Political And Economic Transformation: Mexico

Political and economic transformation: Mexico

Introduction

For a long time, Mexico has been considered as one of the strongest economies in Latin America, according to Elstrod, H. (2007, p.23), Mexico and Brazil alone represent two-thirds of the total GDP of Latin America. One of the great advantages of this country is that it shares a border with the United States, which is one of thestrongest economies of the world. This closeness to the U.S. has had an important influence in the economic situation of Mexico and has increased its attractiveness to foreign investment. Mexico has struggled for many years to maintain a healthy economy. Throughout its history, this country has faced different political and economic events that have shaped its current situation.

The followingdocument pretends to describe the economic and political transformation that Mexico has experienced. First of all, the main political and economic events that this country has experienced in the past years will be presented and it will be explained how they contributed to the current economic status. Then, the role of politics in the economic transformation will be described along with the mainproblems of stability, poverty and inequality. Finally, a recommendation will be made for a company to expand its operations in this market.

Economic and political events and its effects on the nation’s economic situation

We must first understand that Mexico was conquered by the Spanish in the 16th century and finally obtained its independence in 1821. Ever since the country became independent itwas established as a democracy. This nation’s federal government has three branches: executive, legislative and judicial. The executive power is represented by the president, the legislative power is vested on the Congress of the Union and the judicial power is exercised mainly by the Supreme Court of Justice.

From 1951 until 1970, the performance of Mexican economy was consideredsuccessful; the GDP grew at a constant rate of 3% - 4% annually and presented an average inflation rate of almost 3% (Lustig, N. and Székely, M., 1997, p. 3). These are called the “golden years” of the Mexican stabilizing development. This period was characterized by a modern and industrialized economy along with macroeconomic and financial stability. It is also important to note that at that time there wasa protected market with high tariff duties on imports and a highly regulated foreign direct investment. Moreno, Pardinas and Ros (2009, p.156) state that the economic strategy of the period is called import substitution industrialization (ISI) and that it was designed to protect domestic manufacturers from imported goods. Also, the government played an important role creating many publiccompanies in order to intervene in key markets, reduce unemployment and help private companies to avoid bankruptcy.

The economic situation of Mexico changed during the 1970’s. The government tried to make the economy grow by increasing dramatically the public expenditure. Unfortunately, at the same time the oil prices also increased and since Mexico was a net importer, the economy suffered. Moreover,during 1974 an inflation of 20% occurred (Hogan, J., p.114). In the late 1970’s the state oil company, PEMEX, discovered large amounts of oil reserves. The government grew overconfident and assumed that the oil prices would be increasing indefinitely. The state nationalized the banks and continued borrowing money which increased the foreign debt. According to Lustig, N. and Székely, M. (1997, p.4), from 1978-1981, the increase of international oil prices allowed the GDP of Mexico to grow at an average rate of 8.4% annually, the total investment increased 16.2% and the employment rate also experienced a growth of 5.4%. Nevertheless, the fact that the government was becoming corrupt and had overspent decreased the confidence of the private sector and their money left the country. Along...