MexECON Blog

Mexico Is Not Greece

Since late 2009, world financial markets have been on edge because of the Greek government's unexpectedly large budget deficits and a risk that Greece could default on its debts.  Not only has that sparked concerns about a break-up of the Euro zone, but it has sparked speculation that other countries might be in a similar bind.  Looking at three key fiscal indicators, it appears that Mexico is in much better shape than Greece, in spite of Mexico's sharp recession in 2009.

Of course, official data from less developed countries can be open to question.  Indeed, much of the problem with Greece is that its leadership apparently engaged in dramatic window dressing to make its financial reports look better than the reality.  Nevertheless, recent revisions have probably left Greek official figures closer to the truth, and Mexico's figures are rarely under significant suspicion.  That suggests that the figures used in this analysis are reasonably reliable.

Over the last decade or two, many of the so-called "emerging markets" have made a valiant effort to reform their economies.  While some aspects of that effort have fallen short, the trend has been toward greater fiscal discipline.  As a result, many of the major developing countries now look like they are in a much better position for future growth than the advanced countries, with their yawning budget deficits and high debt levels.  As shown in the table below, Mexico has a much lower level of public spending than Greece.  Its budget is also close to being in balance, and its debt levels are very modest.  In particular:

  • Government Spending.  Over the last two decades, Greece's public-sector spending has never fallen below 42.0% of the country's Gross Domestic Product (GDP).  In 2009, as the global financial crisis mushroomed and the European economy fell into recession, Greek spending surged to more than 50.0% of GDP.  These figures reflect Greece's numerous public employees, high public wages and benefits, generous welfare programs, and extensive government activities.  Greek spending levels, which are on par with the average for the Euro zone, are significantly higher than the long-term average of about 35.0% for the United States.  More important for this analysis, Greek spending is about twice as high as Mexico's.  Indeed, Mexico's public spending is typically about 22.0% of GDP, and the share only rose to 26.1% in 2009.  While there is some evidence that Mexico's stingy spending is a drag on the economy - by shortchanging public investment in education, for example - it has also made it easier for the country to keep its budget in balance.
  • Budget Deficits.  Now that corrected figures are available, it is clear that Greece's budget deficit never fell below 3.0% of GDP as required for entry into the Euro zone.  Efforts to manipulate the figure brought it close to that level at the beginning of the 2000s, but then the deficit expanded again to the country's historical levels of 5.0% or more, before finally ballooning to 12.7% in 2009.  In contrast, Mexico kept its budget essentially balanced for many years before the recent recession, and even after the recession arrived, the deficit has been held to just 2.3%.  Mexico's tax collections are hindered by problems such as a narrow tax base and rampant evasion, but at least Mexico's leaders have worked hard to live within their means.
  • Government Debt.  Because of its big budget deficits and easier borrowing terms after joining the Euro zone, Greece's debt levels have been above 100.0% of GDP for at least the last decade and a half.  With its balanced budget and the discipline forced on it by the international bond markets, Mexico's total debt has been kept extraordinarily low.  In 2009, Mexico's debt rose only to 35.1% of GDP.

In sum, Mexico's fiscal situation is much better than Greece's.  Indeed, Mexico's fiscal situation is better than that of many of the world's most developed countries.  Mexico still has many economic hurdles to cross - such as solidifying its current recovery, increasing investment, deregulating its economy, and ending a credit crunch that is still weighing on growth - but its prospects still look attractive.

Patrick Fearon, CFA
Vice President, Fund Management

Mexico Is Not Greece

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