Squeezing Mexico's cash flows

By Dave Anderson:

My basic analytical model of the Mexican economy's interactions with the rest of the world assumes five major cash flows from abroad.  Smuggling, remittances, manufacturing,tourism and oil make up a significant portion of Mexico's cash flow from the rest of the world.  Tracking those sectors allows for a quick and dirty appreciation of the resources that the Mexican state has available to it to provide public goods and to fund its narco-war.  One of those sectors that previously had not been under significant pressure from the narco-war looks like it may experience an insecurity squeeze. 

The first,smuggling, is firmly controlled by the cartels and gangs which are seeking to create a series of temporary autonomous zones along the US-Mexico border region as staging areas for their smuggling activities.  The next three areas of cash flow track the US economy.  Remittances make up 3% of GDP but are declining.  Light and medium manufacturing for the US market is a critical industry in northern Mexico, centered around the city of Monterrey.  Tourism centered around the tropical beaches are another major source of cash.  All three of these activity groups are correlated with the US economy and political climate.  

The final and major export sector for Mexico is oil.  Prices have stabilized just north of $70 a barrel, and production is declining although exports have stabilized because Pemex is diverting oil from the domestic market to the international market.  The oil export infrastructure has not been systemically targeted despite oil export revenue making up over a third of the Mexican federal budget.  There is some minor league bunkering and smuggling, but nothing that resembles either the Iraq 2003-2007 campaign or the Nigerian Delta region.   

Borderland Beat reports that the violence is spreading along the border and places the legitimate economic engine of the region under threat. Violence is spreading south to Monterrey, the hub of the border-region's manufacturing system:

In early 2010 the violent split between the CDG and Zeta cartel caused
the violence in Nuevo Leon to grow exponentially. In January, 23 drug
related murders were recorded. February accounted for 29 drug related
deaths. March accounted for 73 drug related murders and April saw the
number of executions grow to more than 100.



It would not be an overstatement to say that in early 2010 stability in
Monterrey and the northern and eastern areas of Nuevo Leon
disintegrated.



Growing cartel violence seriously undermines the public�s confidence in
the ability of government institutions, including federal police forces
and the military, to guarantee public safety...

In the early morning hours of April 21 a group of up to 50 gunmen
blockaded the thoroughfares leading to several high end hotels in
Monterrey. The gunmen performed a room to room search of the
establishments and abducted 4 guests registered as businessmen,
including one female, and 3 hotel employees. The fate of the victims is
unknown....

Combined with recent Zeta weapons seizures in Tamaulipas, the arsenal is
big enough to arm a modern combat infantry battalion...

Remittances are in decline.  Total exports are holding up although they are being supported by the increase in oil prices, tourism is flat to declining.  If manufacturing is isolated due to violence, the Mexican government will see another one of its cash generating centers flatline if not decline.  Less cash means either depending on foreign loans or less capacity to both fund the narco-war and provide the basic services that its citizens expect and the government's legitimacy depends upon.  A series of routine assassinations in Monterrey targeting the city's professional/managerial classes as well as visible signs of foreign money would seriously degrade the ability of the Mexican government to operate effectively.