Mexico has a chance to be the world's 'next great power'

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mexpowerfrontMany people would be stunned to find that the Mexican economy is ranked right up with the UK and Italy.

Mexico has the 11th-highest GDP in the world based on purchasing power parity, according to the International Monetary Fund. As Europe weakens, it will be in the top 10 in the not-too-distant future.

Yet, this country is regarded by many Americans as a Third World nation, dominated by drug cartels and impoverished people desperate to get into the United States.

Obviously, Mexico is not as developed as Britain is. Like most nations transitioning from underdevelopment to greater development, Mexico suffers from substantial class and regional inequality.

But it doesn't change the basic reality of Mexico’s relative strength.

Mexico Has One of the Leading Economies in the World

While it is true that organized crime exists in Mexico and that many Mexicans want to immigrate to the US, a roughly equal number are leaving the US and returning to Mexico… drawn by economic opportunities in their home country.

The largest auto plant in the Western Hemisphere is in Mexico, and Bombardier builds major components for aircraft there. Mexico has many problems, of course, but so does the UK (the 10th-largest economy) and Italy (12th).

At the same time, Italy also has substantial regional inequality. Mexico can't aspire to British standards, but Italy is a reasonable model.

Inequality diminishes the significance of being 11th in some ways. Mexico is commonly perceived, far too simplistically, as a Third World country with a general breakdown of law and a population seeking to flee north.

That perception is also common among many Mexicans, who seem to have internalized the contempt in which they are held.

Mexicans know that their country’s economy grew 2.5 percent last year and is forecast to grow between 2 percent and 3 percent in 2016 roughly equal to the growth projection for the US economy. But, oddly, they tend to discount the significance of Mexico’s competitive growth numbers in a sluggish global economy.

Here, therefore, we have an interesting phenomenon. Mexico is, in fact, one of the leading economies of the world, yet most people don’t recognize it as such and tend to dismiss its importance.

NAFTA is Mexico’s Biggest Opportunity and a Major Threat

North America is now an island of tranquility and opportunity with Mexico as the most promising region economically.

The Eastern Hemisphere (Eurasia in particular) is moving toward systemic failure. The EU is struggling to manage a host of problems. Russia is contending with strategic and economic challenges, particularly the collapse in oil prices.

China is trying to find a stable new normal and maintain social stability. As for the Middle East, no summary will suffice. The rest of the Eastern Hemisphere is experiencing what I might call “normal instability.”

Compared to other parts of the world, North America is not only remarkably stable but is also doing well economically.

After the collapse of the Soviet Union, there was no longer any European global power. The center of gravity of the international system shifted away from Europe… to North America.

While roughly 30% of GDP comes from exports in Russia, 46% in Germany, and 23% in China, US exports account for only 13% of GDP with over a third of that total sold to Canada and Mexico.

While Eastern Hemisphere powers teeter on the edge of an economic volcano (or tumble in), the United States finds itself relatively insulated from declines in global import demand. And the US insulates the countries on its northern and southern borders to a great extent.

The contrast between the European Union and NAFTA is critical. The most important difference is that Germany, the foundation of the European system, is a massive exporter, while the United States is a net importer. Given the vastness of the US economic base, the net negative flow has little impact.

However, it has an important twist in terms of Mexico. Exports, more than 80% of which go to the United States, constitute 32% of Mexico’s GDP. Thus Mexican exports to the US amount to about a quarter of Mexico’s economy.

US GDP is about $17 trillion, and imports from Mexico are about 0.2% of the US economy, so they have very limited impact. But their impact is further mitigated because Mexican-manufactured exports contain a substantial quantity of components made in the US.

For example, Mexico is one of the top exporters of automobiles to the United States. These cars are not sold under a Mexican label, since Mexico manufactures them for foreign companies.

But unlike Japanese or Chinese exports to the United States, cars manufactured in Mexico contain about 40% of their parts purchased from the US.

This means that US manufacturers contribute to the total value of Mexican exports.

Synergies have driven Mexico into dependence on the United States. The US has had the option of shifting its imports away from China and sourcing from Mexico instead. This shift has had a huge impact on Mexico’s growth.

It is also one of the reasons why the Mexicans are less than positive about their economic position.

Thinking Beyond Common Sense

Today, Mexico is seen as a land of drug dealers. But this perception is like viewing the United States as if it were Chicago in the 1920s and 1930s and the typical American as Al Capone.

The Mexican fear of the US is not unreasonable. Nor is the American fear of Mexico. It is easy to construct a tale of Mexico featuring cartels and illegal aliens seeking to plunder and terrify the country. There is a deep history between our nations, a history that regenerates in different ways at different times.

Everyone knows what US President has been saying about Mexico during his campaign and resents the way he preys on American fears. There is no denying these fears… or that Trump understands them.

There is also no denying that there is some truth to them. Yes, there are cartels and illegal immigrants (if fewer than before). But it is the distance between the Mexico that these fears conjure and the reality of what Mexico has become that is startling.

The Mexicans themselves don’t even trust their own transformation. They expect success to be snatched from them probably by the United States.

But here are the facts: Mexico is the 11th-largest economy in the world with free access to the largest economy in the world… not to mention, vast amounts of American investment pouring in.

It may still have to contend with the challenges of sharing a border with Central America, but with China in decline, even the poor of the south might be mobilized by the low-level industries that made China successful and that now seek a new home.

The borderland and the smugglers who live there do not represent Mexico. Mexico will be one of the top 10 economies in the world shortly, and since North America is now what Europe once was, the prospect of two great powers on one continent is worrisome.

Of course, most of us cannot imagine Mexico as a great power. Nor could most people have foreseen the emergence of China or the resurrection of Japan or even the United States itself as a great power.

This is a failure of imagination masquerading as common sense. I always doubt the ability of humanity to manage its future. The inevitable rolls over us. But here is a moment when an understanding of what Mexico has become might just have some real value, if only for our grandchildren.

Source: Business Insider

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