The Geography of the Recession and the Imperfection of Short-Term Economic Analysis

Mexico lost 3.4 percent of its formal jobs in annualized rate in April 2009. However, employment had not a uniform behavior; Chihuahua, lost 14.0 percent; Baja California, 9.4 percent and Tamaulipas, 8.3 percent; all north border states. However, other states created jobs; Campeche, 4.1 percent; Chiapas, 4.0; Oaxaca, 3.7; and Veracruz, 3.7; all of them southern states.

The main reason behind this irregular behavior is not its geography per se but their economic structure (with variable geography being important). Remember, the state’s economic structure defines its business cycle responsiveness and how it reacts to economic shocks. In the present recession with a international shocks affecting through two transmission channels: fall on exportations and tight conditions on financial markets.

Let’s take a look over the four larger states with high employment swings to describe its structure and how they have reacted recently in the face of the current economic downturn, particularly: Chihuahua, Baja California, Veracruz and Campeche.

Contribution to its GDP by three sector: manufacture, mining and commerce

(Percent)

	Manufacture	Mining	Commercial Activity
Chihuahua	18.6	0.8	34.1
Baja California	18.9	0.1	25.3
Veracruz	16.0	1.1	19.6
Campeche	1.3	42.1	17.3

Source: INEGI at: www.inegi.org.mx

Clearly the exposition to the recession is larger in Chihuahua and Baja California because they have more participation in two sectors highly expose to international shocks; manufacture and commerce. The industry of boarders states is deeply concentrated in the production to consumer goods for exportation, therefore a suddenly fall in US consumption led a fall in manufacturers products (during May exportations fall 35 percent); and both states have higher participation in commercial activity, very sensible to border commerce, wages and credit conditions.

On the other hand, Veracruz and Campeche have lower participation in commercial activity and manufacture production. The economy of Campeche is largely determinate by mining, particularly oil extraction, a sector with sources of volatility determinate, in order, by: natural endowment, financial health in public budget, and oil prices. So this time with relatively stable oil production andincrease spending on oil extraction; this sector keep its peace, creating jobs and compensating the fall on other sectors.

In the case of Veracruz ,which despite having a smaller commercial sector it has industrial sector almost similar in size to the northern states. However, its industrial sector is very different from the northern states; Northern states produce more than 50 percent on higher value added goods such as computer equipment and other electronic goods, while Veracruz produces processed food by 50 percent; this industry traditionally more affected by supply disruptions than demand shocks.

These results brought some reflections about the short term economic analysis. Recently has been attractive to declare the supremacy of some ways of growth over others ways. Under the criteria of recent economic performance, France in Europe and China in Asia, are the winners; both countries are heavily regulates, with strong presence of the government, and both economies show better figures than US, Canada and Japan for instance . The losers are Mexico and Germany, respectively, countries highly dependent on exportations, whose have been working toward trade openness, less regulation, more competition, less unions, more flexibility, fiscal discipline, etc.

Now, is better be Veracruz than Aguascalientes, better be Oaxaca than Baja California. Have strong government than a weak one. Now government spends better than privates, and more important, government spends better private resources than private themselves. This is supported by short term economic analysis that enjoy Keynesians (“In the long run we are all dead”).

This discussion is very important under assumption that shocks with permanent effect of economic growth. This time this assumption is stronger than ever because lawmakers, policymakers, and all kid of adviser are questioning the “old way” of doing economics around the world and they are doing something about it. Fiscal deficits are in fashion. Industrial policy are more active than the previous decades; saving sectors and companies “engulfed” in flames. Increasing public debt –future tax - and forgetting the “old economic agenda”: fiscal discipline, quality education with educational vouchers, technological innovation with private resources through financial instruments as investment risk funds.

It’s very important the presentation of conjuncture reports as Bank of Mexico does. However, this report and other of this class, should be taken carefully and considering its main goal, in the case of Bank of Mexico, justify the monetary policy decisions, the economic context of these decisions, explains the causes of the trajectory of prices in the economy, and as result of its commitment in terms of accountability and as an operational objective through its effects on inflation expectations. It shouldn’t seen as tool to persuade those involved in modify the incentives in the economy, particularly those incentives created to affect negatively the economic performance as strong government presence on the economy, industrial policy or rules in executive pay.