Mexican Drug Violence Isn't Hurting Foreign Investment

| Jul. 29, 2011 |

Published by Minyanville

A 15-year-old hitman, convicted of four murders, was sentenced to a maximum jail term of three years this week in Cuernavaca, just south of Mexico City. Despite Mexico’s high threshold for news of gruesome violence, Edgar Jiménez Lugo shocked the country in December as videos of him appeared online slitting a victim’s throat, beating others with a stick, and posing alongside corpses and weapons.

Since President Felipe Calderón came into power in December 2006, more than 35,000 have been killed and many businesses scared out of Mexico in the drug wars. Much of the violence has taken place on the country’s border with the United States.

However, foreign investment looks to have increased in the region during Calderón’s presidency. According to a study, foreign direct investment (FDI) totaled $31 billion between December 2006 and December 2010, compared to $30 billion in the previous four-year period.

The six northern states actually have seen more foreign investment as a proportion to the rest of the country during the current presidency, accounting for 28.5% compared to 22.5% in the previous period.

“What is all the more remarkable about the findings is that they include the precipitous drop in FDI that Mexico, and the rest of the world, suffered in 2009,” writes Adam Thomson in Financial Times. He cites efficient production for export as well as the provisions of the North American Free Trade Agreement (NAFTA) which allow cheap labor, in particular for US export.

The news has surprised many, as businessmen have been forced out of many border regions and even the country’s industrial centers. Cartels in many cities collect a “cuota”, essentially an extortion tax from local business. However, they rarely mess with big business, especially that involving US or Asian companies.

“The big corporations manage everything in checks and international transfers, they don't work with cash,” Juan Benavente, deputy secretary of the economy for northern Chihuahua state, told AFP. “Here the local businesses manage everything in cash, depositing in banks here in the city, so they're more vulnerable.”

Local workers in the city may disagree, though, that they are unaffected by violence. They complain about low wages, poor working conditions, and women workers regularly being raped and killed on their way to and from work.

Still, as well as business, tourism appears to be on track for growth. International tourism to Mexico increased 2.1% in the first five months of 2011 compared to the same period last year, according to the US Department of Commerce.

Mexican authorities are trying hard to bring in tourists from both the US and emerging economies, such as the so-called BRIC nations—Brazil, Russia, India, and China. It is the drug war that is putting tourists off, and authorities are keen to distance tourist destinations from the violence.

Former President Vicente Fox told CNN this week he believes drugs like marijuana should be legalized in order to end the drug violence that is ravaging the country. More than 50,000 troops are now fighting the cartels, in a much-criticized strategy of Calderón’s. This, says Fox, is not working. The former president also added that the US should be doing its bit to help.

Criminal gangs, linked to the cartels, have infiltrated state oil company Pemex. More than 100 oil workers and contractors have been helping gangs steal millions of barrels of fuel over the past decade, according to a Reuters investigation.

According to the investigation, truck drivers are the usual culprits, helping criminals steal fuel. In the last year alone, fuel theft has cost Pemex around $600 million.

Since 2000, the company has received more than 2,600 formal complaints for fuel theft. Only 15 of these have resulted in convictions. While new laws are to be brought in, which would impose up to six years in jail for the criminals, their enforcement will be difficult thanks primarily to the country’s weak justice system.

Inflation Fears Calming

Weak demand is allowing Mexico’s economy to stabilize, easing inflation. This is allowing the benchmark interest rate to stay low at 4.5%, unlike in many emerging economies, notably that of Brazil, which has raised interest rates five times this year. Brazil’s figure now sits at 12.5% and is expected to rise further before 2012.