By Don Quijones, Spain & Mexico, editor at WOLF STREET. His blog: Raging Bull-Shit.

Thanks to the Mexican government’s recent structural reforms “more Mexicans will be able to turn their dreams into reality.” Indeed, in time the country “could become an inspiration for the rest of the world to dare to dream.”

Those were the closing words of Christine Lagarde’s speech during a recent visit to Mexico City. While the government and most of the national and international press seized on the IMF chief’s honey-coated words as proof of the great strides the country’s economy has made, a little caution, I believe, is in order.

After all, when it comes to parsing the tea leaves of our economic future, few institutions boast as risible a record as the IMF. A case in point: the Fund of Funds was still singing the praises of Iceland’s “Viking Tiger” economy in the summer of 2008, just before its deregulated financial sector – by then ten times the size of its real economy – imploded, triggering one of the most severe economic downturns of living memory. Before the Viking Tiger, there were the Asian Tigers, and before them the Baltic ones. Just like Kipling’s tiger, they all burned bright, before being engulfed in the flames of financial crisis.

A Tequila Hangover

Indeed, for Mexico itself this is not the first time that the IMF has shown a keen interest in its economic potential. As I recounted in “The Tequila Crisis: The Prelude to Europe’s Economic Storm,” in the late eighties and early nineties the IMF served as frontline cheerleader for both the liberalization of Mexico’s financial markets and its incorporation in the NAFTA free-trade agreement.

Then, just as now, Mexico’s economy was held aloft as a miracle just waiting to happen. Then, just as now, the financial and business press gleefully jumped on board. So, too, did international investors, drawn by the country’s attractive interest rates and bullish investment returns.

In the end, Mexico’s first economic dream would quickly turn sour. The year was 1994, which had begun with two simultaneous and none-too-auspicious events: a short-lived revolution in Mexico’s southern province of Chiapas, and the signing of the North American Free Trade Agreement, by which Mexico pledged to open its doors.

The passage of the trade treaty was meant to mark a new era of prosperity, but within months Mexico’s economy was in the gutter, as international hot money fled the country for safer shores. By the end of ’94 the peso had lost half of its value, public debt had exploded as the Mexican people were left on the tab for an unprecedented bailout of its (read: New York’s) financial sector, and the country’s middle class was decimated.

What has followed since then has been a long period of slow, often painful economic recovery. The question is: what will happen now that the nation is once again back on the front pages, for all the right reasons? Perhaps most pertinently, why are the prophets of prosperity back in town and what does their renewed interest bode for the country’s economic future?

Here are three reasons why Mexico (in the words of Ruchir Sharma, head of emerging markets at Morgan Stanley) has gone from a country that the Wall Street investment community had “all but given up on” to becoming its “favorite.”

1) An Energy Bonanza. In December 2013, Mexico’s Congress voted to break up the longstanding monopoly held by the state-owned oil giant Petroleos Mexicanos — commonly referred to as Pemex — and to open the nation’s oil and gas reserves to foreign companies. It was the first time that foreign majors were welcomed into the country since President Lázaro Cárdenas del Rio’s nationalisation of its oil and gas industries in 1938.

The reforms are expected to kickstart a historic hydraulic fracturing (“fracking”) and deepwater offshore oil and gas drilling bonanza off the Gulf of Mexico.

“This reform marks a major breakthrough in Mexico’s economic history only comparable to the signing of the North America Free Trade Agreement (NAFTA) in 1992,” international investing and banking giant Banco Bilbao Vizcaya Argentaria (BBVA) wrote in a January 2014 economic analysis.

There can be little doubt that Pemex’s highly inefficient and long-corrupt monopoly desperately needed breaking up. However, the fear among many Mexicans is that the balance has now shifted to the other extreme. Exploration for oil and gas is about to go wild throughout the country’s oil rich land, leaving in its wake vast riches and environmental devastation. The prospecting rush, led primarily by U.S. and European majors, will likely center on three main areas: the deep-water offshore in the Gulf of Mexico; the shale gas opportunities in the Burgos Basin; and the tight oil and shale gas plays in the Chicontepec field.

While the new reform is certain to bring in fresh new funds and tidy returns for both Pemex and the Mexican government (not to mention the world’s biggest energy conglomerates), serious questions remain, as Steve Horn warns in counterpunch:

• Does Mexico have enough water to support fracking operations, particularly in this time of long-term drought (or desertification)?

• How will Mexico move all this oil and gas? Examining the infrastructure: pipelines, refineries, shipping terminals.

• What regulations will be enacted and enforced to protect the local environment, public health and safety?

2) NAFTA Goes South. On February 12th of this year the president of Mexico, Enrique Peña Nieto, signed the Pacific Alliance agreement with his counterparts from Colombia, Peru and Chile. The agreement, seen by many as a Southward expansion of NAFTA, will eliminate tariffs on 92% of trade among the countries, with the ultimate aim of wiping out all trade barriers.

The historic deal is  as a counterweight to the much more protectionist Mercosur agreement among the less-aligned nations of Latin America’s Southern Cone, such as Brazil, Argentina and Uruguay. It is also viewed as a precursor to the Trans Pacific Partnership (TPP) agreement, which seeks to mesh together more than 20 economies on each side of the Pacific Ocean, but which is currently stalled in the U.S. Congress.

Like the Transatlantic Trade and Investment Partnership, the Pacific Alliance and TPP are far less about expanding trade than they are about freeing up capital. Their purpose is to give investors and corporations the right to invest in, produce and sell whatever they want, whenever they want, wherever they want, at the cheapest possible price and completely unhindered by environmental or labor regulations.

Post-NAFTA Mexico is a perfect case in point. It is as much a poster child of the potential macro-economic benefits of so-called “free trade” as it is of the micro-economic ravages it leaves in its wake.

First, the positives:

• Between 1993 and 1998 foreign investment in the country almost tripled.
• The number of employees in industry more than doubled in the space of six years.
• The total value of Mexico’s exports to the United States rose from 49.4 billion dollars in 1994 to 135 billion dollars in 2000.
• Productivity increased by 47 percent between 1994 and 2001.

Now, here’s some of the negatives:

• The real value of the minimum wage plummeted by around 20 percent between 1993 and 2001.
• Much of the new employment generated was in the assembly of imported component parts for re-export in semi-sweat shop facilities called Maquiladoras. The lure of the maquilas is low wages, a lack of environmental or labour regulations, low taxes, and few if any duties — the sort of conditions that are still hard to find in the more heavily regulated markets of Europe and the U.S. Products produced include apparel, electronic goods and auto parts.
• The percentage of Mexicans living in outright poverty rose from 21 percent of the population in 1994 to 50 percent in 1998, and currently languishes at just over 40 percent.
• With the liberalisation of agriculture, the exodus of campesinos to cities and big corporate farms in the US has accelerated: in the last 20 years millions of Mexican farmers have had to abandon their land.

3) The Return of Hot Money

In light of the derisory recoveries (or otherwise put, continued recessions) of the U.S. and European Economies, combined with the recent dramatic slowdown in growth of the BRIC nations, hot capital is frantically looking for somewhere new to briefly lay its hat. And second-rung emerging economies such as Mexico appear to fit the bill — at least for now!

As Walden Bello, a columnist for Foreign Policy in Focus, notes, the aura of excitement that currently surrounds the economies of countries such as Mexico and the Philippines reflects less the realities of their economies than the desperate fantasies of international finance capital and the partisans of a failed globalization.

Put simply, the vast new funds that have been created since the financial crisis must go somewhere, and for the moment they are Mexico-bound. According to data from the Bank of Mexico, the total value of government bonds in the hands of foreign investors has doubled in the past three years to 2 trillion pesos (roughly equivalent to 150 billion dollars, and 80 percent of Mexico’s total foreign reserves).

Mexico’s tragic history may not be repeating itself, but there are still a number of rather disconcerting parallels. Now, as then, Mexico has just signed a historic free-trade agreement. And now, as then, its debt is the international investment du jour.

The world’s hot money has found a new place to set up stall. If, as happened in the early stages of the Tequila Crisis, that hot money were to suddenly get cold feet (as it always does), the dreams of which Cristine Lagarde foretells could very quickly turn sour. And just as in 1994, it won’t be the investors holding the bags — by then, most of them will have long gone. It will be the nation’s middle and working classes. By Don Quijones, Raging Bull-Shit

Under the guise of austerity, taxes on the middle class and small businesses in Spain and other countries have reached confiscatory levels. But for the wealthy, there is a special deal – and it erupted into a scandal. Read…. Mini Tax Havens: How Europe’s 1% Gets to Pay Only 1%

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