Mexico's economy suffers a historic fall in the second quarter of the year

27/08/2020

During the second quarter of 2020, Mexico's economy reported a fall of 18.7% compared to the same period last year, confirmed by the Inegi, a historical contraction of the Gross Domestic Product (GDP) as a result of the COVID-19, mainly due to the closing of businesses and the suspension of activities to avoid further contagion.

Economy in Mexico lags behind due to lack of governance and business climate
Economy in Mexico lags behind due to lack of governance and business climate

In this way, the economy has accumulated five consecutive quarters of decline, deepening the recession that Mexico was going through before the health emergency. The bottom of the economic downturn was reached in May of that quarter, since June registered a rebound of 8.9% over the previous month.

The Bank of Mexico warned that the country will have its worst economic contraction since 1932 and estimates an annual fall of up to 12.8% (according to reports from the School of Economics at UNAM, in the 1930's the contraction was more than 14% per year).

The negative scenario is so uncertain that the duration of the sanitary crisis continues being; that is to say, everything would be complicated if the increase of infections or deaths by the new coronavirus returns the population to isolation, as it is happening in other parts of the world.


The economy in Mexico lags behind due to lack of governance and business climate

The International Monetary Fund (IMF) warned that Mexico's economic growth is lagging behind due to poor governance and the business climate. In a study entitled Comparing Latin America's Lack of Convergence with Eastern Europe: Is Low Investment to Blame? the international body noted:

"We studied the different components of GDP growth in Poland and Mexico since 1995, and the picture is very clear: the combination of human capital and productivity is an important positive factor in the European country, but often a negative factor in North America".

According to the document, governance and a good business climate are important for productivity growth. In countries where property rights are not guaranteed and governance is poor, businesses remain small and productivity low. Whereas, in well-managed countries, successful enterprises can grow in size and efficiency.

IMF analysis shows that countries with more human capital and better governance and business climate are often richer than countries where these variables are deficient. High human capital alone is not enough: this analysis shows that countries thrive only when governance also improves. In this context, it is not surprising that in both respects Mexico lags behind Poland.

"In general, the same is true for Latin America compared to advanced countries or emerging economies in Europe, which helps explain why it is relatively poorer. Of course, there are exceptions: in Chile, governance is on a par with some advanced economies and is better than in most of the emerging economies of Asia," it said.

A look at the history by the international body showed that, in 1989, on the eve of the fall of the Berlin Wall, the countries behind the Iron Curtain were much poorer than those in Western Europe, while today, some have income levels similar to those of Spain and Italy. This explained that convergence was rapid because human capital was already similar to that of Western Europe, while income was much lower in the early 1990s.

The strengthening of institutions contributed, and in this respect, the European Union (EU) played an important role. The prospect of EU membership led to further reforms and strengthened growth. Countries that joined or bid for membership experienced significant improvements.

While for Latin American countries, such as Mexico, the IMF concluded that the region lagged behind in the convergence process mainly for two reasons:

First, it did not have the same combination of high human capital and low income as the former communist countries. In fact, in the mid-1990s, the level of per capita GDP was slightly higher than would be expected with existing human capital.

Secondly, there was not a strong institutional improvement in Latin America as observed in Europe either. In fact, in many countries governance indicators worsened.