Mexico is having a bad year, but it's a good long-term bet

By Ian Bremmer

It's been a rough year for Mexico. The global economic downturn has inflicted heavy damage by reducing demand for Mexico's oil, depressing tourism, and limiting the flow of remittances into the country from Mexicans working in the United States. These are Mexico's three largest sources of foreign currency. The broader economy has taken a serious hit, one that will probably be worse than the officially expected 5.5 percent contraction.

Throw in swine flu, which has killed more than 100 people inside the country, sickened 6,000 more, and cost Mexican tourism billions of dollars on top of that. Add the government's war against drug cartels, which has killed thousands of civilians in recent months. And then Earthquakes in April and May contributed to a feeling that everything has gone wrong at once.

But Mexico is no failed state. President Felipe Calderon enjoys domestic approval numbers in the mid-60s, in part because a majority says his government is making progress in battles with the drug gangs. His National Action Party (PAN) will probably lose some seats in July's lower house elections. But those losses will profit the centrist Institutional Revolutionary Party (PRI), not the populist Party of the Democratic Revolution (PRD). In fact, after threatening to bring Mexico's government to a standstill following his very narrow loss in the 2006 presidential election, PRD heavyweight Andres Manuel Lopez Obrador has succeeded mainly in marginalizing himself. Government handling of swine flu won't be much of a factor in the elections, because some of the most seriously affected areas are governed by opposition parties.

The drug war could seriously complicate U.S.-Mexican relations by spilling over the border to a degree that the U.S. mainstream media can no longer ignore. And Calderon's government is unlikely to make more than marginal progress on key economic reforms for the foreseeable future. The fiscal picture just isn't quite dire enough to force the political compromises on which serious liberalization will depend.

Still, there are plenty of reasons why Mexico remains on a long-term path toward growth and greater prosperity. First, dependence on exports to the United States isn't such a good thing for the moment, but over the longer term, it will push Mexico to new heights. The U.S. economy will recover. Mexico's economy will follow. That's good for exports, remittances and tourism. U.S. investment will continue to flow into Mexico, particularly as U.S. market access to China becomes more difficult in years to come as the Chinese leadership begins to more actively favor Chinese companies at the expense of foreign competitors.

But the best news for Mexico became obvious during that much disputed 2006 election. Following Lopez Obrador's loss (by less than one percent of the vote), he declared victory and challenged the official result in court and in the streets. For days, tens of thousands of his supporters brought traffic to a standstill in central Mexico City. Yet, Mexico's courts and legislative bodies continued to function and markets avoided sustained damage. The election proved that Mexico's people have enough confidence in the country's public institutions to allow the democratic process to run its course.

Mexico is having a bad year. Recovery will take time. But it will recover its position as a politically stable and dynamic emerging market and a sound long-term investment bet.

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