Manuel Sánchez: Mexican structural reforms and the binational
relationship
Remarks by Mr Manuel Sánchez, Deputy Governor of the Bank of Mexico, at the Latino
Business and Community Leader Luncheon, Federal Reserve Bank of San Francisco,
Los Angeles, California, 9 September 2014.
* * *
I would like to thank the Federal Reserve Bank of San Francisco for inviting me to participate
in this luncheon with the business and community leaders of the great city of Los Angeles. It
is an honor to speak on Mexico's structural reforms and how they will enhance the economic
ties between our countries.
Today I would like to organize my comments in three parts: first, the binational economic
relationship; second, the opportunities stemming from Mexico's ambitious structural reform
agenda; and, third, recent developments and the outlook for the economy. As usual, my
comments are entirely my own and do not necessarily reflect those of the Bank of Mexico or
its Governing Board.
The binational economic relationship
The United States and Mexico have long had strong economic ties, which have grown tighter
in recent years. The relationship encompasses trade in goods and services as well as labor
migration.
In the last two decades, the annual dollar value of Mexican merchandise exports to the
United States has almost sextupled, while U.S. sales to Mexico have more than tripled.
California has been a significant destination and origin for these trade flows.
Both countries have clearly exploited their comparative advantages. The abundance of labor
in Mexico has combined with new technologies and know-how from the United States and
other advanced nations to allow the country to produce a host of products of increasing
sophistication at low cost. At the same time, Mexico has enjoyed a considerable degree of
specialization in products such as autos.
Economic engagement has been facilitated by geographic proximity, as well as two decades
of life with the North American Free Trade Agreement (NAFTA). Furthermore, integration
between the two countries has occurred in a context of ever-deepening globalization.
The effects of increased trade due to NAFTA seem to have overridden any potential trade
diversion from the preferential trade agreement. In fact, during recent years, Mexican exports
have seen geographic diversification. While at the turn of this century, approximately
90 percent of Mexico's total nonoil exports went to the United States, currently this proportion
is roughly ten basis points lower.
In services, exchange between the two countries has been significant in tourism and finance.
In particular, major direct and portfolio investments come from and go to the United States.
Additionally, net migration to the United States has been considerable for a long time. A few
facts of note include the following. The migration corridor from Mexico to the United States,
by number of immigrants, is by far the most important in the world. The largest demographic
minority in the United States is now comprised of the Hispanic population, with families of
Mexican heritage forming the largest bloc in that group.1
California, with an economy almost twice as large as that of Mexico, is the state that absorbs
the most Mexican migrants. This is a significant reason Mexico and California are becoming
more and more intertwined. But Mexico's influence in the United States has become ever
broader as immigration has spread to areas that are far away from the immigration corridor,
such as small towns in North Carolina and ranches in Northern Colorado.
Also, Mexican immigrants in the United States tend to get attached to this country, as
suggested by the relatively high proportion of immigrants owning a house and the low
fraction of total earned income sent in the form of remittances to Mexico.2
During this century, annual net migration flows to the United States have, on average,
declined, and since 2008 they have been slightly negative.3 There are several explanations
for this phenomenon, the most important being a combination of demographic factors
stemming from a previous decline in the fertility rate, and the aftermath of the big financial
crisis.
Indeed, Mexican immigrants living in the United States were likely hit hard by lower economic
growth, especially in sectors with high concentrations of Mexican labor, such as construction.
Remittances to Mexico from abroad have declined since the crisis, and economic recovery
has been weak, thus affecting the incomes of Mexican families back home.
It is reasonable to expect that, as the U.S. economy recovers ground, migration may
increase. However, the aforementioned demographic trends and new labor opportunities in
Mexico, derived from higher economic growth and structural reforms, may result in lower
migration flows than those of the 1990s.4
Empirical evidence suggests that immigration has not hurt job creation in the United States
and has contributed to output and productivity. Other studies posit that legalization of
immigrants in the United States could increase economic efficiency through channels such
as higher labor mobility, better matches between wages and skill levels, and investment in
training and education.5
Structural reforms
The Mexican government has embarked on an ambitious reform agenda encompassing
many sectors of the economy. The broad array of reforms is likely to yield benefits in terms of
greater investment and productivity, thus enhancing potential long-term economic growth
and the general well-being of Mexicans.
A stronger economy south of the border should, in turn, have spill-over effects in the United
States, with greater demand for U.S. products, and further deepening integrated production
processes, such as in software and high-tech industries.
Mexico's reforms have changed the rules of the game and the legal frameworks affecting the
labor markets, education, the telecommunications sector, the financial system and the
2
See, for example, Cervantes, J.A., and A. Rodríguez (2014), "Propiedad de la vivienda en Estados Unidos de
la población inmigrante de origen Latinoamericano y del Caribe." CEMLA, Documentos de Remesas, 2;
Cervantes, J.A. (2014), "El perfil de la población de origen guatemalteco en Estados Unidos." Programa de
aplicación de los principios generales para los mercados de remesas de América Latina y el Caribe,
CEMLABID, July.
3
See Cervantes, J.A (2014), "Indicadores sobre migración Mexicana hacia Estados Unidos." CEMLA, August.
4
A similar argument was advanced by Gary Becker. See Becker, G.S. (2013), "The decline in illegal
immigration from Mexico."
http://www.becker-posner-blog.com/2013/03/the-decline-in-illegal-immigration-frommexico-becker.html
5
See Peri, G. (2012), "The effect of immigration on productivity: evidence from U.S. states." The Review of
Economics and Statistics, 94(1): 348-358; Hinojosa-Ojeda, R. (2012), "The economic benefits of
comprehensive immigration reform." Cato Journal, 32(1).
energy sector, among others. The general aim has been towards making markets operate
more freely, reducing obstacles to private investment and increasing competition.6
Among other changes, with the new labor legislation, temporary hiring is allowed, and wages
can be determined by productivity rather than seniority. Also, mandatory back wages after
labor disputes have been capped, and the "closed shop clause" for unions was repealed,
meaning that if a worker leaves a union, the employer does not have to terminate the labor
relationship anymore.
The education reform enforces hiring and promotion based on qualifications and
performance for teachers in public education at all levels before college. An autonomous
evaluation institute is in charge of the process, open not only to candidates from teachers'
schools.
In telecommunications all operators are allowed to provide triple play services subject to
restrictions for dominant firms, and limits on foreign direct investment (FDI) are reduced. New
licenses for TV frequencies will be auctioned to form at least two new national-coverage TV
companies. A new regulatory authority is now in place.
The financial reform pursues stronger protection for creditors' property rights, by closing legal
loopholes used by debtors to prolong the debt resolution process, and reducing obstacles to
expediency in the judicial process to recover collateral. More competition is encouraged
through the facilitation of loan substitution by debtors across banks and the prohibition of
bundled sales of financial products. Regulation and supervision are strengthened, and a new
banking resolution mechanism has been established.
Of particular interest is the energy reform. Before the reform, production and most other
activities in this sector were open only to government monopolies. The reform has modified
the Mexican Constitution to allow wide access to the energy sector to private participants.
Major changes include contracts in exploration and extraction for oil and hydrocarbons;
permits in gas processing and oil refining, transportation, storage, distribution, and
commercialization; and participation in electricity generation and sales.
The depth of the benefits the reforms could eventually bring depends greatly on how they are
implemented. Additionally, to more profoundly transform Mexico's economy, other policy
measures would help, such as strengthening the rule of law, enhancing physical
infrastructure, and improving public security.
Meanwhile, the reforms undertaken offer great scope for further U.S. investment in Mexico,
thus further binding the two economies.
Mexico's economic outlook
After a year and a half of deceleration, during 2014 Mexico's economy has been gaining
steam. Higher momentum has been supported by stronger manufacturing output which, in
turn, has been linked to increasing external demand, notably from the United States. Auto
exports to this country, in particular, have posted a significant rise since February.
Following six quarters of decline and stagnation, mainly reflecting lower public spending and
the bankruptcy of the three major housing developers, construction picked up in the second
quarter. Domestic spending also has begun showing signs of recovery. Both private
consumption and total investment have rebounded, although the latter remains below the
levels prevailing two years ago. Unfortunately, consumer and producer confidence indexes
remain relatively low.
Notwithstanding some recent pressure partly from geopolitical risks, international financial
volatility has declined so far this year, largely reflecting the market's perception that the
normalization of monetary policy in the United States is not imminent and will be gradual.
Declining international risk aversion has fueled some appreciation of Mexican financial
assets. The yield curve has shifted downward in tandem with that of the United States.
As in many other emerging-market economies, the proportion of nonresidents' holdings of
Mexican government peso securities has remained relatively stable since 2013. This may
attenuate concerns about possibly ever-increasing financial risk in the economy.
However, as experience confirms, portfolio capital flows can easily stop and even revert
following a change in market sentiment. Due to longstanding, extraordinarily accommodative
monetary policies in advanced nations, international markets have tended to react negatively
to good news from those economies and vice versa. This apparently awkward behavior
seems to reflect the search for yield facilitated by those policies.
Mexico's strong fundamentals have drawn players with long-term investment profiles. Yet,
Mexico is not immune to spillover effects from factors unrelated to fundamentals, such as
anticipation of the path of U.S. interest rates, which could induce a redirection of capital flows
away from emerging markets. Hence, domestic financial risks should be monitored.
On the back of expected higher U.S. growth, a gradual recovery of the Mexican economy this
year and next is predicted. The Bank of Mexico's GDP interval forecast is for 2- to
2.8percent growth in 2014, and 3.2- to 4.2-percent growth for next year. Analysts' consensus
point forecasts currently fall within these ranges.7
Some risks to these forecasts persist. To the upside, faster U.S. output growth and a
greaterthan-foreseen positive impact from structural reforms could occur. To the downside,
insufficient improvement in consumer and producer confidence is also a possibility.
In the context of slower GDP growth, since March 2013, monetary policy accommodation
has been successively broadened. The objective for the policy interest rate, which is the
interbank overnight rate, has accumulated a reduction of 150 basis points during this period.
On the other hand, since July, annual headline inflation has breached the upper limit of the
variability interval around the 3 percent permanent target. Pressures from both the core and
noncore components of the National Consumer Price Index have contributed.
Going forward, some inflation risks should be watched. Second-round effects from possible
minimum wage hikes, unfavorable shocks to noncore inflation and volatility in global financial
markets may make convergence of inflation to the 3 percent permanent target challenging.
Concluding remarks
Mexico and the United States have been growing closer in recent years, both economically
and culturally. Trade in goods and services, as well as labor migration, have benefitted both
countries. In this connection, California, the state with the largest Mexican population, has
played an important role.
An ambitious Mexican reform agenda opens up a great variety of business opportunities to
U.S. investors. While potential gains from the reforms may be to the advantage of the entire
Mexican economy, certain sectors such as energy and telecommunications are likely to
emerge as highly attractive destinations for FDI.
Finally, recent developments reveal that the Mexican economy has begun to rebound, and
higher expected growth in the United States provides a foundation for the widely held
forecast of Mexico's gradual economic recovery. Some inflation risks should be watched,
since if they materialize, they could make convergence to the 3 percent permanent target
difficult.