industry also seems designed to minimize the creation of production linkages (forward and backward) with the rest of the economy. Since so many maquiladora companies are owned by foreign corporations, a large degree of “transfer pricing” or pricing with the intent of producing no profit for the local company probably occurs in spite of substantial tax concessions from the state. The lack of domestic linkages ensures easy international mobility, and anecdotal evidence abounds suggesting that Mexico has lost hundreds of thousands of maquiladora industry jobs to China in the past decade.
In 2000, South Korea had a manufacturing industry with a level of exports similar to that of Mexico ("maquiladora" and "non-maquiladora" manufacturing exports together)—about $150 billion; however, Korea had a manufacturing industry generating twice the level of value added and only using half the level of imports of Mexico. Furthermore, Korea had relatively low levels of manufacturing imports despite a substantially higher level of investment in machinery and equipment, which traditionally have a high import component. Considering South Korea’s disadvantages to Mexico with regard to the Washington Consensus Model, this is a startling outcome. Yet it is also explicable in terms of the comparative absence of the maquiladora industry in South Korea. Because capital in South Korea can only consistently grow in an environment of rising productivity, significant investments in worker productivity are encouraged. In contrast, Mexico provides the paradigm case for the failure of the neoliberal model advocated by the Washington Consensus.
One of the main reasons why investment performed badly after the reforms is precisely that capital could easily end up having little incentive to invest. In this new investor framework, as capital (domestic or foreign) can increase its accumulation rate (at least for a long period of time) either via stagnant wages (in sectors with productivity growth) or via shrinking ones (where there is none), why should it make a significant investment effort? Furthermore, if in the new equilibrium of the labor market, labor loses the property rights it had over the benefits that may derive from the use of this additional capital (increased productivity), labor also can end up having little incentive to acquire human capital. If all the benefits that might accrue from human capital accumulation go to capital, workers actually have a lesser incentive to invest in themselves.
Mexico: A Quarter Century of Unfulfilled Potential
Mexico’s recent economic history is littered with financial instability. The recurrent currency, debt, and banking crises of the past quarter century had a ruinous effect on real economic activity. Mexico’s election years frequently intensify the risk of financial devastation. Massive devaluations, debt defaults, or both have accompanied three of the last five presidential elections – and history could easily repeat itself if the disputed 2006 elections continue to spur unrest into 2007. While Mexico is clearly not immune to economic catastrophe, Mexico has taken many strides toward ameliorating the fiscal infirmities that allowed the 1994 Tequila Crisis.
Mexico’s modern economic history begins in 1976, a tumultuous year that witnessed a rescue loan package from the Federal Reserve and US Treasury in April, the election of President Jose Lopez Portillo in June, the first peso devaluation in 22 years in August, and the discovery of enormous oil reserves. High oil prices fueled tremendous government spending, and the resultant triple threat of a weakening trade balance, yawning government budget deficits, and rapidly rising inflation endangered Mexico’s fixed-exchange-rate system. Foreign investors countered in the early 1980s by reducing their positions in Mexico and converting a large fraction of their Mexican bank deposits to dollars. In the run-up to the 1982 presidential election, the monetary authorities did little to address the country’s deteriorating financial situation and quickly found themselves unable to defend the country’s currency. Mexico sharply devalued the peso in February 1982. In August, the country announced it could no longer meet its short-term, dollar-denominated obligations. December bore witness to another sharp devaluation.
The 1982 crisis triggered Mexico’s worst recession since the Great Depression and prompted drastic policy reforms. During the 1980s, the country took steps to raise tax revenues and limit fiscal spending. Restrictions on foreign investment and trade were lifted gradually. In 1986, Mexico joined the General Agreement on Tariffs and Trade (GATT). Between 1985 and 1990, the country’s maximum tariff fell from 100 percent to 20 percent. Most sectors opened to foreign investment in 1989, paving the way for a wave of privatizations. By 1994, 80 percent of state-owned firms had been sold off.
The country’s growing commitment to policy restraint and reform began to pay off in the late 1980s with lower interest rates, lower inflation and declining debt-to-GDP ratios. In 1989, after the Brady Plan marked the completion of the debt-renegotiation process, Mexico finally regained access to international financial markets. In fact, foreign direct investment started flowing into the country at unprecedented rates. Yet by the end of 1994, in another presidential election year, Mexico once again suffered financial crisis. Unrest in Chiapas, along with the assassinations of the leading presidential candidate and the ruling party’s leader, fed uncertainty and increased speculation against the peso. As the government began to rely increasingly on short-term, dollar-denominated debt, the ratio of short-term debt to reserves rose sharply. In December, Mexican authorities announced yet another vast devaluation of the peso.
Sustained financial instability has ensured Mexico’s inability to achieve consistent economic gains. In 1983, real GDP per capita fell by more than 6 percent. Between 1982 and 1994, Mexico experienced no overall growth. During the Tequila Crisis, GDP per capita fell by almost 10 percent. Even with the past decade’s relative stability, GDP per capita has grown by an average of less than 1 percent a year since 1980.
Mexico’s modern economic history begins in 1976, a tumultuous year that witnessed a rescue loan package from the Federal Reserve and US Treasury in April, the election of President Jose Lopez Portillo in June, the first peso devaluation in 22 years in August, and the discovery of enormous oil reserves. High oil prices fueled tremendous government spending, and the resultant triple threat of a weakening trade balance, yawning government budget deficits, and rapidly rising inflation endangered Mexico’s fixed-exchange-rate system. Foreign investors countered in the early 1980s by reducing their positions in Mexico and converting a large fraction of their Mexican bank deposits to dollars. In the run-up to the 1982 presidential election, the monetary authorities did little to address the country’s deteriorating financial situation and quickly found themselves unable to defend the country’s currency. Mexico sharply devalued the peso in February 1982. In August, the country announced it could no longer meet its short-term, dollar-denominated obligations. December bore witness to another sharp devaluation.
The 1982 crisis triggered Mexico’s worst recession since the Great Depression and prompted drastic policy reforms. During the 1980s, the country took steps to raise tax revenues and limit fiscal spending. Restrictions on foreign investment and trade were lifted gradually. In 1986, Mexico joined the General Agreement on Tariffs and Trade (GATT). Between 1985 and 1990, the country’s maximum tariff fell from 100 percent to 20 percent. Most sectors opened to foreign investment in 1989, paving the way for a wave of privatizations. By 1994, 80 percent of state-owned firms had been sold off.
The country’s growing commitment to policy restraint and reform began to pay off in the late 1980s with lower interest rates, lower inflation and declining debt-to-GDP ratios. In 1989, after the Brady Plan marked the completion of the debt-renegotiation process, Mexico finally regained access to international financial markets. In fact, foreign direct investment started flowing into the country at unprecedented rates. Yet by the end of 1994, in another presidential election year, Mexico once again suffered financial crisis. Unrest in Chiapas, along with the assassinations of the leading presidential candidate and the ruling party’s leader, fed uncertainty and increased speculation against the peso. As the government began to rely increasingly on short-term, dollar-denominated debt, the ratio of short-term debt to reserves rose sharply. In December, Mexican authorities announced yet another vast devaluation of the peso.
Sustained financial instability has ensured Mexico’s inability to achieve consistent economic gains. In 1983, real GDP per capita fell by more than 6 percent. Between 1982 and 1994, Mexico experienced no overall growth. During the Tequila Crisis, GDP per capita fell by almost 10 percent. Even with the past decade’s relative stability, GDP per capita has grown by an average of less than 1 percent a year since 1980.
The Labor Market Effects of Immigration
Immigration in the world today is largely an economic phenomenon. Despite the numerous differences in the structure and function of governments throughout the western world, the world's people are overwhelmingly migrating to the United States, Canada, and Western Europe at the expense of Mexico, Central and South America, Eastern Europe, Asia, and Africa. Indeed, looking at world immigration flows on a purely national basis paints a picture of migrants that move unerringly straight toward the largest concentration of wealth in their immediate proximity. The United States is the destination for well over 95% of Mexican migrants and Western Europe has a similar monopoly on Eastern Europeans.
Given the obvious economic incentives for the immigrants themselves to go wherever their lives will be most quickly improved, the only worthwhile area of study is on the populations already in the destination country and those remaining behind.
For those communities that send a significant portion of their population abroad, immigration is a mixed blessing. The local economy is likely to swell dramatically with remittances from abroad, but the workforce will be decimated by the loss of many of the best workers who receive the greatest potential benefit from moving away. So-called "brain drain" is a very real possibility, but wildly overpopulated countries like China or India are likely to receive competing benefits that overwhelm that force.
Communities that welcome numerous migrants, either explicitly willingly or not, are likely to feel a palpable sense of anger toward those migrants when they add to the labor market and drive down prevailing wages. But immigrants don't join the workforce solely as a source of cheap labor. If the immigrants have any degree of higher education, they are significantly more likely than the native population to start their own small businesses. In a modern service economy, of the type that dominates many of the world's immigration magnets, small businesses that employ fewer than 100 workers are actually one of the greatest sources of job creation. While most immigrants will not likely immediately start a new business upon their arrival, over the course of their lifetimes they are more likely than the general population to choose this path.
The ultimate labor market influence of immigration is likely to be a steep decline in the value of the goods and services that immigrants can produce, and a concomitant rise in the living standards of everyone else in society that is only a consumer of those goods and services.
Given the obvious economic incentives for the immigrants themselves to go wherever their lives will be most quickly improved, the only worthwhile area of study is on the populations already in the destination country and those remaining behind.
For those communities that send a significant portion of their population abroad, immigration is a mixed blessing. The local economy is likely to swell dramatically with remittances from abroad, but the workforce will be decimated by the loss of many of the best workers who receive the greatest potential benefit from moving away. So-called "brain drain" is a very real possibility, but wildly overpopulated countries like China or India are likely to receive competing benefits that overwhelm that force.
Communities that welcome numerous migrants, either explicitly willingly or not, are likely to feel a palpable sense of anger toward those migrants when they add to the labor market and drive down prevailing wages. But immigrants don't join the workforce solely as a source of cheap labor. If the immigrants have any degree of higher education, they are significantly more likely than the native population to start their own small businesses. In a modern service economy, of the type that dominates many of the world's immigration magnets, small businesses that employ fewer than 100 workers are actually one of the greatest sources of job creation. While most immigrants will not likely immediately start a new business upon their arrival, over the course of their lifetimes they are more likely than the general population to choose this path.
The ultimate labor market influence of immigration is likely to be a steep decline in the value of the goods and services that immigrants can produce, and a concomitant rise in the living standards of everyone else in society that is only a consumer of those goods and services.
Thursday, May 17, 2007
Bernanke Sees No Subprime Mortgage Contagion
Reuters reports that Fed Chairman Ben Bernanke has come around to the conventional wisdom that the subprime mortgage woes that so captivated the media will not metastasize into a broader recession.
Of course, the housing sector is still the weak link in the economy these days, taking more than 1% off GDP after the top of the boom. The economy's dependence on the housing sector has been both underestimated and surprisingly narrow. Economic growth in retail has collapsed as the faltering housing market cut off easy access to home equity. Yet, the industrial sector has been almost completely unfazed. Exports have been soaring, and productivity outside of the construction industry has been chugging along nicely.
One of the unanticipated consequences of the housing sector's weakness has been the fate of Latin America. Many recent immigrants of Latin American extraction have found a livelihood in the construction industry - and they routinely send remittances back to their home countries to share the wealth with relatives. Since the top of the housing market, job prospects for these immigrants have gotten much worse and remittances have collapsed. The amount of money being funneled back to Mexico has fallen by more than 30% in the past year, and this big drop will have real consequences.
Many areas of Mexico, and not just in Chiapas, are almost completely dependent on these remittances. In five Mexican states, remittances from the United States are greater than the rest of the economic activity by everyone who remains in the country.
Subprime mortgages don't seem to be holding the US economy back, but the unintended consequences for Mexico and the rest of Latin America will certainly be severe.
Of course, the housing sector is still the weak link in the economy these days, taking more than 1% off GDP after the top of the boom. The economy's dependence on the housing sector has been both underestimated and surprisingly narrow. Economic growth in retail has collapsed as the faltering housing market cut off easy access to home equity. Yet, the industrial sector has been almost completely unfazed. Exports have been soaring, and productivity outside of the construction industry has been chugging along nicely.
One of the unanticipated consequences of the housing sector's weakness has been the fate of Latin America. Many recent immigrants of Latin American extraction have found a livelihood in the construction industry - and they routinely send remittances back to their home countries to share the wealth with relatives. Since the top of the housing market, job prospects for these immigrants have gotten much worse and remittances have collapsed. The amount of money being funneled back to Mexico has fallen by more than 30% in the past year, and this big drop will have real consequences.
Many areas of Mexico, and not just in Chiapas, are almost completely dependent on these remittances. In five Mexican states, remittances from the United States are greater than the rest of the economic activity by everyone who remains in the country.
Subprime mortgages don't seem to be holding the US economy back, but the unintended consequences for Mexico and the rest of Latin America will certainly be severe.
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