The Big Mac Peso-Dollar Blues in Mexico

Could the “Tequila Crisis” happen again? The IMF is worried.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

Although Mexico’s economy has grown at a steady rate during the lion’s share of this fledgling century, Mexican workers’ real salaries have barely shifted. In fact, over the last four decades, Mexicans’ purchasing power has not just stagnated, as has happened in many Western nations, in terms of minimum wage, it has shrunk by 78%. In 1976, a family on minimum wage could buy four times as much as today.

So bad have things become that when CNN’s Spanish edition did a study comparing the minimum statutory wage of over a dozen Latin American countries set against each country’s performance on the Big Mac index, with the US Dollar as the benchmark currency, Mexico came in 13th out of 13, behind a host of much smaller, weaker economies.

In Mexico the legal minimum wage is 74 pesos, or around $4 per day. That’s the equivalent of $0.50 per hour, compared to $1.40 in Brazil, $1.45 in Peru, $2.07 in Ecuador and Chile, $2.38 in Argentina (soon to increase by 33%) and $2.43 in Uruguay. According to the study, the five countries in Latin America with the highest minimum-wage purchasing power are, in ascending order, El Salvador, where a minimum-wage worker has to work 1.51 hours to buy a Big Mac; Chile (1.47 hours); Costa Rica (1.33 hours); Puerto Rico (1.03 horas) and y Argentina (1 hour).

In Mexico, by contrast, a minimum-wage worker has to clock in 5.6 hours to be able to get his or her lips around a Big Mac — over triple the number of hours a Salvadorian must work to receive the same “reward.” In other words, Latin America’s second biggest economy appears to have a significantly lower minimum-wage purchasing power than its tiny neighbor to the south.

The Big Mac index is hardly a perfect measuring stick. It was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level, but since then it has become a global standard, included in several economic textbooks and the subject of at least 20 academic studies. As The Economist itself recently conceded, a better measure of the current fair value of a currency would be the relationship between Big Mac prices and GDP per person, on the basis of which the authors calculated that the Mexican peso was undervalued by 43%.

But that was back in early January when it took 17.44 pesos to buy $1. Today, it takes 18.42, even though the Bank of Mexico raised interest rates by 50 basis points to 3.75% in February. The trend is clearly not the peso’s friend. In the last two years it has shed over 40% of its value against the dollar. In May, it was the world’s second worst performing currency behind the South African Rand.

All of this is made possible by the openness of Mexico’s financial markets. As even the IMF now concedes in its report “Neoliberalism:Oversold?,” if a country opens its economy too widely, too quickly — as the Fund has been advocating for decades — it can expose itself to some very serious risks. As the report points out, while “neoliberals” often tout the magic growth-fueling properties of unrestrained, footloose global capital, in reality the impact of many flows — especially hot, or speculative, debt inflows — seem “neither to boost growth nor allow the country to better share risks with its trading partners.”

More to the point, the potential threat they pose in terms of increased economic volatility and crisis frequency is huge:

Increased capital account openness consistently figures as a risk factor in [boom-bust] cycles. In addition to raising the odds of a crash, financial openness has distributional effects, appreciably raising inequality… Moreover, the effects of openness on inequality are much higher when a crash ensues.

This is precisely what happened to Mexico the last time it suffered a major crash, in 1994, when a sudden reversal of hot capital flows triggered the Tequila Crisis. Over just a few months, the free-floating peso lost almost 50% of its value against the dollar, wiping out the savings of much of the country’s middle class and raising fears that collapsing asset values would push Mexican banks over the edge.

The Crisis threatened to engulf not only most of Mexico’s banks but also a number of Wall Street titans, including Citi and Goldman Sachs. Thanks to the hurried intervention of the U.S. Treasury Department (led by former Goldman co-Chairman Robert Rubin), the IMF, and the Bank of International Settlements, Wall Street’s finest were saved, Mexico’s banks were bailed out and sold off, and the Mexican people were lumbered with untold billions of dollars of compounding debt they still service to this very day.

Could such a crisis happen again? On the surface, it’s hard to imagine. Despite signs of a slow down, Mexico’s economy is chugging along better than most other emerging economies, and inflation still appears to be under control.

However, below the surface problems are bubbling. Around 2 trillion pesos ($109 billion) of local currency debt is held by foreigners, and a stampede for the exits could sink the peso. Then there’s the huge exposure of Mexican companies to dollar-denominated corporate debt, topped off by the slow-motion meltdown of debt-laden oil giant, Pemex.

To calm nerves, the IMF last week boosted its “flexible credit line” (FCL) with Mexico from $70 billion to $88 billion. Merely meant as a “precautionary measure,” the FCL purportedly has no strings (i.e. no structural adjustment conditionalities) attached — apart from a $200 million price tag — and is reserved for countries that have shown themselves capable of consistently applying “solid economic policies.” In other words, countries that are following the IMF’s every order to a T, something the Mexican government has done with aplomb, often to its own detriment, as the IMF itself now concedes.

In the meantime, with the government continuing to resist calls to increase the statutory minimum wage, the Big Mac is likely to remain a near-luxury item for Mexico’s poorest formal wage earners. That said, considering the obesity epidemic gripping the nation, perhaps that’s not such a bad thing. By Don Quijones, Raging Bull-Shit

No one is immune to the crippling effects of a crumbling currency. Read…  Pemex-Peso-Dollar Crisis Takes its Toll in Mexico

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  39 comments for “The Big Mac Peso-Dollar Blues in Mexico

  1. ke says:

    Remittances from California should be growing. They got their licenses and took off for the big cities, where labor willing to work on DOA projects is in shorter supply. News from the countryside.

    • nick kelly says:

      Don’t forget picking all that lettuce etc. without which the US would have a food inflation shock comparable to real estate.
      The worst of the worst jobs in the fields ( they are all lousy) is strawberries. AKA ‘the fruit from hell’.
      Most ethnic Spanish Mexicans get out of strawberries as soon as they can, graduating to sweet- heart broccoli. The job falls to Mestizo Indians.
      A white kid lasts two hours.

      • ke says:

        That’s why they are going to highly regulated boutique organic out here, and they have pretty much destroyed the soil. The ones who didn’t leave run good small businesses, and funny, hire their own. Can’t blame them.

        • ke says:

          Sorry if this is too much.

          Grew up on streets in San Diego, back in old Navy days, more sailors than civilians. Then in construction trades and universities. Mexico has many cultures, each with a distribution. In my experience, you want the top pair from each culture on your job, and work it from there.

          Last elevator job, I refused to work more than 3 hrs a day, because others wanted to play politics and call it work. Funny, they made sure I had everything I needed. But, I have great confidence in the upcoming generation. With four daughters, I’m quite biased.

      • ke says:

        Having been born to farming in Ohio, with the highest nutrition to calorie intake in the country at the time (yes, you can look it up), no one should pick strawberries to excess; more neighbors grow strawberries. But that was back before global trade. Empires have very distinct phases.

        • nick kelly says:

          The majority of strawberries picked in California are consumed in the US. California is the overwhelming supplier of most produce in the US-locally grown remains a niche, although a growing one. Most produce is bought in supermarkets, that prefer to deal with large predictable suppliers.
          In BC this irks me because the Okanagan region grows fantastic field tomatoes but the BC supers don’t ever handle them- its BC hot house (tasteless) or US or Mexican field. I buy lots at farmers markets in August.
          Only California has the climate for year round production, and grows most citrus, although here Florida can compete.
          What most threatens California’s pre-eminent position is drought.
          This has small and agri-business looking at Oregon,for one.

        • nick kelly says:

          Have you ever been sent to the market at say Christmas in Ohio with a shopping list for salad items, and maybe some fruit, other than apples.
          You would be shocked (or most people would be) if they said we only have our seasonal stuff, so we don’t have what you want.
          For better or worse the consumer expects the only difference re: seasons to be price.
          And we haven’t even got to coffee or tea.

      • IRISHWHITEGUY says:

        Not so fast Einstein. I had to pick them when in Xtian boarding school. Pretty much all white and it was over hundred acres. Strawberries, zuch’s, and lettuce. Plus was then having to go to classes. So some whites don’t fit your paradigm, comprende?

        But is very hard work. Most Americans have no idea.

  2. ke says:

    Also headed for new SV distribution hubs like Medford, Oregon. Cheaper labor chasing global finance,in a circle. Fewer babies though.

  3. steve says:

    So Mexico is worse than the USA for screwing the working-middle class family. Why is this not surprising? Does the “national” government really represent Mexicans or just their favored special interests, same as it ever was? The average American and the average Mexican are too propagandized to know anything different.

    • mary says:

      I can assure you that the average Mexican is much more tuned in than the average American. Axe ’em. If you ask a Mexican, “What’s the biggest problem in Mexico,” they will ALWAYS answer, “La corrupción.” It’s just that they feel completely powerless to do anything about it–sort of like Americans in that way.

      And yes, from time immemorial, the little guy in Mexico has been screwed worse than in the US. The one thing that has saved them from starving all these years is that they can get away with under the table income. I wonder if anyone has an idea how large the black market in Mexico is compared to the US. All the people I met in Mexico had at least two sources of income, and one was usually sales–under the table.

    • tim says:

      Spot on Steve! I see this election in the US as no choice at all. I believe that all of this bs is about social control. Hammer the people with debt and you control them!

  4. nick kelly says:

    Hi Don- we’ve crossed swords before (well, words) but I gotta say this one boggles my mind. I just came back from Uruguay, the best place on the Big Mac index and they don’t manufacture a THING! OK beer, Patricia, a nice beer at about half the Canadian price.

    But Mexico is a very serious competitor for one of Canada’s champions, auto-parts giant Magna employing 35,000, and worse (for us) is doing very well in attracting car assembly plants.
    Also, because I am intrigued by where stuff is made, I’m noticing quite a bit of other Mexican manufactures up here- e.g, plumbing fixtures. Hacho en Mexico?

    Shouldn’t the Mac thing be reversed for Uruguay/ Mexico? Shouldn’t a country with very substantial manufactured exports and ability to serve its own manufacture needs, be able to outperform Uruguay?

    I can see the shock of opening up markets ( or neo-liberalism) being responsible for a year or two of problems, and for that reason I think local producers should be given a phase- in period to adapt. But since 1976?
    There has to be a missing X factor- could it be that the IMF is reluctant to call the government,, corrupt?

    PS. Plug for Montevideo, Uruguay. A very mellow and strangely classless scene in the old city- evening with kids, dogs, well dressed ladies who return the greetings of well behaved street guys sitting on steps. No hassle cops who ride Segways, don’t even notice you drinking a beer as they confer ten feet away. Old buildings with ten- foot high carved doors.
    Main pedestrian only streets lined with vendors, many just with stuff on blanket, laughing with each other.
    Riding the bus here is for everyone- there are four or more bus outfits.
    One driver, twenty something gal, tee shirt, shades, small nose ring, her tunes playing..

    Nice, but, but.. HTF does this translate into outperforming a ranking manufacturer like Mexico ???

    • Petunia says:

      I haven’t been to Uruguay in over twenty years but I remember they make some very beautiful things. Last year while looking for furniture online, I saw a site that sells the most innovative furniture I have ever seen, multipurpose for small spaces. They are also known for their leather industry which used to service the extremely high end fashion business. They produce leather from unborn calves which is the finest leather in the world. I also still own a fur jacket made with fur originating in Uruguay and made there as well.

      • nick kelly says:

        Glad to hear you’ve been there but remember-you are a recovering fashionista who must beware of temptation

      • Salamander says:

        Leather from unborn calves… damn if that doesn’t sound evil. I’m no vegan, but I don’t even want to think about how that is done. Did the idea spring up after the arrival of Teutonic refugees following WWII?

        • Petunia says:

          Yes, I was surprised by the process. The leather was unbelievably soft, very special. At the time jackets made from that leather were selling in the $5K to $10K range in the fashion houses of Europe. This was over twenty years ago.

          I even ate the veal from the unborn calves, I have never eaten anything better.

      • Glo says:

        Made by Johnny Koppany for a German Dpt. Store. I have one two, beautiful quality.

    • Don Quijones says:

      That’s a very good question, Nick, and one I’ve been asking for a number of years.

      The baffling mystery is that the Mexican government has done just about everything that’s been asked of it by the international business and finance community. It has liberalized its economy, privatized almost all of its utilties — it is even in the process of privatizing water — opened its borders and signed every trade agreement placed in front of it. It has crossed all the Ts and ticked all the boxes, its economy has grown steadily for years and inflation is more or less under control (for now).

      According to Gabriela Ramos, OECD Chief of Staff and Sherpa to the G20, Mexico has also outperformed all other OECD economies at applying the institution’s recommendations on regulatory issues, yet conditions do not improve for the vast bulk of the population. On the contrary, as I reported for WOLF STREET not so long ago, for many they are getting worse: the number of Mexicans living in poverty increased by 2 million over the last three years.

      And while the scourge of corruption certainly has a lot to do with this, Mexico is not exactly the only country in the region to suffer the curse of a crooked government.

      • DV says:

        Well, first of all, while Mexico has been doing impressively on “diverisifcation” of its economy from oil, its oil indsutry has been languishing with oil revenue, critical for financing budget needs, falling. Then, whatever its “industrial” exports may be, the question is what is the value added? Especialy, if you have to import many things, one being gas for power generation. Meanwhile, Mexican population has been growing and probably even all those new industrial jobs are not enough to keep pace with that growth. Many go to the US for work, others join drug trafficers. So there is noting unsual that smaller countries like Uruguay do better in terms of wages and overrall standard of living. They earn enough through their agriculatural exports to keep them going.

      • nick kelly says:

        If liberalized trade produces economic disaster a whole bunch of countries should be looking at a Mexican type situation, e.g. Canada, the US, the EU. There are those in Canada and the US who blame NAFTA for everything, but with the US and Canada being each others largest trade customer- could BOTH sides lose?
        In a former piece on Pemex, you made it sound very corrupt, almost Nigerian.
        Re: ‘even privatizing water’. I believe the UK has done this without an apparent Mexican scenario, but of course the UK is positively full of those who will blame all its problems on anything but its low productivity.
        A mere thirty years after Germany was reduced to rubble, the UK tried to hit up (West) Germany for a loan.
        In the same year the 15th million VW Beetle rolled off the line.
        Amazing what a plant can do when its not on strike.

        • Nicodemos(="victory to the people in Greek) Marat/Paine says:

          The liberalized trade is designed to benefit affluent first world nations by relentless exploitation of 3rd world nations. Mexico is a 3rd world nation, unlike the nations you mentioned as examples and is suffering badly as is the great majority of other 3rd world nations and for the same reasons. Britain, a long time ago, largely abandoned manufacturing by keeping the pound sterling artificially high so as to turn the country into an investors paradise at which they succeeded brilliantly. I think in the late 70’s or early 80’s the pound sterling fell so low it achieved parity with the U.S. dollar. For the first time in 50 years British products were competitive on world markets. Margaret Thatcher was horrified and quickly restored the status quo. The British working class had been obsoleted but were bought off by the dole. Is it any surprise that morale is so poor in Great Britain?
          Our upper classes feel that our working class have it way too good and that needs to be fixed if America is to be “competitive” on international markets. Competitive say with Bangladesh or Honduras. I think they believe if you have a roof over your head, you have it way too good, You should have your choice of cardboard, plywood or sheet metal. If you wear clothes on your back or shoes on your feet you are outrageously spoiled! You should have rags on your back and sandals made from an old rubber tire on your feet. Likewise for things like health care and education. These should be privileges for the affluent only. To say nothing of being able to eat every day. Outrageous coddling of the lower orders! I sincerely hope I am wrong about this but if the elite have plans to plunge the American people into destitution there will be a violent and bloody response.
          I also hope the rest of you will stop “blaming the victim” and put the responsibility where it rightfully belongs!
          Rebel With a Cause

        • nick kelly says:

          Oh right everything was fine, British exports booming and then Thatcher came along.
          Read up on early 70’s Britain ( I am dual UK-Canadian citizen)
          The motor industry was collapsing- nationalizing (British Leyland) made it worse. In 1974 the UK had to get an emergency loan from the IMF- West Germany turned them down, twice.
          Thatcher inherited a basket case- a country about to leave the First World.
          Just one example of how out of touch the UK was- newspaper printing. Innovation was strictly forbidden by unions. Long after they were in museums elsewhere, the print was cast a line at a time in hot metal on Linotype machines. After a page was bolted into a box, a proof was taken. One man would roll on ink, another would place a sheet of paper, a third would apply pressure.
          Incredibly, all three were in separate unions- no one could touch another’s job.
          Much the same mindset afflicted the car unions. Shop stewards ran the plants- hired and fired. And of course, struck. In one memorable year, Austin only had two weeks of uninterrupted production.

      • JerryBear says:

        All that “advice” they followed was never designed the people of Mexico, just the inter national wealthy set. The more they follow that path the worse things will get. instead of growing food for their people, they will grow food for the international market and nothing will benefit the Mexican people. This will go on and on until the people finally rise up in another revolution. Marx’s description of end-stage capitalism has unfortunately proven all too accurate. I think he based his prophecies much more on his knowledge of human nature and he himself was a member of the upper classes in Germany. I honestly don’t know why this is but I get an overwhelming impression of a deep and profound misanthropy on the part of the international elite.

  5. Islander says:

    That the Mexican government is corrupt is well known. Too bad for the Mexican people that their country isn’t more like Iran, which is doing quite well with the ‘independence from western sphere of influence’ thing. They’ve built up a wonderful multitude of industries to become a very self-sufficient country. No wonder Bush included them in his ‘Axis of Evil’.

    The data are clear of course, and well understood outside by the public the US / Europe: IMF involvement, ‘open’ markets etc HURT developing economies. This is a known fact no serious strategic planner could deny. But the alternative is to protect and nurture one’s economy using tariffs etc. After WW2, planners have naturally been very afraid of that option. I believe globalism commanded true, heart-felt optimism in the 40s to 60s. That era is drawing to a slow, fragmented conclusion.

    But since the world thankfully won’t enter into any more major wars on account of nuclear weapons (I sincerely hope), we may just be looking forward to a few unpleasant decades of stagnation and nasty ‘soft power’ wars. Strangely enough, one thing everybody can do to (statistically:) support their own economic well-being is to ‘shop local’. Because local is where you are!

    • Lee says:

      Yeah, where would an article be without an idiotic comment about one of the Bushes: “No wonder Bush included them in his ‘Axis of Evil’.”

      Islander as you seem to be ignorant about the the facts, I’ll educate you. I could give numerous examples, but will provide a few which have been either carried out by Iran or by the direction of Iran:

      1. William Buckley – kidnapped and tortured to death by Hezbollah.

      2. The 1983 embassy and barracks bombings which killed several hundred people.

      3. The 1985 TWA hijacking.

      4. The 1994 bombing in Argentina

      5. The 1996 Khobar tower bombings

      6. Several thousand deaths of US troops in Iraq carried out by Iranian proxies

      I find your comment to be simple and frankly disgusting.

      • Dan Romig says:

        History is worth knowing Lee. Add to what you’ve stated with this please.

        Mohammad Mosaddegh is the legitimate, and democratically elected Prime Minister of Iran in 1953. He tries to audit the books of the Anglo-Iranian Oil Company (now BP), and restructure the contracts that were in place when he took office for the Iranian oil AIOC was pumping out of the ground and selling.

        This had taken a bit of time to boil up; both Churchill and Eisenhower wanted to take out Mossaddegh, but Truman would not play along. Ike gets into office in January 1953, and the CIA takes out Iran’s Prime Minister on 19 August of that year.

        Next, the Shah controls the people and resources from that time to 1979, and he uses the CIA trained SAVAK to brutally repress those who don’t follow in line.

        In August of 2013, on the 60 year anniversary, the CIA of the United States of America admits that they planned and executed the coup. From 1953 to 1979, the USA’s State Department is quite happy with what they’ve achieved in Iran.

      • JerryBear says:

        He is talking about the economic situation of the Iranian nation. Not the bloody misdeeds of the theocrats who run it, You are being completely irrelevant and missing his point entirely.

    • Nicko says:

      Islander, you’ve got it backwards. By Iran signing the nuke deal, it has enabled them to re-enter the globalized economy. The floodgates are now open for Iran, their economy will flourish over the next period, aided by free trade ports like Dubai, whom will profit handsomely by acting as middle-men and financiers. Billions of FDI are flowing into Iran, from Airbus, to India, S. Korea, and others. Half of Iran’s population is under 30, perfect for fast growth of a middle-class and consumer culture.

      • JerryBear says:

        The young people are also really tired of the Medieval theocracy they have to live under and are starting to rebel in quiet ways. They also love American culture. Speaking an Indo-European language themselves, they do not find English terribly hard to learn and intuitively understand the European mind-set. Interesting things should happen from all this.

    • nick kelly says:

      I guess Mexico should start flogging and stoning adulterous women. Iran’s security guys killed a Canadian female journalist in hail.
      The last thing Mexico needs is to become a religious state, Islamic or other.

      I’ve got to admit this is the ONLY time I’ve ever head Iran held up as a model to imitate.

  6. Felix_47 says:

    Given that such a huge proportion of Mexican are in the US and are the demographic future of the US. Half the students in my children’s school are Mexican and as the grades move down into primary school the percentages are just higher. I have often wondered why we have any immigration restrictions with Mexico. As a practical matter we don’t but we just make them go through hoops to get here. If we got rid of the border wages in Mexico would go up instantly and if employers did not pay it everyone would move to the US. A farmer in Mexico with 1000 acres of tomatos or strawberries would be wiped out if he had no one to pick them meaning farm wages in Mexico would go up. A farmer in the US would have to pay more as well. Car assembly wages would approach those in the US which would benefit both sides. The UAW should be able to organize down there……like the VW, Ford, Toyota and Hyundai plants. And can you imagine the boom if we could develop Baja down to Cabo San Lucas and extend the 5 freeway?

    • Petunia says:

      Since they all want to come to the US, maybe we should invade Mexico instead of all those countries so far away.


    as i recall the reverend sun myung moon took over uruguay some decades ago.

    all of the hotels in montevideo were his[ok the unification church].

    how is the reverend moon controlling uruguay these days?

    • nick kelly says:

      Just got back from 2 months in Uruguay, my ex is married to a Uruguyan
      It is extremely secular- just legalized abortion and marijuana.
      I wonder how many Americans realize how odd/ bizarre this whole religious- right seems to the rest of the world.
      In the UK there is NO connection between conservatism and religion.
      In 2012 Rick Santorum amazed the English speaking world by speaking against CONTRACEPTION!
      When the last US Republican contender dropped out, Kaisisch (sp?) I watched his speech begin roughly: The Lord has other plans…”
      Keerist, I said not another one!
      No wonder Trump leads, he’s not a bible thumper.

  8. Agnes says:

    TANSTAAFL That means “There Ain’t No Such Thing As A Free Lunch”. It means that if I eat strawberries I am consenting to stoop labor(Although personally, weeding asparagus was worse). But if destitute people are depending on that work, should I boycott them? Far far better that I know the real cost of the berries, and how can I know the real cost if pesos and dollars are not measured against something stable. Mining shares now have a metric called **AISC**that shows the cost per ounce including the mine clean-up. Strawberries should be the same. And I think I feel the same way about tariffs d, but i am still thinking.

  9. Bobo says:

    In some ways the minimum wage in Mexico is irrelevant since so many businesses hire informally and additionally pay no taxes. In small towns it can be difficult to make even minimum wage. I read that 99.6% of all businesses in Mexico are small or medium sized, very few large businesses, and around 85% of new businesses go under within the first two years.

  10. JerryBear says:

    I once worked for a few months in Mexico illegally. I was teaching English in a language center and crossed the border every day. You have to live full time in Mexico for 5 years before you can obtain a work permit. The agreement I had with the school was entirely verbal and I was paid in cash at the end of each month. I was unemployed at the time and it helped a great deal. The American customs noticed me crossing each day and asked me about it. When I explained they were amused and suggested some things I might say to the Mexican customs agents if they ever stopped me but they never did.
    Human ingenuity can eventually overcome almost any bureaucratic obstacle.

Comments are closed.