‘Tequila crisis’ is a thing of the past, export Mexico ready for recovery

Numerous monopolies keep prices higher than they would be under competition, but the question is whether the entry of foreign companies would bring benefits to Mexico.

After getting acquainted with the complexity of a metropolis like Mexico City and the archaeological sites related to the Olmecs, Toltecs, Mayans, and Aztecs, one concludes that they have seen all the important Mexican wonders. From the resort of Cancun, a tourist expects only a two-day vacation before a tiring 24-hour return to Zagreb.

And then it turns out that Cancun is yet another wonder. Dozens of kilometers of hotels next to each other along beautiful sandy beaches, approximately 25,000 beds at one location are an impressive example of what could be called a successful public-private partnership in Croatia.

The decision of the Mexican government in the 1970s to build a mega-tourist complex in a remote part of the Yucatan Peninsula proved to be correct. The state prepared the infrastructure, and all major global hotel chains built their capacities there. Almost one-fifth of tourism revenue comes precisely from Cancun. This is an example of successful mass tourism with five stars.

The peak season in Cancun is the Christmas holidays and New Year celebrations. Local tourism workers are worried about the season at the beginning of December. It has just been officially announced in the USA that the largest economy in the world has been in recession since the end of 2007. Americans are the most numerous guests in Cancun, so it is realistic to expect fewer of them. However, for Mexican tourism, which is the seventh strongest in the world, there are also good circumstances.

From August to December, the Mexican peso has weakened against the dollar by almost 30 percent. Even if inflation of about 6.5 percent is deducted, with unchanged prices in pesos, Americans can lower dollar prices by at least 20 percent.

The story of the floating exchange rate of the peso is part of the whole thanks to which Mexico has faced this global crisis more prepared than before. Since 80 percent of exports end up in the USA, it is clear that the recession there will slow the growth of the Mexican economy to almost zero. However, thanks to conservative monetary and fiscal policies over the last nearly ten years, Mexico has become only a collateral victim of crises – which, due to low state indebtedness, has room to take loans during recessionary times to maintain business activities through state investments (unlike highly indebted countries like Croatia).

Due to the crises that Mexico fell into at the end of the last century, especially due to the collapse of the fixed exchange rate in 1994-1995, offensive phrases such as ‘tequila syndrome’, ‘tequila crisis’, and ‘tequila effect’ entered economic theory.

The peso exchange rate was fixed, the state borrowed by issuing securities in dollars. The monetary authority did not limit the large growth of credit… At one point, investors got scared, started selling government bonds, and thus the collapse of the fixed exchange rate with all its consequences became inevitable.

A lesson has been learned from all this, and no matter how difficult it is today to endure the crisis in the USA, the Mexican export-oriented economy, when the time for recovery comes, will be more prepared than many others.

Of course, Mexico also has its dark side. From the great poverty of a significant part of its hundred million population, widespread corruption in the state apparatus to crime.

Mexico has some other specificities. There is no chance of drinking non-Mexican beer in a restaurant! Here, demands for easy admission of foreign competition are not yielded to. Gas stations still belong exclusively to the national oil company Pemex. Only now is the possibility of foreign capital entry opening up, primarily due to the demanding extraction of oil from the seabed of the Gulf of Mexico.

It is certain that numerous monopolies may keep prices higher than they would be under stronger competition, but the question is how much the entry of foreign companies would bring more benefits to the national economy.

To conclude this column on the topic of the symbiosis of state intervention and private capital, it should be mentioned that the Mexican government has just embarked on creating a new tourist center, but on the other side, on the Pacific coast. This is a complex that will be twice the size of Cancun. On 2,400 hectares (equivalent to 4,800 football fields!), there will be 17,000 hotel rooms and another 16,000 residential rooms (in our terms: private apartments). The complex is expected to be completed in 13 years and cost 8.6 billion dollars. For every dollar the state invests, the private sector will invest 14.