Question

Please use the economics knowledge you have learned so far to analyze the case below. You can propose your own questions and then answer them. Remember, there is no absolutely correct answer to this exercise. Its purpose is to provide you an opportunity to demonstrate your ability to think like an economist by applying economic principles to interpret the logic of a real-world phenomenon.

Will Economic Reforms in Mexico Boost Economic Growth?

More than 18,000 U.S. companies, including Fortune 500 firms, have operations in Mexico. Proximity is to the United States is an advantage of doing business in Mexico but investing in Mexico is risky because of the presence of crime and corruption. The Mexican government has failed to fully establish the rule of law, which is critical for the long-term prospects of the Mexican economy. Mexican entrepreneurs also suffer from problems in the banking industry that make it difficult to obtain the funding needed to finance expansion

Answer 1

Mexico signed North American Free Trade Agreement (NAFTA) to collaborate with USA which brought about new wave of globalisation and increase in trade leading to multiple rise in GDP. Not just it’s oil export but even moribund steel and automotive industries became highly productive. However, it was initially hit hard just like any other economy in global market because of Chinese competition. Still, Mexico’s labour-market had protection due to its relation with US.

The economic reforms particularly in social policy and educational sector led to significant fall in level of inequality. But average total factor productivity hasn’t been rising which is the measure of economic boost in the long run and the overall productivity and economic growth is negative. This results in significant reduction in standard of living in Mexico compared to other economies.

However, to boost economic growth it must be kept in mind, especially in case of Mexico that external trade and foreign investment alone cannot uplift the economy if there isn’t contemporary development in the productivity i.e. human capital. Secondly, Mexican partnership with its domestic enterprise to enlarge their production and sector specific policies are needed to boost the economy. This will help in analysing problems and rendering solution for firms under risk.

Mexican government’s failure to establish law and order and proper institutions has led to significant loss in its growth. Thus, having strategy to deal with institutions along with industrial policy and human capital simultaneously will help to respond on diverse front and become more competitive in global market.