Three reasons Washington should care about Mexico’s meltdown

Economies around the world have been hit hard by the coronavirus pandemic. In the United States, we have seen a GDP contraction of 9.5 percent, compared with the last quarter, putting an end to the economic boom of the past few years. Europe expects to see its economy contract by 8.3 percent this year, and Japan’s is predicted to shrink by a similar percentage.

Governments across the world have dedicated massive financial resources to keep their economies afloat in the face of a threat that is simultaneously exogenous and endogenous. By doing so, they have inflated their national debts, but have a much better chance of an early recovery from the crisis. For example, the Congressional Budget Office recently announced that new government spending — up from 79 percent last year — will make U.S. government debt surpass the size of the entire U.S. economy in 2021.

Mexico is an outlier. Like other countries, it has been hit hard by the pandemic with more than 76,000 dead, a number that some experts believe should be multiplied several times, given widespread under-reporting. The Mexican economy saw a contraction of 18.9 percent in the second quarter of 2020, and conservative estimates predict a 10 percent or higher drop in GDP for the year. Just to be clear, that means the disappearance of 1 in 10 dollars in national production in 2020. More than 12 million jobs have been lost since the beginning of the pandemic and, although July brought a strong recovery in employment data, today there are 5.5 million more people unemployed than there were in March.

President Andrés Manuel López Obrador, known as AMLO, has refused to engage in emergency stimulus spending, instead preferring to stick to his mantra of fiscal conservatism — or, as he calls it, “republican austerity.” While other leaders are courting national and international investors to pump desperately needed resources into their economies, AMLO appears determined to drive capital away by weakening institutions and reducing investor confidence.

AMLO’s disastrous management of the Mexican economy has meant that even before the onset of COVID-19, the country was in trouble, with five straight quarters of economic contraction. At a time when Mexico should have been reaping the rewards of a new free trade deal with the United States and Canada, a booming U.S. economy, and a developing U.S. trade war with China, AMLO somehow managed to put an end to a period of slow but steady growth. 

According to Valeria Moy of Mexico’s Institute for Competitiveness (IMCO), using estimates supported by Mexico’s Central Bank, the economy is unlikely to return to growth before 2022 and GDP will not return to 2019 levels until 2032 — meaning an entire decade of growth has been lost. 

While Washington’s main focus is naturally on the upcoming U.S. election, COVID-19 and the domestic economy, it no longer can ignore the economic disaster afflicting Mexico. Events transpiring south of the border should matter to the United States for various reasons.

First, we must consider the impact on migration. Shannon K. O’Neill from the Council on Foreign Relations recently wrote of the immigration consequences for the United States in the event of Mexico’s economic collapse, arguing that more and more Mexican migrants are finding their way to the U.S. Southwest border at a time when Central American migration has been dropping and when Mexico should be benefiting from its changing demographic profile. 

Previously mentioned at the highest levels of bilateral diplomacy, this issue threatens to become a campaign issue before the November election. The rising numbers of Mexicans arriving at the Southwest border will grow even more as the Mexican government finds itself with less and less fiscal revenue to pump into its social programs. To put it in perspective, the number of migrants arrested along the U.S. border with Mexico more than doubled between April and July, according to figures from the U.S. government.

Second, the recession in Mexico will have an immediate economic impact on the U.S. economy. The integration of the U.S. and Mexican economies over the past three decades has been impressive — Mexico surpassed China this year to become the United States’s No. 1 trading partner. Unlike China, Mexico has become a major importer of U.S. goods and that market now seems worryingly fragile in the face of the economic crisis. A drop in exports to Mexico will both damage U.S. interests and exacerbate the prevailing rhetoric over the importance of trade deficits.

Third, a weaker economy and higher rates of unemployment surely will mean more young men and women turning to organized crime to satisfy their needs. The AMLO administration, like its predecessors, has proven stunningly ineffective in controlling organized crime violence — homicides took more than 35,500 lives in 2019 — and the flow of drugs to the United States. To add to these woes, cartels in Mexico are investing heavily in developing domestic consumption of illegal narcotics as U.S. border controls and the pandemic have complicated access to the U.S. market. 

After two years in office, AMLO still has not defined a public security strategy for the country, although he has pinned his hopes rhetorically on a social development approach to reducing crime and violence. The collapse of the economy and the social safety net undermines that already troubled effort. 

In sum, the combination of these three factors means that whoever wins the November election will be forced to consider a much more active approach to bilateral relations with Mexico. For the United States, it is vitally important that Mexico does not fall into economic and financial crises as it has done so often in the past. One may think that AMLO’s commitment to fiscal austerity might help prevent that from happening, but it is his neglect of the macroeconomic fundamentals of the country and the urgent needs of both investors and the business community that may precipitate a situation in which the United States will be called upon to inject emergency funds into its major trade partner. 

It is fair to say that nobody north or south of the Río Grande wants to see a repeat of the 1994 peso crisis or the subsequent Clinton administration rescue of the Mexican economy in 1995. Continuous dialogue and engagement to help move Mexico in the right direction could potentially save North America hundreds of billions of dollars now, and years of growth later.

Duncan Wood is the director of the Wilson Center’s Mexico Institute.