Mexico: Large, Immediate Negative Impact and Weak Medium-Term Growth Prospects
no surprise that Mexico was one of the countries in the world most affected by the crisis. In addition, two other factors have hurt the Mexican economy during the crisis:
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Some of the government’s fiscal and monetary policy responses were slow, timid, and clearly insufficient to cope with the magnitude of the external shock. The government’s precrisis policy decisions barely helped improve Mexico’s medium-term economic growth prospects, but they increased the economy’s vulnerability to an external shock. This is because the government’s policy decisions relied extensively on oil revenues to finance additional public sector spending and because Mexico has failed to diversify its export markets, which continued to be heavily concentrated on the United States.
As to growth prospects, we have cited three main obstacles that will limit the ability of Mexico’s economy to grow over the medium term:
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The recovery of the U.S. economy, which could be relatively slow in the next few years A large fiscal imbalance that needs to be addressed relatively soon and that will imply either higher taxes or lower government expenditures A foreseeable contraction in banking credit to the private sector
These three factors may limit Mexico’s ability to grow over the medium term and would be additional to the structural weaknesses that have already limited Mexico’s economic growth during the past three decades. Finally, we discussed the perspectives on poverty and growth in Mexico. Our conclusion is that poverty will probably soar as a result of the crisis and that it will take a relatively long time to return to the precrisis levels in terms of both poverty and income. We therefore see a need for the Mexican authorities to adopt measures to confront the short-run problems of poverty, unemployment, and low income levels, but, at the same time, to implement deeper reforms in a wide range of areas (education, building of a social safety net, infrastructure investments, and so on) in order to transform the Mexican economy and improve its medium- and long-term prospects.
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