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Public insecurity and the private sector in Mexico

David A. Robillard and Duncan Wood

As the North American economies continue their recovery from the deep recession of 2008-2009, and the debate over regional competitiveness marks the discussions between the three North American Free Trade Agreement (NAFTA) partners, Mexico is facing an economic challenge of its own that stems from its ongoing conflict with drug trafficking organizations (DTOs). The violence threatens to become a destabilizing factor for the Mexican economy, despite the fact that Mexico’s macro-economy is weathering the security crisis surprisingly well, and will in turn threaten the economic interests of Mexico’s North American partners.

The overall economic panorama in the country is very encouraging indeed: growth was more than five per cent in 2010 and is predicted to be closer to four per cent in 2011; inflation is firmly under control at roughly three per cent; government finances are among the healthiest in the world —with a relatively small national debt and a tiny deficit estimated at three per cent for 2011; large amounts of foreign investment are flowing into the country and there is a favourable medium-term outlook.

Despite this rosy forecast, certain areas of the economy, both geographical and sectoral, are feeling the impact of the violence and could dramatically change. Clearly the country’s North has been hit worse than the South, with spiraling violence impacting business confidence there. A number of factors come into play.

First, although foreign investment levels remain high, there has been a shift in both the kind of investment and its destination. Whereas Mexico has had a creditable record in recent years of attracting Foreign Direct Investment (FDI) to the productive sector, the past year has seen a spike in portfolio investment inflows as investors seek to take advantage of the booming stock market. In addition to the inflationary and market bubble fears that this generates, it is important to point out that, should the security situation worsen still further, this money can leave the country as rapidly as it came in.

The investment outlook’s second dimension is a shift in FDI from the North of the country to more central locations, with the Federal District and the Estado de Mexico benefitting in particular.

Third, although Mexico’s overall investment numbers are good, they could be better. Credit ratings agency Fitch announced on Jan. 12, 2010 that “Mexico’s drug war seems to be crimping growth and investment” as investors begin to worry about the security of their investments. According to the Association of Maquiladoras in Reynosa, 80 per cent of its members have been seriously affected by crime and, as a consequence, one in five members have postponed investments for expansion of plants.

Mexico’s real estate market, battered by the effects of the country’s 6.5 per cent drop in GDP in 2009, is just beginning to recover. However, prices are not seeing substantial gains due to the drop in buyer confidence and interest in the North.

In cities like Ciudad Juárez, of course, the market has been depressed for years, but the headlines from the drug conflict have meant that Americans are not looking to buy South of the border at the present time, and a substantial number of upper-middle class homeowners are looking to move South.

Monterrey is perhaps the best example of this, with a large-scale exodus from a city that just five years ago was dubbed the safest in Latin America. Indeed, Monterrey is the most chilling example of how the violence is hitting the industrial North. Sixty murders had already been recorded in the first three weeks of 2011. This means that by night, streets and restaurants are often deserted with residents living under a virtual curfew, bringing about a drop in retail sales and a jump in small business failures.

As a result, industry is crying foul. The influential Employers Union (COPARMEX) recently stated that because of the effects of crime and companies’ closures, some $15 billion of investment —or two per cent of GDP— has been lost. With upcoming presidential and gubernatorial elections, the business sector is threatening electoral consequences if government does not create mechanisms to attack this problem.

The leaders of Canada and the United States have already recognized the importance of Mexico’s descent into violence. The Mérida Initiative on the one hand, and the Canada-Mexico Joint Action Plan 2010-2012 with its heavy focus on questions of security on the other hand, both seek to assist Mexico in its struggle, largely because of the potential negative impact on their societies and economic interests of rising insecurity. Although Mexico continues to grow, and the government denies that security concerns are having a profound impact on the economy, the lost opportunities for higher growth, greater business and investor confidence and more job creation will likely come back to haunt not only President Felipe Calderón, but also Mexico’s partners in North America.

David A. Robillard is Managing Director for Kroll in Latin America. He has over 15 years experience advising on matters of business partnering, corporate investigations and competitive risks in a range of industries. He can be reached at drobillard@kroll.com. Duncan Wood is director of the Canadian Studies Program at the Instituto Tecnologico Autonomo de Mexico (ITAM) in Mexico City. He is also Senior Associate at the Center for Strategic and International Studies, and a Senior Adviser for the Mexico Institute of the Woodrow Wilson International Center for Scholars, both in Washington, D.C. He can be reached at: itamdunky@gmail.com. 

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