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The US subprime mortgage crisis has gone viral, infecting the entire global economy. Among large developing countries, Mexico will suffer the most - underscoring the need for a new trade and development model that secures jobs and land for workers, argues Manuel Pérez-Rocha and Sarah Anderson.

24th October 08 -  Manuel Pérez-Rocha and Sarah Anderson, Foreign Policy In Focus

The International Monetary Fund (IMF) forecasts that Mexico's economic growth rate will reach only 1.8% in 2009, a steep drop from 4.9% in 2006, before the subprime crisis erupted. What does this mean for ordinary Mexicans?

Job Loss

Through the 1994 North American Free Trade Agreement (NAFTA), the Mexican economy has become even more deeply intertwined with the United States than it was in the past. According to the World Bank, between 1993 and 2007, the share of Mexico's GNP made up by exports jumped from 15% to 32%. More than four-fifths of these exports go to the United States. Mexico also receives half of its foreign investment from the United States, and about 27% percent of the country's banks are U.S.-owned.

With the U.S. economy on the skids, Mexican businesses that rely on the United States as a market for their products, or as a source of investment or credit, will be badly hurt and likely slash their workforces. In July, the Bank of Mexico estimated that only 370,000 jobs will be created this year, less than a third of what's needed for people entering the workforce. After the present economic meltdown this figure might be even lower.

Poverty and Hunger

Millions of Mexicans rely on money sent home by family members working in the United States to meet their basic food and other needs. But this source of income is drying up. In the U.S. construction industry alone, Latino workers have lost nearly 250,000 jobs over the past year, according to the Pew Hispanic Center. The Mexican government's most recent figures show that "remittances," the wages these workers send to their home country, fell sharply during the first eight months of 2008, from $16.2 billion to $15.5 billion. And that was before the September meltdown.

In large part due to the lifting of trade barriers under NAFTA, Mexico is also more dependent on the United States and other countries for food. In the first half of this year alone, Mexico spent $10.4 billion on food imports — 30% more than in 2007. Domestic production capacity has been undermined by competition against heavily subsidized U.S. agribusiness. An influx of artificially "cheap" U.S. corn has wiped away the livelihoods of more than a million Mexican farmers who had little choice but to seek work in the United States. Now even those opportunities are rapidly disappearing.

Social Services Cuts

The Mexican government will be squeezed in at least two ways. First, Petróleos Mexicanos (PEMEX), Mexico's state-owned oil company, contributes 40% of government revenues. But with the global economic slowdown, oil prices are expected to continue to fall, straining public coffers.

Second, nervous foreign investors are pulling their money out of the Mexican economy, provoking a peso devaluation of nearly 20% in October alone. NAFTA prohibits the government from putting controls on capital outflows, and so it had to try to prop up the currency's value by buying up pesos. That's drained 12.8% of the nation's reserves thus far.

Currency devaluation can make a country's exports more competitive, but only if markets for the products exist. In the meantime, government budgets will be further strained by high prices for imports and for foreign debt payments. Particularly at a time when the Mexican government has made the drug war a top priority, this is likely to mean further cuts in spending aimed at fighting poverty and providing basic services.

This isn't the first time that the Mexican economy has faced a crisis. In 1994 large government deficits, a domestic banking crisis, and other factors sparked massive capital flight that spread to other Latin American countries through what was called the "Tequila Effect." The U.S. government responded with a $50 billion bailout.

In addition, a wave of migration to the United States provided a "safety valve" for the Mexican economy. Today, rising U.S. employment, combined with increased workplace raids to crack down on undocumented workers, is shutting off that safety valve.

ISO: A New Trade Model

The current economic crisis underscores the need for a new trade and development model that secures jobs and land for workers in the U.S. and abroad, instead of the current "free trade" model that only seeks to increase profits for corporations.

This new model should set a floor for basic labor and environmental standards, while also allowing governments more flexibility to pursue their own national economic strategies. For example, NAFTA and other U.S. free-trade agreements should be replaced with rules that allow governments to put controls on capital flows to protect their economies from financial volatility. These new rules should also allow the use of trade and investment restrictions to protect sensitive products, like staple foods.

In this time of crisis, the worse things get in Mexico and other developing countries, the worse things will get for U.S. workers and communities.

Higher unemployment in Mexico will create even more brutal competition for jobs, while more strain on government budgets will lead to even more reckless environmental practices that affect both sides of the border. New rules that promote economic stability and dignified jobs, rather than cut-throat competition, would benefit us all.

Sarah Anderson, a Foreign Policy In Focus senior analyst, is the Director of the Global Economy Project at the Institute for Policy Studies. Manuel Pérez-Rocha, a Foreign Policy In Focus contributor, is an Institute for Policy Studies associate fellow.

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