Mexico: Feeble Growth Calls For Heftier Reforms

Mexico has not yet benefited from the U.S. growth spurt, and the weak pace emphasizes the need for reforms in labor laws, energy, and taxes.

Mexico posted a trade deficit of $434 million in August, with both imports and exports falling. So far in 2003, the deficit is narrower than the same-period total in 2002. But the lack of export growth to the U.S., which buys nearly 90% of Mexico's exports, is holding back domestic factory output. According to the U.S. Commerce Dept. data, Mexican exports to the U.S. in the first eight months are running about 2% above last year's pace, but much of that reflects higher oil shipments. Exports of manufactured goods are lagging. Exports of vehicles and parts, for instance, are down about 3.6% from their monthly average for all of 2004.

Little wonder, then, that factory output fell 4.6% in the year ended in August, with a 3.1% drop in export-oriented maquiladora production. Such data forced the government headed by President Vicente Fox to admit recently that economic growth will reach about 1.5% in 2003, half of what it expected earlier in the year.

Factory Output Is Slumping Badley
As a move to lift exports, Mexico has allowed its currency to slip against the dollar, especially since inflation, at an annual rate of 4.04% in September, is not a worry. The peso's 8% slide so far in 2003 was accelerated in the third quarter when Mexican companies needed dollars to pay for foreign obligations. But factories face increased competition from Chinese producers who can make goods cheaper, and the currency depreciation can only partially offset that cost differential.

Although higher oil prices will provide extra revenue, fiscal reform is still needed. Mexico has one of the lowest tax-collection rates in Latin America. Fox has proposed an across-the-board 10% value-added tax to replace the current 15% tax, which is riddled with exemptions. But political opponents say it will have a regressive impact on the poor. Fox also is finding it hard to muster support to change energy and labor regulations that could lift private investment in the country. Such reforms would lower the cost of doing business in Mexico and maintain the country's competitive export edge.

By James C. Cooper & Kathleen Madigan

By With Geri Smith in Mexico City

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