A Macroeconomic Comparison and Financial Analysis of Greece and Mexico
Introduction
The world is made up of different countries whose economic, financial performance and stability differ. The differences arise based on the diversity of economic resources and the governance policies and strategies (Park 2012). Historically, countries have faced economic and financial crisis whose causes can be local or foreign. Such crisis affects the development rate and the quality of life for the people. The comparative study of two countries can assist in understanding the differences regarding economic performance and financial stability. It is worth noting that the analysis can assist in evaluating the nature of economic crisis ever faced by the two countries at separate times, the causes, and how the challenges were resolved. The two countries considered, in this regard, are Greece and Mexico. Therefore, two fundamental objectives have triggered the comparative study. The first objective is to undertake macroeconomic comparison and financial analysis of Greece and Mexico. The second one is to evaluate the role of the government and other players in achieving a stable financial market.
The understanding of the objectives would be realized with the application of an effective and relevant study method. A critical review of economic data and information from government websites, World Bank, and other websites such as trendingeconomies.com is the method of the study applied. For the purpose of comparison, the key indicators considered include governance, debt crisis, fiscal and monetary policy, foreign exchange, foreign direct investment, and human development index. Based on the comparison, suggestions on the best way forward for the chosen countries will be provided.
The Profile
Greece
According to BBC News (2016), Greece historical and cultural heritage are still popular not only in Europe but also across the world. The country is situated in the southern Balkan Peninsula with the combination of mountains on the mainland and over 1,400 islands. After the World War II, the economy reported significant economic and social change, which was driven by huge tourism and shipping as key economic sectors. As a result of the high economic growth, the government embarked on high public spending on social goods and services. Nevertheless, the widespread tax evasion led to the economic recession and credit crunch, which has affected the performance of the economy over the years since 2009 (Trading economics.com 2016a). Worth noting is that the country has about 11 million people while its country’s National Gross Domestic Product (GDP) stands at US$195 Billion (Trading economics.com 2016a).
Mexico
Mexico is a federal State located in North America bordering the United States and Belize and Guatemala to the north and southeast respectively (Buckley 2011). With a population of about 119.7 million people, the National Gross Domestic Product (GDP) for the year 2015 was US$1144. 33 billion. After the World War II, the country embarked on economic growth and development. In the 1970s, the economy becomes a major petroleum producer, hence improving its growth in revenues. Nevertheless, the government accumulated huge external debt pegged on the revenues (Buckley 2011). The drop in oil prices in the 1980s affected its revenue and the ability to pay the debts. In 1994, the country joined the United States and Canada and formed the North American Free Trade Agreement (NAFTA).
The Comparison of the Two Countries
Debt Crisis
The debt crisis is a financial and economic problem in which public debt accumulates beyond the acceptable limits, and the government is unable to pay the loans and the interest charges (Buckley 2011). It is a weakness in public finance management in a country. At times, the crisis can be associated with the economic downturn, which impedes the ability of the government to raise adequate revenue to support the servicing of the debts (Buckley 2011). The crisis faced in the Greece economy currently and in the past few years are therefore as a result of the poor public finance management. In fact, according to Akram and others (2011), the government borrowed hugely to fund military funding, which did not assist in raising revenue to support the repayment of the debts. In the 1980s, the government borrowed at an increasing rate but failed to put in place economic growth measures. Upon joining the Eurozone in the 1990s, the debt to GDP rate gained a relative stability as shown in the graph below. The rate worsened in the late 2000s where it was the same time that the world economic crisis was being experienced based on financial instability in the United States. As other economies in Europe and beyond are heading into recovery, Greece continues to experience the impact to date (Mussachio 2012).
Saucedo and Rullan (2014) highlight some of the reasons behind the Greek debt crisis. First, it is clear that the problem can be traced back in 1980 in which the macroeconomic policies undertaken weakened the economy and made it vulnerable. With the weak economy and joining the Eurozone at the same time, the initiative reduced the control that the government had on the economic management based on the openness to spillovers from the rest of the European economy. Greece started sharing a currency with other economies whose economies were far much strong and stable. Secondly, the power of the political parties and trade unions weakened the political system in the 1980s and 1990s (Saucedo & Rullan, 2014). The political leaders were forced to make choices and support the ideologies of the parties and the unions at the expense of the economic prosperity and for the good of the Greek people. The civil servants could easily take sides to protect their careers instead of giving services for the benefit of the population. As a result, expenditure in the government departments and units become significantly uncontrolled and ineffective, leading to huge public borrowing (Saucedo & Rullan, 2014). In 2015, the debt to GDP was 176.9% (the national debt is 1.769 times the GDP; see graph above), which implies that the crisis is still unresolved and the economy has not recovered (Trading economics.com 2016a).
The Mexican economy experienced a debt crisis in the early1980s as the government reduced its public expenditure to support the repayment of public debt. As a result, the economy experiences a slowdown (Park 2012). Upon the renegotiations done in 1989, the economy showed the sign of recovery. Next, the government embarked on the privatization of banks where all the institutions were nationalized, a situation that highly liberalized the financial sector. At the same time, in the early 1990s, the government applied a crawling peg regime in the exchange rate (Park 2012). According to Levy-Yeyati & Sturzenegger (2005) the regime crawling peg is a system in which a currency is allowed to exchange with a fixed rate, but allowed to fluctuate within predetermined range of rates. The aim of the regime is to reduce the inflation rate and decrease the implication of the economic strength of the U.S.A., which was a major trading partner. The Monetary Trilema adopted in this case aims at stabilizing the exchange rates to maintain the foreign capital flow at the preferred levels.
The deregulation of the financial sector increased the borrowing, and more people and firms were able to access the credit facilities from the banks. Therefore, the efficiency in business enterprises and hence their profitability boomed. As such, the creditor developed more confidence, and since competition among the banks was high, sensitivity to credit risks was considerably reduced. Furthermore, foreign investors developed positive speculations about the market and eventually invested heavily in the sector. The positive situations were short-lived; the political factor triggered the economic crisis in 1994 (Saucedo & Rullan, 2014). During the same year, there was tension in Mexico after the presidential elections upon which one of the presidential candidates was killed. There was also considerable tension in the military following the formation of the Zapatista Army of National Liberation (Saucedo & Rullan, 2014). The situation brought the mistrust among the foreign investors leading to Capital Flight; most of the foreign investors withdrew their investments. As a result, employment and the income level significantly declined (Saucedo & Rullan, 2014). As show in the line graph below, the rise in interest rates leads to decline in aggregate output, income. With the decline in income and rising interest rate, the borrowers could not afford to repay many of the debts leading to the collapsing of the banking sector.
In response, the government devalued the Mexican currency (peso) by 15%, causing the foreign exchange reserve to reduce immensely (Saucedo & Rullan, 2014). The devaluation did not help as most of the foreign investors had withdrawn the huge amount of dollars in their investments. Eventually, the government could not have an adequate amount of dollars to repay the public debt as they fell due. The Exchequer was bankrupt and hence a debt crisis was experienced. The crisis was of significant concern to the United States as a trading partner and a neighboring state, which triggered the American government to assist. The US government offered $20 billion regarding the loan. Other international players also came in to offer the assistance led by the IMF, the Bank for International Settlement, and some private banks. The institutions offered $18 billion, $10 billion, and $ 50 billion respectively to the Mexican government. The government reduced expenditure and increased tax rates, particularly value-added tax as well as charges for public goods and services. Upon the stabilization, the law has been enacted to reduce government borrowing and public expenditure.
As we can see from the graph above, the public debt to GPD for Mexico was high before 1990 and then in 1995, where it declined considerably until the late 2000s. The ratio has since grown at a steady rate to reach about 43% in 2015 up from about 17.10 percent in 2007. Contrary, the debt to GPD for Mexico has had a positive growth from 1981 but stabilized in the 1990s where there has been in a growth state in 2000s. Currently, the ratio is relatively high at 176.9%, compared to the 43% in Mexico. The other difference is that as Mexico has alternated both the floating and pegged exchange rate in different times, Greek has been unable to control the rates because of being a Eurozone member. Floating and pegged exchange rate implies that the currency is allowed to exchange based on the forces of demand and supply, but its value is based on a single foreign currency. Hence, it implies that Mexico has had the opportunity to control its exchange rates depending on the economic situations in the economy and the international scene. Lastly, it is clear that when Mexico faced the financial and credit crisis, it received a significantly huge amount of financial assistance from the international players. The convergence financial approach was adopted with the practical efforts from other players experienced. The assistance from the IMF, U.S.A, and other financial players was directly and promptly. This is unlike the Greek situation where the international community, including the European partners, has delayed their intervention despite the calls for bailout (Saucedo & Rullan, 2014). The Contagion financial approach (integrating local financial systems with international financial markets) was adopted with Greece expected to act individually in resolving the crisis.
The Monetary and Fiscal Policies
The monetary policies define how the government controls the money supply in the economy. The fundamental indicator is the interest rates, which are percentage charged to the borrowers on money advanced on credit/loans. A government intending to spur economic growth would reduce the interest rates to encourage the private sector to borrow and invest in economic activities (Park 2012). In Greece, the interest rates have dropped from 1.5% in 2011 to 1% in 2012, and then to 0% in 2015, which has remained so to date. The rate of 0% implies that the government has adopted an expansionary monetary policy (Trading economics.com 2016a). The step, in this regard, is to assist the economy to move into recovery following the recession arising from the debt crisis. The increased money in the supply will assist in boosting investment for the production of goods and service as well as consumer expenditure (Fethi & Pasiouras, 2010). As money supply increase the aggregate output increases (see LM curve below)
On the other hand, the interest rates in Mexico decreased from 4.5% in 2012 to 3.5% in 2015. However, it has risen to above 4.5% in 2016 (Trading economics.com 2016b). The decrease between 2012 and 2014 was an effort to spur economic growth, most likely after the implication of the crisis in the late 2000s, which was an expansionary monetary policy. However, the growth in the rates in recent years aims at discouraging borrowing to reduce the money supply. Upon the recovery from the 2000s crisis, the inflation rate could be high and hence need to reduce the monetary supply through the increased interest rates. The government is adopting the contractionary monetary policy.
The fiscal policy regards how the government spends money and collect revenue to control the economic environment in the country (Levy-Yeyati & Sturzenegger, 2005). The primary indicators used in evaluating the policies include the government expenditure and tax rates. Therefore, to encourage the economic growth, the government can increase its expenditure and or reduce the tax rates and vice versa. For instance, the increase in government expenditure increases the demand for goods and services as well as income levels, which encourages individuals and firms to produce more to benefit from the expanding market. The government expenditure in Greece has decreased from 12, 000 EUR Million in 2012, to 11,500 EUR Million in 2014, and then to about 10,800 EUR Million at the end of 2015 (Trading economics.com 2016a) (see Greece Government Spending graph below). On the other hand, the corporate tax rate increased from 20% in 2012 to 26% in 214, and then to 29% in 2015 (see Greece corporate tax rate graph below). This implies that as the government reduces its expenditure level as it strives to increase its revenue from the taxes. The objective to this effect could assist the government to collect adequate revenue to cover its expenditure and assist in the repayment of huge public debts.
Greece Government Spending & Corporate Tax Charts
On the other hand, Mexico government has embarked on a constant corporate tax rate at 30% since 2010 (see Mexico Corporate tax graph below). The stability in tax rates is an indication that the economy has been stable and that companies can invest in the economy with less uncertainty of the likelihood of the changes in the tax rates charged. Additionally, the constant in the tax rate can assist in keeping the inflation rate in a constant mode. The government expenditure increased over the same period from MXN 1,480,000 million in 2012 to MXN 15,480,000 in 2014, and then to MXN Million 16, 000 000 million in 2015 (Trading economics.com 2016b) (see Mexico Government Spending graph below). The growth in the government expenditure implies that the government was keen to spend more on social goods and services of the revenues collected. This could be an indication that there is an improved income level upon which the constant tax rate is applied to raise increased revenue for the government.
Mexico Government Spending & Corporate Tax Charts
From the discussion, it is evident that Mexico is in a position to undertake autonomous monetary policy (country’s central bank to with its money supply independent from international monetary system) destined to the realization of domestic economic goals. Original Sin is likely to affect developing leading economies such as the USA, Japan, and the Eurozone upon which exchange rates are pegged. A country that applies autonomous monetary policy can avoid it through the interest rates and controlled exchange rates. The government in charge of such a country can succeed in fulfilling its moral obligations of managing the economic affairs to the betterment of the livelihood of its people (Saucedo & Rullan, 2014). Therefore, since Mexico has its own controlled currency through its central bank the original sin can be avoided contrary to Greece because its monetary control is influenced by European Central Bank been a member of the Eurozone. Therefore, it implies that a floating exchange rate regime is adopted Greece. The monetary trilema adopted, in this regard, aims at enhancing the freedom of financial flow among the Eurozone member states.
Foreign Exchange Reserve
The reserve is used by the government in controlling the exchange rate and the flow of capital from and to other economies across the world. Greece has had increasing reserves between 2006 and 2009, but recorded a fluctuating foreign exchange reserve all through from 2010 to 2016 (Trading economics.com, 2016b) (see Greece Foreign Exchange Reserves graph below). The fluctuation in recent years could be associated with the payment of foreign debts and interests using the reserves as the government strive to reduce public debt. On the other hand, in Mexico, the reserve has been growing all through since 2006 (Trading economics.com, 2016b). (See Mexico Foreign Exchange Reserves graph below).The growth has been associated with the growth in financial flow to and from the Mexican market to the rest of the world particularly in the NAFTA region.
Human Development Index (HDI)
HDI of a country is calculated using indicators influencing the quality of life to the residents. The key indicators include access to healthcare, life expectancy, literacy level, as well as water and sanitation among others. According to UNDP report 2015, Mexico was ranked at 74 among the world countries with an index of 0.756. The life expectancy of the residents at birth is 76.8 years while schooling is expected to take 13.1 years. The net income per capita was $16,056, in 2015 (UNDP 2016a). On the other hand, Greece is ranked at 29 with the index of 0.865, which is relatively strong compared to Mexico. The life expectancy in the country is 80.9 years, while the expected years in school are 17.6. Besides, the net income per capita was $ 24,524.1, in 2015 (UNDP 2016a). Clearly indicated is that the quality of life is better in Greece compared to Mexico despite the debt crisis faced in the latter.
Opinion: The Best Way Forward For Greece and Mexico
As it is evident from the discussion, the political systems in both countries have continued to affect crisis significantly. The Greece government has a significant role to play in reducing the public debt and reviving the economy to increase employment opportunities for the people. First, the government should continue using expansionary policies to encourage investment in the country. The first step would be to revive and strengthen the private sector. All the publicly controlled banks should be privatized, and the investors offered favorable operating environment. The government should embark on control and regulation, leaving the business to the private players. Apart from the banks, players in other sectors, including the local and foreign investors should be encouraged to invest in both the existing and new business entities (López 2011). Secondly, the administration should reduce government spending to the optimal level such that only the most essential public goods and service should be offered. As a result, the need to make huge borrowing will be reduced.
Thirdly, the Greece should try to seek more solid international interventions from trading partners and friendly countries. As evident, the crisis in Mexico was resolved upon the intervention of foreign players and stabilized the economy within a short time. On the other hand, I would encourage Mexico to increase its public borrowing slightly, and use the proceeds in funding public goods and services. This is in agreement with Park (2012) who supposes that the strategy is likely to improve the quality of life for its people As a result; the economy is likely to provide better health, education, water, and sanitation hence improving life expectancy.
Conclusion
As noted in the analysis, it is palpable that economies across the world are prone to both the economic and financial crisis. However, the difference depends on what triggers the crisis, and how well they are resolved. The causes are likely to be from within the economy such as political systems and the economic policies adopted. For instance, the crisis experienced in Greece arose from the many years of ineffective monetary policies in which the government borrowed excessively to fund none productive activities. The growth in debt level while the revenues dragged behind cumulatively led into a crisis that has taken longer before being controlled. The crisis in Mexico arose as a consequence of the political situation in the presidential election year after a continuous economic growth. It is noble for the government in power to ensure that the economic policies adopted are strong and effective to assist in averting possible crisis. In case the crisis becomes inevitable, the economic and monetary management strategies should be effective in rectifying the inefficiencies encountered by the country. Interestingly, the HDI for Greece, which appears to be a weaker economy compared to Mexico, is relatively high. This implies that the quality of life in Greece is better than that of Mexico. The finding could be confusing, but according to me, the HDIs represent the economic development progress made in the two countries. However, it is my personal view that Greece had developed stronger and quality socio-economic infrastructures over time compared to Mexico. In this case, the social-economic infrastructures are permanent and not affected by the financial crisis being experienced. As a result, the quality of life for its people remains at the favorably high level, hence the high HDI. In essence, HDI measure is a reflection of the countries’ economic development despite the possible confusion.
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