Mexico and Venezuela, both situated on the American Continent, have many similar problems to overcome in their economic development. Both nations boast vast petroleum reserves that contribute to their export growth as oil price increases, and yet this boon can turn into a disadvantage if the large stream of oil revenues prevents the effective development of other sectors of the economy. These American nations that emerged as a result of merging European and Amerindian populations have come a long way from establishing independence from their colonizers to establishing the democratic political systems they have today. Political and economic instability that has been a plague for many nations on the continent have also taken toll on their economies, which is particularly visible in Venezuela. However, Mexico, due to many factors, seems to have profited more from offered opportunities and has a better potential to approach the status of an industrialized nation in the foreseeable future. Although Venezuela in 2004 had a higher growth rate, 16.8% compared to 4.1% in Mexico, the nation has worse prospects due to many factors.
Geography
Both nations are located in the Western Hemisphere. Mexico is situated in North America, bordering on the United States in the north. This neighborhood offers serious economic advantages, making the country an ideal partner for outsourcing of US businesses with high labor costs.
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Bordering on the Caribbean Sea, the Gulf of Mexico, and North Pacific Ocean, Mexico has excellent opportunities for tourism development with its “9,330 sq. kms of beachfront property” (Country Reports). The country is also prone to the same natural calamities as the southern US due to its close location, including hurricanes originating in the Gulf of Mexico and the Caribbean Sea and tsunamis forming in the Pacific. The seismological conditions of the country also contribute to the threat of an earthquake. In terms of the area, Mexico is about three times as big as Texas occupying a territory of 1,972,550 sq. km (Country Reports).
Similarly, Venezuela has to suffer the negative consequences of its geographic location in an area subject to “floods, rockslides, mudslides and periodic droughts” (Country Reports). With a smaller area of only 912,050 sq. km, Venezuela also has the territory a great part of which is mountainous, including the Andean heights in the north and the Guiana Highlands in the south. In contrast, most of Mexican territory is desert-like plain. Mountains create obstacles for the economy, making transportation costlier and more difficult. However, Venezuela benefited from the rich natural resources including ores, gold, bauxite, diamonds, and, most importantly, oil. Venezuela has proved oil reserves of 78 billion barrels in comparison to 18 billion barrels in Mexico, an important oil producer for the US (Global Edge). At the same time, irresponsible exploration and industrial practices have caused the nation environmental problems including deforestation and pollution of Lago de Valencia and Lago de Maracaibo.
Geography can have serious impact on economic growth, as suggests a study by John Luke Gallup and Jeffrey Sachs (1998). They point, for instance, that countries located in the tropical zone or close to it are almost all poor. This may be a factor affecting Venezuela and having a smaller impact on Mexico. Besides, they point to transport costs as a factor in economic growth (Gallup & Sachs 1998). These may be higher in Venezuela due to its mountainous landscape. Besides, Mexico can profit from the proximity to the US much like Europe benefited from “agglomeration of economies and diffusion of technologies” (Gallup & Sachs, 1998, p. 12).
Demographics
According to CountryReports.org, Venezuela has a population of 25,017,387 people. The country enjoys a low rate of elderly population: only 5% of the population is aged 65 or more, and children under 14 constitute 30.5% of the population. This bodes well for the future economic well-being due to the high proportion of children, the future workforce. The country also has a high literacy rate of 93.4% (CountryReports). The population is also noted for high concentration of the population in the area north of the Orinoco River where 85% of the population lives (Wikipedia). This high concentration of population in coastal areas can contribute to the development of the nation, as Gallup & Sachs (1998) that high density of population in well-connected coastal areas is a boon for the country. The Venezuelan people are for the most part (96%) Roman Catholic, and the uniformity of religion suggests that the nation does not have any substantial threat of religious conflicts.
Mexico is also a predominantly Catholic nation (Global Edge). The country also has a high proportion of children under 14 (31.6%) and a low proportion of the elderly over 65 (5.5%). The immigration, predominantly to the US is an important factor in Mexican demographics as each year on average 4.87 migrants out of 1,000 people leave Mexico in search of a better fortune elsewhere. The same rate is 0.04 in Venezuela, which can be explained by relative ease of immigration from Mexico to the US due to geographical proximity and the presence of a large Mexican community in most American cities. Recent immigrants tend to support their families back in Mexico, so immigration need not be regarded as an exclusively negative factor in the national economy. The literacy rate is 92.2%, which is also quite good, although less than in Venezuela.
Government
Mexico is a democratic state whose development was heavily influenced by the American model of democracy. Thus, under the 1917 Constitution the nation is a “a federal republic with powers separated into independent executive, legislative, and judicial branches”, with the executive branch traditionally having the greatest powers in the face of the president (Wikipedia). In 2000, the nation experienced a serious turn in its development when Vicente FOX representing the then oppositional National Action Party (PAN) was elected President (Global Edge). This ended the rule of the Institutional Revolutionary Party (PRI) that had been in power since 1929 and confirmed the democracy and fairness of Mexican elections.
In Venezuela, the president is also elected by the people through direct vote, and rules relying on the parliament also elected through popular vote. Despite this democratic setup, the nation suffers from political turmoil and frequent coups including the coup attempts of 1992, 2002, a recall referendum of 2004. At present, Venezuela is run by an authoritarian President Hugo Chavez who came to power as a result of the coup (Wikipedia). His rule evokes strong opposition among the Venezuelan people, and the opposition’s protests destabilize the situation, disrupting oil supply and negatively affecting the economy. The political situation is aggravated by “a polarized political environment, a politicized military, drug-related violence along the Colombian border” (Global Edge).
The relationship between political stability and economic growth has been shown to be reciprocal, meaning that economic growth promotes stability and vice versa. Political instability observed in Venezuela is threatening because it may “lead to capital flight”, procrastination in implementation of investment projects, and unwillingness of multinationals to locate their offices in the nation (Zablotsky, 1996, p.2).
Exports/Imports
Mexico “has a free-market economy with a mixture of modern and outmoded industry and agriculture, increasingly dominated by the private sector” including a strong export industry (Wikipedia). The greatest part of it is oriented toward the thriving northern neighbor, the US, that accounts for 85% of Mexican trade. However, the share of Japan and the European Union can be expected to grow since the country has signed 12 Free Trade Agreements with forty different countries (Wikipedia). Party of North American Free-Trade Agreement (NAFTA) with the US and Canada and WTO, Mexico has overcome its dependence on oil that was tangible in the 1970s and increased the share of industrial exports during the 1980s (Economist).
As of present, Mexico exports oil and oil products, manufactured goods, agricultural produce, and cotton. The nation is dependent on imports of “metalworking machines, steel mill products, agricultural machinery, electrical equipment, car parts for assembly, repair parts for motor vehicles, aircraft, and aircraft parts” (Global Edge). Oil is an important source of Mexican export revenues, accounting for about a third of state revenues and making Mexico the ninth-largest oil exporter in the world (Wikipedia). However, Mexico also has industrial exports that diversify its economy, although manufacturing exports are vulnerable to fluctuations in the US economy due to large dependence on the US economy.
Venezuela also exports a lot of oil which makes its economy vulnerable to fluctuations in the price of this commodity (Global Edge). Besides, the nation also produces drugs which cause an increase in drug consumption among the local population. The dangerous practices in mining are destroying rainforest areas and threaten the survival of indigenous ethnic groups. Apart from oil, Venezuela exports other fossils such as aluminum and bauxite, produces steel and agricultural produce and basic manufactures (Country Report). It imports, in turn, “raw materials, machinery and equipment, transport equipment, construction materials” (Country Report). Thus, Venezuelan imports are less industrial and more oriented toward raw materials than those in Mexico.
According to a study by the Inter-American Investment Corporation, the reliance on commodity prices bodes ill for the economies of the region given the fact that “the World Bank forecasts a negative long-run trend for commodity prices” (IIC 2001). Although oil prices are on the rise, there is no certainty that the rise will continue forever, or even for a long time. A world-wide depression could send those prices down. On the other hand, the concentration of Mexican exports on one nation, the US, also makes it vulnerable to the swings of that nation’s economy.
Economic Indicators and Outlook
Mexico is obviously a larger economy with a total GDP of $1.006 trillion (2004), while Venezuela compared to just $145.2 billion in Venezuela for the same period by purchasing power parity (Global Edge). At the same time, Venezuela enjoyed a far greater GDP real growth rate in 2004: 16.8% versus 4.1% in Mexico (Global Edge). However, Venezuela has a lot of catching up to do before it can achieve Mexico’s per capita GDP of $9,600 starting from its 2004 per capita GDP of $5,800. In addition, Venezuela had a dangerous inflation rate of 22.4% in 2004 while Mexican inflation was limited to 5.4% in 2004. besides, growth in Venezuelan GDP can be attributed both to a rise in oil price and recovery from the recession that led to a 18.3% contraction of GDP in the first half of 2003 as compared to the same period of 2002. The inflation rate constituted 31.2% in 2002, and looking at the high inflation rate today in Venezuela, one can say that the nation is still recovering from the shock of decline and Bolivar devaluation. Both nations suffer from considerable economic inequality: the poorest sections of the population hold only 0.8% of the national wealth in Venezuela and 1.6% in Mexico (Global Edge).
Mexico, too, has experienced economic turmoil of late: “a devaluation of the peso in late 1994 threw Mexico into economic turmoil, triggering the worst recession in over half a century” (Global Edge). However, since then Mexico has experienced a strong recovery that has helped it to join the list of the most promising developing nations of the world along with China, India, Brazil and Argentina. Recent growth in GDP holds potential for overcoming the low level of real wages and underemployment, especially in the backward southern provinces. Most agencies have noted a strong improvement in macroeconomic fundamentals since the 1994 peso crisis. The positive outlook for Mexico is confirmed by investment-grade ratings issued for the nation’s debt by all three major credit ratings agencies, Moody’s, Standard & Poors, and Fitch Ratings in 2004 (Global Edge). At the same time, strong dependence on the US business cycle, evidenced by virtual absence of growth during the 2001 recession in the US, creates conditions under which growth in Mexico is most plausible on condition of growth in the US.
In Venezuela, the outlook mainly depends on oil that allows the nation to post a trade surplus and makes up 82% of the nation’s export revenues (Global Edge). Although the nation’s share of non-petroleum exports has been on the increase, they still account for just one-fifth of Venezuelan total exports (Global Edge). Thus, a plausible increase in oil prices over the next years contributes to the positive outlook for Venezuelan economic development, but makes it vulnerable to sharp swings. Venezuela is also dependent on the US in terms of export as the US is its most important trading partner (Global Edge).
Professionals engaged in the analysis of the economic situation in Latin America also generally favor the view that the economic situation in Mexico is more favorable. Stanley Fischer, First Deputy Managing Director of the International Monetary Fund in his speech at LACEA conference in 2000 explained Mexico’s economic progress with “the consistent policies followed since the 1994-95 crisis, and the remarkable strength of its principle export market, the United States, as well as higher oil prices”. In contrast, Venezuela is able to capture increase in revenue due to spike in oil prices. However, as Fisher (2000) notes, “both macroeconomic and structural policies need significant strengthening”.
However, Venezuela can be credited with having recovered from a recent crisis, which, as noted above, explains the high growth numbers. The fact of the nearly completed recovery was recognized by Dr. Anoop Singh, Director of the IMF’s Western Hemisphere Department, who stated that Venezuela should have no problems with growth in 2006 because of the continuing increase in oil prices. In his recent report, “Global context and regional outlook for Latin America and the Caribbean”, he also pointed that both nations have been able to reduce their debt to GDP ratio. However, Venezuela’s rate remains higher at 39.2% in comparison to 25% in Mexico. It is not clear whether the Venezuelan government will choose to use oil revenues for debt repayment or for internal development. However, the higher debt proportion may also weigh on the country’s prospects.
Conclusion
Mexico seems to be in a better position than Venezuela at this point due to greater diversification of its economy, higher GDP, geographic proximity to the US, and political stability. The success of this country will largely depend on its ability to attract foreign investment and overcome its dependence on the US as the single most important trading partner. Mexico seems to have achieved the transfer from commodity (petroleum) to manufacturing exports during the 1980s, a problem that Venezuela still has to overcome. However, on this way Mexico was assisted by political stability exemplified in the long-term rule of a single party, while Venezuela suffers from political upheavals. Besides, Mexico has had time to recover from currency devaluation in 1994, and Venezuela experienced a similar crisis as recently as 2002. In any case, both nations have to overcome serious problems such as un- and underemployment, underdevelopment of separate regions, drug trafficking, corruption, and dependence on the US and its trading cycles.
Bibliography
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Fischer, Stanley. “Latin America 2000.” Given at the
Gallup, John Luke & Jeffrey Sachs. “Geography and Economic Growth”. The Annual Bank Conference on Development Economics, Washington, D.C., 20-21 April 1998. http://www.worldbank.org/html/rad/abcde/sachs.pdf (accessed March 15, 2006).
LACEA 2000 Conference Held in Rio de Janeiro, 12 October 2000. http://www.imf.org/external/np/speeches/2000/101200.htm (accessed March 14, 2006).
Economist Intelligence Unit. Economic structure. http://globaledge.msu.edu/ibrd/cioffsite.asp?URL=http%3A%2F%2Fwww%2Eeconomist%2Ecom%2Fcountries%2FMexico%2F&CountryID=5&CategoryTitleText=MEXICO (accessed February 24, 2006).
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Singh, Anoop. “Global context and regional outlook for Latin America and the Caribbean.” At a symposium sponsored by the Banco de la Republica Bogota, Colombia, October 13, 2005. http://www.imf.org/external/np/speeches/2005/101305.htm (accessed March 14, 2006).
Wikipedia. Mexico. http://en.wikipedia.org/wiki/Mexico (accessed February 24, 2006).
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Zablotsky, Edgardo E., ‘Political Stability and Economic Growth’, February 1996, http://www.cema.edu.ar/~eez/Publicaciones/DocumentosdeTrabajo/doc109.PDF(accessed March 15, 2006).
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