The development of the Mexican low- and middle-income housing market since the economic crisis of 1994

Table of contents

List of appendixes

List of abbreviations

Abstract

Preface

Acknowledgements

Appendixes

1 Summary introduction
1.1 Rationale
1.2 Research question and aim of the paper
1.3 Theories, state of the art, and academic method

2 Mexico, a developing country in a emerging region
2.1 Mexico’s economic development since the Tequila crisis
2.1.1 Increased regional integration and free trade
2.1.2 Liberalization and foreign direct investments
2.1.3 Crude oil sales & transfers from foreign Mexicans
2.2 Political and legal improvements were making the way
2.3 Mexico’s poverty, demographics, and society changes
2.4 Summary of significant developments since

3 The Mexican housing market
3.1 Three-fold weak grounds, but significant growth potential
3.1.1 General, systemic housing shortage
3.1.2 Under-supply with mortgages since
3.1.3 Severe under-capitalization of housing developers
3.2 Customer segmentation in the market
3.2.1 Affordable entry-level homes for low-incomes
3.2.2 Residential housing for a growing middle class
3.2.3 Luxury housing for the top earners
3.3 Change in the customer base
3.3.1 Changes and growth of Mexico’s population
3.3.2 A changing society demands individual housing
3.3.3 Mexico’s economic success leads to a higher demand
3.4 Poor performance of the housing sector
3.5 Summary on reasons, segments and changes in housing

4 Driving forces for the increase of the Mexican housing base
4.1 Governmental motivations
4.1.1 Main aim: extend and keep social stability
4.1.2 Catering for a growing middle class
4.1.3 Support for further economic development
4.2 Motivations of international financial actors
4.2.1 Mainly politically motivated actors
4.2.2 Mainly economically motivated actors
4.3 Governmental vehicles of motivation and work
4.3.1 Federal mortgage society
4.3.2 Federal pension funds
4.4 Summary on the Mexican housing structure

5 Foreign involvement and motivation in Mexican housing
5.1 Politically motivated international actors
5.1.1 World Bank and International Financial Corporation
5.1.2 Inter-American Development Bank
5.2 Economically motivated financial actors
5.2.1 Foreign commercial banks including local subsidiaries
5.2.2 Mutual funds and private equity
5.3 Interactions and summary on foreign involvement

6 Assessment of the situation and potential obstacles

7 Conclusion and ideas beyond

List of appendixes

Map of the United Mexican States / Estados Unidos Méxicanos

List of interview partners (structured / unstructured) and other contributors

List of officials mentioned

Participation at official venues, trainings, and trips to Mexico

List of the members of the United Mexican States

List of Mexico’s 15 largest metropolitan areas

Example interview questionnaire

Bibliography

Sources directly and indirectly cited in the paper

Additional sources helpful to the author, but not directly cited

Index figure of tables, graphs, and figures

Tables, graphs, and figures

List of abbreviations

illustration not visible in this excerpt

In addition to this list, on page XVIII the names and abbreviations for Mexico’s member states and the Federal District are provided.

Abstract

A devaluation of the Peso in 1994 threw Mexico into economic turmoil, triggering the worst recession for over half a century. Since then the nation made an impressive recovery on many scenes ranging from economics to society. Also the housing market has improved dramatically for various reasons such as significant policy changes. Only the general, systematic housing shortage, the under-supply of mortgages and the under-capitalization of developers still hindered further growth. This was yet addressed by the Fox government introducing new approaches and special agencies to keep social stability and enhance further economic growth.

Therefore the thesis points on the rather recent developments of the Mexican housing market including the question how it became the way it is. Furthermore, the political and economic motivations and influence of both, public and private local and foreign actors to the market, without which neither it would not have grown that much, nor will grow as projected, are highlighted. Moreover, potential obstacles to further market growth and increased stability such as an ongoing lack of capital are named, and promoted along with ideas beyond like environmentally friendlier approaches that are in the long-term favor of the Mexican society.

Preface

Only since a decade an increasing inflow of foreign capital expanded the opportunities to finance investments in Mexican infrastructure and housing developments, which was a late effect of the severe Tequila crisis in the early 1990s.

Mexico, however, turned to a hotspot for real estate investments of all kinds due to its economic and strategic potential. Investors, to a large extent deriving from the US but now also from Europe, are actively investing in office buildings, shopping malls, and hotels for diverse reasons. In addition, looking at a current gap of five million homes, which is still growing, there has been and there will be a substantial market for housing development for a number of years from now.

The starting point for this was during the presidency of Vicente Fox when housing became a national topic. Traditionally burdened with a huge gap between some rich families and a large poor population, federal support for lowand mediumincome families to obtain own homes strongly helped to stabilize the society. Also, the new government under Felipe Calderón continues to make substantial efforts to improve the living standards of its population by providing mortgages or guarantees for lower income families to buy a home. They see housing as a basic condition for living, which is not available in the quantity and quality needed.

So, Mexico seems to be a good example for beneficial synergies of national governmental support funded by international actors such as the World Bank and foreign investments to improve the living for many people in an emerging country.

Therefore this thesis is important in describing the positive development of the Mexican lowand medium income housing market since 1994 to the better. Further on, its conclusion that the measures taken by the relevant political actors have been adequate is only to support. Overall, the work provides good insight and presents an outlook for responsible market participants along with ideas beyond.

Ulrich Dischler

Acknowledgements

The author is pleased to be able to thank the many people that have been helpful in the preparation and execution of this thesis. Without them, one never would have gained that much knowledge and insights. In particular thanks goes to the various interview partners and their organizations as mentioned in the appendix. Furthermore to friends and family, who spend a significant amount of their time and nerves on giving advice, over-reading and backing the author. To name only two, these are Mr. Ulrich Dischler and Mr. Erik Ramirez Ruiz, who strongly supported the field research in Mexico and opened doors in Washington, DC.

In addition, much thanks is owed to bvt Holding GmbH for their kind and selfless offer to provide the author with precious insights in both the world of practical foreign investments abroad and the sophisticated real estate business in general. This mainly happened due to the close work with their Atlanta office. Moreover, the close connection with Urban Capital Management, a new fund management company, and their executives gave practical advice and solid foundations, too.

And finally one wants to thank both, the supporting staff from the at the Master of International Relations participating universities in Berlin as well as the relevant academic and research staff from Columbia University and New York University. In addition to them, also some senior people from the Science, Industry, and Business Library in New York City were helpful for the research on this thesis.

Appendixes

United Mexican States / Estados Unidos Méxicanos

Map1: Map of Mexico / Source: Economist Intelligence Unit

Remarks¹ : “The Americas” is the combination of the two continents of “North America” and “South America”. Their boarder runs at the Isthmus of Panama. “Middle America” or “Central America” is the narrow Southwestern part of North America between Mexico and Panama. The Northern remainder is sometimes called “Anglo America”. Mexico is geographically North America. However, as most observers, this thesis often compares it with Middle and South America. Eventually this might change in the future due to Mexico’s positive development. However, now it is not yet comparable to the US and Canada in general.

“Latin America” includes all (predominantly) Spanish-, Portuguese-, and Frenchspeaking countries of North, South and Central America including the West Indies with the exception of the US and Canada. They are seen as still mainly Englishspeaking, although one has a large Spanish, the other a large French population.

List of officials mentioned illustration not visible in this excerpt

Participation at official venues, trainings and trips to Mexico

In addition, for the research of the thesis various talks and meetings were held over the phone and personally in New York City, NY, Washington, DC, Munich, Germany, and Zurich, Switzerland.

List of the members of the United Mexican States

Mexico is a union of 31 sovereign states with own constitutions and congresses. The citizens elect their governor (gobernador) and representatives to the congress (diputados locales). Below, the states are divided into municipalities (municipios).

Names and abbreviations for Mexico’s member states and the Federal District: illustration not visible in this excerpt

Source: CIA (2007)

List of Mexico’s 15 largest metropolitan areas illustration not visible in this excerpt

A metropolitan area (see above) is defined to be a group of municipalities which heavily interact with each other. Based on this the National Population Council (CONAPO), the National Institute for Statistics and Information (INEGI) and the Ministry of Social Development (SEDESOL) defined such areas for Mexico.², ³

The most countries populated metropolitan area is Mexico-City, with a 2005 population of 19.23 million, or about 18% of the nation's population of 107,449,525.⁴ The next four are Guadalajara, Monterrey, Puebla and Toluca – together the five add up to nearly 30% of Mexico's population.⁵, ⁶

Example interview questionnaire

This questionnaire was used to support certain interviews.⁷ It was never send out or received fully filled out. Instead some interview partners used it as support for their answers. The author knows that such questionnaire is not empirically correct. However, it was necessary to keep the goal of the interviews in mind.

Dear Sir or Madam-

Thank you for taking the time to answer these questions as best as you can. I have carefully picked the interview partners and think you could contribute perfectly to the study.

Please place yourself, if you are not already such a person, into the situation as being part of an organization that is planning or yet investing (working with organizations that do so) into the Mexican lowand middle income housing market as an equity partner.

The answers are interpreted qualitatively and do not lead back to you or your company / organization (anonymous interview) in the final version of the paper.

I appreciate your support very much! Thank you.

Yours,

Michael A. Braun

In general:

1) What is your name and occupation?
2) What is the name and size (e.g. employees, turnover, etc.) of your company?
3) What does the firm / you do? How is it related to housing development in Mexico?

Current state of the market:

1) How do you evaluate the context for investments into this sector so far?
2) What do you think is the investor’s dominant motivation to invest in this sector now? And what are potential minor reasons?
3) How do you see the success of measures taken so far (since 1994 or after 2000)?
4) Name the most important measures in favor of the sector. And why are they so?

Development of the sector:

1) What do you want the context for investments to be vs. what you expect it to be?
2) Which chances for further improvement do you see?
3) What obstacles for further developments do you detect?

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Index figure of tables, graphs, and figures illustration not visible in this excerpt

Tables, graphs, and figures⁸

Projection for housing funds mortgage availability in Mexico

President Calderon’s housing plan consists of granting at least six million mortgages during his sexenio. And, as can be seen, the current housing policy emphasizes more housing for the lowand middle income sector

illustration not visible in this excerpt

Table0.1: Mortgage distribution plan of the Calderón government – Source: CONAFOVI, Mexico in SARE (2006), p2 illustration not visible in this excerpt

Figure0.2: Financing, building, and purchase structure – Source: Softec, Mexico

1 Summary introduction

This paper looks at the tremendous developments of the lowand middle-income Mexican¹ housing market from 1994 on. It is understood that they have occurred for internal and external reasons forced by both Mexican and international actors.

To gain insight, one points on the decade following the Tequila crisis, in which Mexican politicians put new policies into place, including major changes for the housing sector. For this and the economic rebound, the housing sector became one of the most dynamic sectors of the Mexican economy. And this in turn is fuelled by foreign actors (mostly as investors) from both, public and private bodies.

But why do these various actors from abroad and Mexico get active in the housing market? What is their motivation and which impact did and do they have on it and towards each other? Moreover, if they have an enhancing, positive effect for Mexican lowand middle-income housing, what can make them do more to the sector? Embedded into the phenomena of globalization and foreign direct investments (FDI), these questions may guide the reader. By reading the thesis, one can expect these questions to be answered using first-hand information (however, not cited!) gained from expert-interviews, field-trips and empirical research that underlines the findings. In addition, the reader gets ideas beyond for what is potentially needed to sustainably increase the market volume over the next years.

1.1 Rationale

In the early 1990s Mexico faced prosperity not seen for long. This period of rapid growth and low inflation prompted the country to be the first emerging country admitted to the Organization for Economic Cooperation and Development (OECD) in 1994. The very same year Mexico also joined the North-American Free Trade Agreement (NAFTA) with the United States (US) and Canada.

But in December 1994, Mexico experienced a massive economical crisis², known as the Peso crisis triggered by the sudden devaluation of the currency. After an intense week, the Peso stabilized when international actors granted loans. Also, the traditional Latino behavior on crisis such as trade protection was not shown. Instead, the macro framework was placed into an independent, conservative policy with flexible exchange rates, and open trade.³ Since then Mexico has undergone further radical changes and adjusted various political “screws” for the better. This not only took the country out of the severe crisis, but made it respected globally.

Therefore, if one looks at Mexico today, economic growth and increasing stability, including historically low interest-, inflationand unemployment-rates can be seen. Also the society is changing rapidly; it faces both challenges and opportunities.⁴ And this positive picture is delivered since a decade with only a slight interruption in 2001 / 2002. Moreover, between 2000 and 2006 the country also has acquired a solid reputation for its political stability under former President Fox .

However, Mexico still struggles for various reasons with some other challenges. One of them is a housing deficit of more than five million units.⁵ And this will not even be met in the next decade, but continues to rise since there is an additional demand of over 700,000 units each year.⁶ Therefore these strongly needed homes serve as another vital engine for the Mexican economy in the years to come.

The building boom, which started in the late 1990s due to demographics and the country’s economic success, has transformed the society by now. In addition, massive governmental support, favorable policies and changes in the national housing legislation have fuelled the developments after 2000 ever more. Same is expected as well for the presidency of Felipe Calderón , who took office in 2006.

Also a national commission for housing development was set up to craft permanent, long-term effective policies and planning as well as to improve the efficiency of existing and new mortgage institutions. Along with the favorable economic situation, these structural changes started massive growth in the lowand middle-income segments, not seen for long due to restrictive mortgage granting.

However, regardless any well-meant policies made in the capital, it is easy to understand why lowand middle income Mexicans in general like such new homes. Although these are often American-style single-houses, rather small and built in rows, their inhabitants improve their individual situation by far. Many of the people, who now can afford a home, used to live along with other family-members in at least partly self-built houses or even shelters.⁷ These places were often built on sliding hillsides or other inconvenient places in the crowded outskirts of cities.

Instead, as the author experienced personally, the new homes are solid and have proper roofs, plumbing, electricity as well as car-parking. The roads in the new settlements do not turn into rivers during showers and schools, which projectdevelopers often are obliged to build by city order, are in walking distance rather than an hour by bus. Also with prices from US-Dollar (USD) 15,000 to USD 85.000 per home the prices are affordable even for ordinary worker families.

The foundation of this change, however, is owed to the substantial measures taken for (1) stability (politics) and financial capacities that came with foreign investors for (2) profit (economics). So, the changes are not only caused and effective internally but they also strongly involve external actors.

(1) From a political point of view, stability comes into play as the Mexican government, international organizations and neighbor-states continuingly try to calm down (stabilize) the internal situation. This mainly happens through governmental housing programs. Giving Mexicans access to proper housing along with supporting the economic growth and employment is widely seen as to integrate them into a life without the need to riot or to leave the country.⁸

And this behavior is yet clearly changing Mexico by breaking traditional models: Many homebuyers are singles or young families, who had lived in their parental homes before. Also, nearly all of them are buying property for the first time, but are now getting proper title deeds compared to the places where they lived before. These people now will stay in Mexico and benefit from the improvements.

(2) Compared to this the (economical) involvement of international actors is often for profits. Nevertheless, international profit-seeking actors also have the political and social dimension of their work in mind and execute their powers carefully.

For foreign investors in the housing market it appears that there is diminished (political) risk, but a significant lucrative opportunity and great support by the government as outlined later. For this reason, Mexico and especially members of its housing sector appeared in the last years strongly on the international financial markets as a receiver of foreign capital as well as searching for advice.⁹

1.2 Research question and aim of the paper

The paper analyzes the development of the lowand middle-income Mexican housing market since the Tequila crisis in the end of 1994 until today. This includes the reasons why such severe shortage of homes has occurred and what was, if at all, done against it. The analysis includes the measures taken by national policy makers, but one focus is on causing effects imposed by international actors.

So, one is asking (1) what happened, how the mentioned development looks like and what its driving factors were. Also of interest is (2) which influence (international) actors’ actually had and have on the sector. In addition, one asks (3) for potential developments and ideas beyond to support the housing boom.

These questions are of interest for several fields of science including international relations and economics as well as for the business world. Since the approaches are slightly different, the thesis will be divided. The first (1) part applies contentrelated findings on globalization and FDI to the topic. The second (2) covers practical findings and is supported by the interviews and, ideally, undermines the first.

Therefore the paper aims not only to outline the market specifications, its changes and developments as well as the influence undertaken by international actors, but also some demands expressed by investors for the future. This connection is seen as an interesting, missing gap. So, the aim is to closely link description and analysis with a potential guideline for further developments. This is reached by concluding that the thesis has provided enough ground work, but also given an outlook and valid ideas beyond on both the housing sector and its relevant actors.

On the basis of recent literature, field trips e.g. to Mexico containing meetings and interviews with senior business leaders, lobbyists and politicians, one states these hypothesizes, which shall be the roadmap for the further work: (1) The Mexican lowand middle income housing market has changed dramatically since 1994 towards the better. (2) The measures taken by national and international political actors have been adequate to increase the people’s ability to buy homes and there- fore increased the number of homes. And finally: (3) Foreign actors got and took the chance to execute significant influence on the Mexican housing market.

1.3 Theories, state of the art, and academic method

The studies’ topic, the development of the Mexican lowand middle-income housing market since 1994, is placed in a range of economic and social developments, international economic relations, international political economy, and regional studies (political, economical, and social). The main ideas that are introduced either by directly mentioning or just using them¹⁰ are: interdependence, various findings on globalization, and later in the thesis, findings on FDI.

Speaking about these ideas, remarkable similarities occurred between the 1970s (interdependence) and the 1990s (globalization). This is important, since the thesis assumes the ongoing process of globalization to be beneficial for both Mexico and its local housing sector. In addition, one argues that interdependence¹¹ focused on certain units, whereas globalization focuses on the connection within the units.¹² Therefore the concept of globalization describes current trends better than interdependence. Hence, the findings on globalization are more adequate to the thesis.

Important, existing literature on these fields was found with Keohane / Nye (interdependence) and e.g. Dunning (FDI)¹³ et al. In addition, data on housing, and in particular the Mexican housing market, was found especially with the Joint Center of Housing Studies at Harvard and the World Bank (WB). Moreover, the paper is backed by data from various statistics (governmental and private ones) on the sector and on the economic, political and society development of Mexico.

In addition, support as well as strong interest in the results of the study comes from members of internationally operating investment companies such as: BBVA (Madrid), BlueCapital (Hamburg), BVT (Munich/Atlanta), Credit Suisse (New York City/Zurich), Goldman Sachs (London), Lehman Brothers (New York City) and Kimco Realty (New York City). In addition, several of the Mexican and American interview partners have yet expressed their interest in the results, too.

Although there were many resources¹⁴, the author lacked a comprehensive paper that combines the development of Mexico’s lowand middle-income housing market and the influence that is undertaken by international actors. Therefore, this article argues that it can fill a gap in the toolkit of the ‘new’ international political economy, offering findings that capture the distinctive impact of investors’ behavior on the Mexican society and its housing market. In fact, it will apply existing findings into a new environment. And the thesis will be of external validity, since it is discussing not only a single-interest, but a nationand industry-wide question with the notion of being important and applicable to various recipients.

The design of the thesis (and reason for it) is interest-led and observation-based. It is a case study, which is theory-proposing and based on three hypotheses. Its data will be gathered as argued (academic literature) and through interviews (first hand information). The paper will partly get its results from a survey, which is undertaken personally with senior members in the groups of foreign investors, Mexican housing developers and Mexican local and federal politicians. The questions were based on a questionnaire and asked more or less strictly to all participants. The interview partners were selected on the basis of qualification, notion, and availability. In addition, the author did not select only supporting interview partners and cases, but the ones that were promising the most outcome to the thesis’ question.

As argued, one can assume that a study of this kind paired with the support provided is capable for an important contribution to science and theory as well as for practical use. Nonetheless, there is still room for further research such as proposed in the end of the thesis. This, however, will not only be demonstrated in the paper’s findings, but also can be realized at a business¹⁵ that is directly linked with the outcome of this study and the group of firms and people mentioned above.

2 Mexico, a developing country in a emerging region

Unlike other world regions, Latin America¹⁶ recently was not able to go back to its former importance in the international system. Moreover, within the last 50 years the share of Latin¹⁷ America at the world population has not changed, too. It still stagnates, whereas Asia managed to double along with economic success.¹⁸

In addition, for years the region faces stronger segregation towards either the US or the EU (European Union).¹⁹ The South, meaning mainly members of the Mercado Común del Cono Sur (MERCOSUR), prefers the EU. The North, however, including the Caribbean, and especially Mexico, instead is focused on the US. Besides, some countries are establishing themselves into a new sphere.²⁰

In general and despite several political and economic crises in the last decades, Latin American states followed an ongoing path to democratization. This neglects, however, the fact that some of them, although legitimate, fail to execute their power and secure social, economic and public security, which makes them almost look like “failing states” (e.g. Colombia, parts of Brazil).²¹ The general trend of the region, however, is leading for stabilization. And as this chapter outlines, Mexico does not have these challenges (any more) like other societies in change. Moreover, Mexico was / is different compared to the other Latin American states.

Based on a triad of economic, political / legal, and social developments one will realize that the country is on a highly stable track since the 1980s. This can be illustrated in three steps²², which begun with (1) honest democratization involving free and fair elections. The 1997 parliament and 2000 presidential elections concluded this step and breached a multi-decade long single-party system.²³ Than (2) economic liberalization followed, starting in the 1990s pressured from inside and outside including the NAFTA participation. Finally, since recent years (3) modernization of the society completes the positive process Mexico has made. Here one might think of changing family models and people’s perceptions on their lives. In the following, these trends and findings will be elaborated on.

2.1 Mexico’s economic development since the Tequila crisis

Although economic development due to increased interaction has influence on the entire system of actors, it is still one of the least researched topics in international relations. Therefore this section is discussing Mexico’s recent economic development, shows its place in a globalized world, and serves as a foundation for the findings on the Mexican housing market. Moreover, without that groundwork, the significant developments in this market seem to be unintelligible, too.

Former President Vicente Fox promised even more at the beginning of his presidency in 2000, but Mexico still did economically well in recent years.²⁴ After the 1994 Peso devaluation the country gained investment grade (Figure0.2, Appendix), growth is stable²⁵, stock markets are booming and the inflation is as low as in other states.²⁶ This positive, decade long economic picture was only interrupted in 2001 / 2002, when Mexico experienced a downturn from which it soon recovered.

Compared to other Latin countries (Figure2.1, Figure2.2) Mexico is slightly ahead when it comes to the gross domestic product (GDP) / head, but lacks the growth dynamics of the 1990s. For 2006 a GDP at purchasing power parity (PPP) / head of USD 10,600 and a growth rate of 4.5% is estimated.²⁷ However, the GDP / head is still only 1/4 of the US; and the income distribution remains highly unequal.²⁸

Bearing this in mind it also can be stated that Mexico turned over the last two decades into a rather “Lockean” economy. This means that in general, contemporary politicians are willing to subordinate the role of the state to the interests of the civil society and the markets. This therefore opposes the “Hobbesian” governance style of some Latin American leaders and makes Mexico distinct to them.

Like Fox, successor President Felipe Calderón also strongly trusts in the market and a minimalist state.²⁹,³⁰ Therefore active, clear industry policy is not conducted and cannot be expected. Medium or small market participants have to care for themselves and only major players can assume support from the government.

Moreover, during his Presidency, Vicente Fox promoted a foreign and economic policy calling for openness and acceptance in the international community with increased involvement in foreign affairs. However, as traditionally, the Mexican government has maintained its interests abroad largely through morale rather than by political or economical pressure.³¹ Nonetheless, in its efforts to revitalize the local economy and making it more competitive, Mexico also gained closer relations on various levels with Europe, Asia and especially Canada and the US.

Therefore one might ask what made this development leading back to Mexico’s roots as an upper middle-income country actually happen? And why did the country’s free market economy, which is increasingly dominated by the private sector, gained so strongly since 1994? There, apart from the globally lower interest rates, must be something that has supported the stable growth (though less than vs. Latin America, Figure2.3) and kept inflation under control.³² (Figure2.4)

One can argue the key to this economic success is the mentioned openness and international integration Mexico’s due to globalized governance, corporations, and individuals.³³ Apart from the strict path towards internal openness by expanding the competition in former state-dominated sectors, Mexico now has also opened up to the outside. For this the best proof is the free trade agreements with over 40 countries, which put most of the Mexican trade under a “free trade umbrella”. And this brought it, like many emerging countries, into the vastly ramified structures of the global economic system. It now belongs to the countries that benefit from globalization in opposition to the ones that are in a win-lose situation.³⁴

In conclusion the well-being of today’s economy depends on the continued openness of its markets, capital mobility and economic restructuring. And this is especially true, when it comes to Mexican housing with strong foreign involvement.

This increased openness, however, also was mostly fuelled by the valuable experiences made with NAFTA before and during membership. One can argue, that, speaking again about the economy, a correlation occurred, which is comparable to a positive (!) vicious circle. In line with these improved economic data, an increased inflow of foreign capital, and increased economic output, trust in the Mexican economy was strongly increasing as well. This led to the fact, that Mexico also became part of the “Next Eleven” (N-11) list of countries³⁵ named by Goldman Sachs in honor of having promising outlooks for investments and future growth.³⁶ The main outcome, however, is the idea that Mexico is most likely to be the only one of these eleven countries to play a globally important role, soon.³⁷

By 2035 Mexico is, together with Brazil and Russia, seen as being able to overtake even Germany (sic!) economically – if they make use of their growth potentials.³⁸ And Mexico alone, in 2005 yet the globally twelfth largest economy, is also seen as possibly becoming the fifth.³⁹, ⁴⁰, ⁴¹ As one argues this might happen also due to three facts that are looked at more closely in the following.

2.1.1 Increased regional integration and free trade

As indicated before, Mexico is strongly integrated into international structures, due to its political objective of unhindered flows of goods and services between countries. And the recent governments repeatedly expressed their belief in free trade. Their interest is to give incentives for cross border business and integration by decreased bureaucratic requirements. This eventually led to the phenomena of the maquiladoras⁴² and the establishment of NAFTA, as discussed later.

And indeed, Mexico became the first and so far only Latin American country to be member of the OECD. Furthermore it is part of the Organization of American States (OAS), the Group of Eight plus five (G8+5), the Latin Union, and the Group of 15 (G15). Mexico also joined the General Agreement on Tariffs and Trade (GATT), and became a member of the World Trade Organization (WTO). Mexico’s arguably most beneficial membership, however, seems to be NAFTA. Moreover, some even argue that the negotiations to NAFTA have been as historically important to Mexico as the Guadalupe-Hidalgo agreement of 1848 was.⁴³ And this clearly shaped history and Mexico’s development towards a mature state.

NAFTA was, with the US and Canada as counterparts, started in 1994. Though this only started further similar agreements with other countries, NAFTA became the most important agreement so far. It yet made possible that Canada and Mexico now together hold a share of something over a third of the US foreign trade.⁴⁴

In doing so, Mexico has surpassed Japan as the second largest trading partner – to be overtaken shortly after by China, which became second, now.⁴⁵, ⁴⁶ This was a shock for Mexico, which only managed to become important to the US, but than new competitors came along and Mexico is caught between low cost labor (China) and sophisticated services (India).⁴⁷ But neither a country can remain the cheapest, nor the best. Therefore one argues that creating high-value added industries and educated jobs might help Mexico out of this.⁴⁸

Since given the size of the US-Mexico and the few trade disputes, former Mexican President Vicente Fox went even further and promoted the idea of converting NAFTA into a “North American Community”. But after the 9/11 attacks, bilateral relations cooled down⁴⁹, US priorities changed and the Security and Prosperity Partnership of North America (SPP) was signed, instead.

Furthermore, in 2000 and 2001 the Fox and the Bush administrations promoted the establishment of a “Free Trade Area of the Americas”. It was expected that US President George W. Bush honestly planned to make Latin America a major region of his politics. During the 2000 election campaign he promised his strong interest and showed a vision of a “century of the Americas” to be coming.⁵⁰ Therefore, logically when he came to office, his first state visit was to Mexico.

But again, the 9/11 attacks shattered these ideas and led to a stop of further discussions. The US instead concentrated on internal topics such as the war on terror. This defensiveness continued and experts started to even argue the US might have completely lost their interest in the region.⁵¹ But this is too harsh critique since the US still has got some vital interests in Latin America and especially Mexico.

One impressive fact needs to be mentioned: Yet some 90% of all Mexican exports are shipped within NAFTA – with a major US-share (Figure2.5). Of Mexico’s 2005 cumulated USD 230 billion exports⁵² the US held 85.7%. Against this stand some USD 243 billion for imports⁵³ of which the US again hold the majority. This imposes risk to Mexico, since it makes its economy depended on one customer.

These numbers, however, do not show that the country nearly doubled its export share of products⁵⁴ and tripled the trade with the US and Canada since the start of NAFTA. The rest of Latin America, Europe and Asia are left far behind and only account for a minority. So, one can argue that much of Mexico’s trade success can be attributed to the fact that low wages attracted maquiladora work for re-export.⁵⁵

So, for the reasons mentioned NAFTA is undoubtedly the most important trade agreement Mexico has signed, yet. It was stated by many researchers that it has been positive for Mexico. Nonetheless, they also argue that not enough has been done to promote economic and infrastructural growth. This, however, might change eventually by the influx of foreign capital and knowledge to the country.

[...]

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¹ Lagassé (2000)

² INEGI (2005a) – Also source to for the mentioned population numbers.

³ INEGI (2005b)

⁴ CIA (2007) - July 2006 estimation

⁵ INEGI (2005a)

⁶ INEGI (2005b)

⁷ This means, the question built the starting point for a discussion with the interview partner.

⁸ These additional data is to support the thesis and its findings. There is no direct link, nor mentioning. However, the author thought it might be helpful and supporting to the reader.

¹ Mexico is the conventional short form for United Mexican States and will be used in this paper.

² Some call it “Tequila crisis” due to the Mexican national drink, others “el error de diciembre” (December mistake) for the fact that mistakes were made in the early presidency of Zedillo.

³ Giugale (2001), p4

⁴ ibid, p1

⁵ Quote Guillermo Babatz Torres at the Forth Annual Mexican Housing Day in New York City.

⁶ ibid

⁷ Economist (2004), pp32

⁸ The author is fully aware that the development of a society requires more than just better housing. Also, a working infrastructure, a democratic framework, and a flexible job market are helpful. Nevertheless, housing is seen as one of the most important ones to give a people and its government the peace that they need. Therefore, the thesis is concentrating only on this topic.

⁹ Giugale (2001), p3

¹⁰ The chapters apply them more or less coherently. However, sometimes their name will not be used repeatedly since they are not the thesis’ focus, but actual developments in a certain field.

¹¹ Sensitivity and vulnerability were introduced to international relations by Keohane / Nye, who saw them as consequences of interdependence. Today, they capture the impact of globalization.

¹² Zürn (2002), p393

¹³ In addition, the author worked yet on the influence Volkswagen AG took on Poland.

¹⁴ This includes reports from banks, real estate brokers, consultants, and researchers.

¹⁵ Working title is “Urban Capital Management” with a targeted start in October 2007.

¹⁶ Lagassé (2000) – “The Americas” is the combination of the two continents in the western hemispheres called “North America” and “South America”. Their boarder runs at the Isthmus of Panama. “Middle America” or “Central America” is the narrow Southwestern part of North America between Mexico and Panama. The Northern remainder is than sometimes called “Anglo America”.

¹⁷ ibid – “Latin America” includes all dominantly Spanish-, Portuguese-, and French-speaking countries of North, South and Central America including the Caribbean.

¹⁸ Grabendorff (2003), p3

¹⁹ Gratius (2003), p38

²⁰ E.g. Venezuela with its Hugo Chavez , who is proposing “the socialism of the 21st century”.

²¹ Grabendorff (2003), p4 – Indicators for this are corruption, the incredible amount of 140,000 murders and 28 million muggings per year in the region south the US.

²² ibid, p5

²³ Maihold (2005), p67 – The democratic change started in the northern states of Mexico. This includes not only the communal, but also the regional level. From there it spread over the country.

²⁴ Huffschmid (2006), p32

²⁵ Bartholdy (2006), p11

²⁶ ibid, 12

²⁷ CIA (2007) – Estimated by sector: agriculture: 3.9%, industry: 25.7%, and services: 70.5%

²⁸ ibid

²⁹ Huffschmid (2006), p35

³⁰ Ehringfeld (2007)

³¹ Huffschmid (2006), p35

³² CIA (2007) – The 2006 rate estimated to be at a low of 3,4%.

³³ Friedman (2005), p10 – The author argues that in globalization 1.0 countries got closer. In globalization 2.0 it was companies, and in globalization 3.0 it yet is individuals that loose distance.

³⁴ Samuelson (2005), pp150

³⁵ Apart of Mexico, the N-11 list includes: Bangladesh, Egypt, Indonesia, Iran, Nigeria, Pakistan, Philippines, Turkey, and Vietnam as developing countries and South Korea as a developed one.

³⁶ O’Neill (2005), pp1 – The N-11 paper is a direct follow-up to the banks 2003 concept on the emerging "BRIC" economies Brazil, Russia, India, and China.

³⁷ This is owed to the fact that the analysts see in Mexico the strongest and best prepared economy.

³⁸ WiWo (2006a)

³⁹ WorldBank (2006a)

⁴⁰ WorldBank (2006b) – Per capita, however, Mexico is currently only ranking 71st and 81st.

⁴¹ JLL (2005), p2

⁴² A (Mexican) maquiladora factory is an in-bound assembly place that builds only for re-export.

⁴³ Fernández de Castro (2004), pp159 – This is when Mexico lost parts of its territory to the US.

⁴⁴ Gratius (2003), p32.4

⁴⁵ Huffschmid (2006), p36

⁴⁶ WiWo (2006b) – Mexico has to fear further decreasing market shares compared to China due to the relative loss of competition advantages: Fright costs declined and labor is cheaper, as well. Instead Mexico might want to concentrate on more advanced work than just manufacturing.

⁴⁷ Friedman (2005), p309 - 310

⁴⁸ ibid, p332 – This also can be found in other affected middle-income countries such as in Eastern Europe, which try to protect their low-wages jobs instead of creating better ones.

⁴⁹ Huffschmid (2006), p36

⁵⁰ Nolte (2003), p20

⁵¹ IAD (2003), p21

⁵² WTO (2005), pp3

⁵³ EIU (2007a)

⁵⁴ WTO (2005), p14

⁵⁵ Weintraub (2004), pp16