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When the going gets tough…

3 December 2008

Víctor Cardoso, writing in Jornada, sees yet another danger to Mexico peeping over the border:

Foreign companies with operations in Mexico have sucked nearly 2,300 million (2.3 billion U.S.) dollars out of the nation’s economy, to provide emergency funding, resulting from the lack of liquidity during the present financial crisis for their domestic operations.

According to Banco de Mexico data, from January to September of 2008, profits remitted to foreigners is nearly equal to all of 2007, when 2,619 million U.S. dollars (2.6 U.S. billion) left the country.

Central bank officials say the phenomenon reflects “the normal transactions of a country well-integrated to the world-wide economy”. But for the financial analysts, the remittances to the home offices indicate financial pressures resulting from an international credit shortage, and attempts to self-finance.

A report from Banamex on the stock market mentions that Mexico’s situation is not unique, and that in all Latin American countries, there is a outflow of cash accumulated over the past 20 weeks.

The Latin American economy as a whole is fairly sound, and most analysts expect Latin America to be less affected by the “credit crisis” than the rich nations.  Mexico has a unique problem in that it’s the “weakest link” in NAFTA.  If the U.S. economy was expanding, and U.S. capital was underwriting Mexican expansion  — NAFTA would be a good deal for Mexico.

The assumption, when NAFTA was new, was that what went up would keep going up.  People would keep buying consumer goods, or bigger houses, or more cars forever.  I suppose if they could keep borrowing money forever, and there was an infinite availability of stuff, nothing could ever go wrong.  And if wishes were horses, beggars would ride.

There’s one of two things going on right now in the U.S. — or two things happening simultaneously.  Either there isn’t enough money for all the stuff…. or the people who have money can’t use any more stuff.  They’re stuffed… we’re stiffed.   The reaction by the foreign companies is not — what it probably should be — to unload some of their stuff (or their cash) in Latin America, but to pull all the cash back they can, and hope they can get people to acquire even more stuff.

Think about buses.  The inter-city buses were largely Mexican made products with U.S. or European name plates, but the short-run and municipal buses were mostly second-hand U.S. buses.  Mexico City had Mexican made buses, and, in my time here, the local buses in smaller towns were less and less likely to be used American school buses or airport limos, and more likely to be second hand Mexico City rutas.  I haven’t seen a used U.S. school bus on a Mexican street in several years now.

NAFTA was probably a big help in building the Mexican bus manufacturing business, but it’s not a consumer good that requires the U.S. any more.  The same with Mexican autos (though lack of sales north of the border are hurting).  Mexicans can buy their own cars and more than meet their own demand.  Losing U.S. capital may not be a disaster.  I’ve thought for years that Mexico — only the 10th largest economy in the world — was held back by trying to integrate with the world’s largest economy.  It would be better off over the long run looking at markets — and financing sources — more in its own league.  There are several in the neighborhood — Brazil, Argentina, Venezuela just for starters.

When you think about it, smaller economies can’t pull their cash out without facing consequences at home sooner. I don’t know what percentage of the entire U.S. cash the money pulled out of Mexico amounts to.  It’s not going to be noticed much, and the drop in sales are going to be overlooked.  But, with smaller economies (not insignificant, just smaller), the effects of pulling out a few billion to save a banker’s bonuses is going to have the exporters screaming bloody murder.  A billion here, a billion there is real money in Latin America.  With less stuff all around, no one country’s system can afford to write off a market… especially one of equal size.

The U.S. situation may slow growth in Mexico (and many argue that NAFTA has been doing just that for years) and slow the acquisition of consumer goods but I’m not sure Mexico — or anyone else — really needs all that “stuff.”  Sure, a car (or two or three) in every garage (and a three car garage on every house) would be nice, but buses to every health clinic and a health clinic in every colonia would still require a huge economic expansion.  The money is there — from Latin American sources (both the Latin Common Market, Mercosur, and the self-financed Latin American development bank, Banco del Sur, are likely sources) and the goods and services are available.

The meek may not inherit the earth… but they’ll have enough stuff to get by.

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