Recent years have seen significant changes in the economies of both Mexico and Chile. Given this, it can be useful to examine the current economic situation in Mexico and Chile, comparing the two. While many people in the United States might tend to think of these two nations as being identical in nature because of the fact that they have Hispanic cultures and the Spanish language, there are in fact many differences. For example, Mexico since the late 1990s has been able to benefit from the existence of NAFTA (the North American Free Trade Agreement). This has allowed it to trade freely with the United States in here than two decades. This is an advantage the Chileans have only enjoyed since 2004. At the same time, there are similarities between the two countries as well. For example, both economies are largely capitalist in nature. The following will make a comparison between the economies and development of these two nations.
An Overview of Chile’s Economy
Over last 10 years, Chile has had one of the most rapidly growing economies in Latin America. However, following the rapid stimulus produced expansion between 2010 and 2012, Chile’s growth dropped to less than 2% in 2014. In part, this slowdown was a result of the drop in revenues from the mining sector because of a drop of copper consumption and falling copper prices (O'Brien Online). Directly related to this, the unemployment rate in Chile went from 5.7% in 2013 to 5.8% in 2016.
Despite the slight problems, Chile’s economy on the whole is relatively sound and is primarily market focused. The Chilean government has a well-founded reputation for sound economic policies and a commitment to maintaining strong and reliable financial institutions. Furthermore, Chile’s economy benefits from high levels of international trade. Chile’s sound policies have given it an extremely strong bond rating. Roughly 1/3 of Chile’s GDP results from services and goods exports. Commodities make up 75% of these exports. For example, almost 20% of the Chilean government’s revenues come from copper exports. In the 10 year period from 2003-2013 the Chilean economy generally achieved a growth of nearly 5% annually (although there was of course a slight dip in growth following the economic crisis in 2009). The following chart shows Chile’s fiscal balance as a percentage of its GDP. It clearly reflects the problems the country faced following the 2008 global economic crisis.
As mentioned above, Chile’s long commitment to free trade was broadened by the 2004 free trade agreement it signed with the United States. In addition to this agreement, Chile has almost 2 dozen existing trade agreements, such as with China, Mexico, India, South Korea and the European Union. Furthermore, Chile recently joined with the United States and several other nations in the TPP (Trans-Pacific-Partnership). This agreement will create a vast Pacific based free-trade area.
For the most part, the Chilean government has believed in a countercyclical fiscal approach in which they accumulate surplus funds during times of high economic growth and higher copper prices. They then permit deficit spending during times in which the economy is not doing so well and copper prices are lower. For example, during the 2009 economic crisis, Chile made use of its sovereign wealth funds deposited outside the country to support a stimulus package. In 2015, the government increased spending by almost 10% in to counteract the perceived sluggishness in the economy. One of the problems the nation has faced in recent years has been its declining share of the global copper market, as demonstrated in the following graph.
Overview of Mexico’s Economy
The economy of Mexico continued its moderate rate of expansion (2.5%) throughout 2015. While the country has enjoyed wage growth, significant job creation and expanded credit, consumption by the citizenry has been the principal driving force behind this recent economic vitality. On the other hand, investment in the country has (generally speaking) dropped considerably because of government budget reductions.
Oil is of course central to Mexico’s economy (Dicker 117). Among the major external factors that are currently presenting a challenge to the Mexican economy is the significant drop in oil prices, the drop in growth projections for emerging economies (such as China) tighter monetary policies in the US and a noticeable depreciation of the value of Mexican currency (the peso). In fact, over the last year the peso has lost almost 1/3 of its value against the dollar. Despite this drop in the value of the peso, the annual inflation rate in Mexico has managed to stay just below 3%.
It should be noted that recently Mexican monetary and fiscal policy managers announced further reductions in public expenditures, as well as changes to monetary policies regarding intervention in the currency market. In large part, these policy changes are a direct result of the global drop in oil prices. The inability of the OPEC nations to agree on production quota limits, as well is the introduction of fracking technology in the United States, led to a glut of oil on the market. While prices have risen slightly since their lows of one year ago, the following graph demonstrates that oil production and exports by Mexico still have not returned to their pre-2008 levels. This has impacted Mexico’s budget decisions (Wilkinson A7).
In spite of a 2% drop in GDP resulting from declining oil exports, the government was able to hit its deficit goals for the year 2015. One reason for this was that the drop in oil revenues resulting from falling oil prices and falling production levels was offset by higher income tax revenues. These higher income tax revenues were in turn a result of tax reforms that were enacted in 2013, as well as a significant increase in consumer taxes on things like diesel fuel and gasoline.
Economic growth for 2016 is expected to be slightly down because of the impact that the nation’s fiscal and monetary policy will have on consumer demand. However, in the long term the ongoing financial and price stability that will result from these policies, as well as the increased confidence among investors, will ultimately result in enhanced growth, greater exports, greater private sector investment and greater consumption by the private sector. The introduction of the CM’s to the energy, financial and telecommunication sectors is also anticipated to accelerate the economy’s expansion in the immediate future. Like the Chilean government, the Mexican government has committed itself to gradually reducing its deficit in the coming years (Pérez Online). As the following graph makes clear though, the drop in oil prices is making this extremely problematic.
The external environmental factors confronting the economy of Mexico present it with a number of challenges when it comes to growth and making choices about economic policy. These factors include the slow growth United States industrial activity, lower oil prices for the foreseeable future, volatility in the financial markets and increased aversion among investors to risk. Looking into the future, the leaders of Mexico are faced with a complex series of priorities when deciding upon their policies with regard to fiscal, financial and monetary matters. Choosing the right path will allow them to create economic environmental conditions for strong growth in the short and medium-term, while the implementation of structural reforms will support long-term growth.
A Point by Point Comparison
The following directly compares significant economic statistics for both Chile and Mexico.
The World Bank’s human development Index (HDI) system ranks nations according to a set of criteria, such as GNI (gross national income) and life expectancy. The following graphs look at these numbers for both Chile and Mexico.
As the above makes perfectly clear, the HDI life expectancy rate in Mexico rose by 3 ½ years between 2004-2014. However, Chile began 2004 with a life expectancy rate almost equal to that of Mexico’s in 2014. By 2014, Chile’s life expectancy rate had vastly outstripped that of Mexico.
The chart above looks at the HDI income index. It demonstrates that both nations have made considerable progress in income levels in the ten years since 2004, but clearly Chile has done better than Mexico.
The above graphic makes clear that the population growth rates for both Mexico and Chile have declined slightly over the last 15 years. Fortunately, there has been a .2 drop in the annual growth rate, while for Mexico there has been a .1 drop. Of course, these numbers do not necessarily indicate a drop in birth rate or even survival rate, since a fairly high percentage of Mexicans make their way across the border into the United States, thus artificially dropping Mexico’s population growth rate.
The actual current population for these two countries and a projection for what that population will be in 2030 is described in the following graph:
Obviously, the population of Mexico is much larger than that of Chile. In some ways, this provides Mexico with certain advantages. For example, they have sufficient overall resources to create systems (education and otherwise) that a smaller nation like Chile would have a more difficult time building. Of course, any economies of scale could equally be offset by a larger and less efficient bureaucracy.
The following represents the relative GDP of Chile and Mexico. Given Mexico’s much larger population, it’s hardly surprising that it also has a much larger GDP. Although it is perhaps surprising that the gap shown is not even greater.
Of course, the fact that Mexico has such large population relative to Chile means that all those GDP pesos are distributed among far more people. As the following shows, Chile’s population enjoys a much higher GDP per capita than the population of Mexico.
It might be possible to draw a number of conclusions from the above data regarding Chile and Mexico. For instance, it may be that the greater stability of the Chilean government in recent years (as opposed to that of Mexico’s) and its ability to control all the regions within Chile has resulted in a situation in which greater prosperity is possible, along with greater longevity. When looking at Mexico, it is clear that the last 20 years have seen it dealing with rebellious elements in its interior and vast drug dealing cartels along its northern borders. The high levels of poverty in Mexico also no doubt contribute to the shorter lifespans of its citizens. Conversely, one might suggest that these numbers are a bit deceptive, since many younger Mexicans who would otherwise live very long lives in Mexico moved north into the United States. This in turn could force down the longevity numbers in Mexico.
Works Cited
CIA World Factbook. “Chile.” CIA.gov. Central Intelligence Agency. 07 June 2016.
CIA World Factbook. “Mexico.” CIA.gov. Central Intelligence Agency. 09 June 2016.
Dicker, Dan. Oil's Endless Bid: Taming the Unreliable Price of Oil to Secure the Economy. Hoboken, N.J: John Wiley & Sons, 2011. Print.
O'Brien, Rosalba. "Chile 2014 Copper Sales Lowest since 2009." Reuters. Thomson Reuters, 2015. Web. 11 June 2016.
Pérez, Santiago, and Anthony Harrup. "Mexico Prepares to Cut Spending as Oil-Price Drop Hits Revenue; by Reducing Spending, Government Signals it Aims to Continue Lowering Deficit." Wall Street Journal (Online). Jan 30 2015.
United Nations Development Programme. "Human Development Reports." Human Development Index 2004. UNDP, n.d. Web. 11 June 2016.
United Nations Development Programme. "Human Development Reports." Human Development Index 2014. UNDP, n.d. Web. 11 June 2016.
Wilkinson, Tracy. "Mexico, Buffeted by Low Oil Prices, Cuts Spending." Los Angeles Times. Jan 31 2015.
