The Dutch disease in Mexico and its influence on GDP

What is conventional Dutch disease? Dutch disease refers to unfortunate symptoms that may afflict a country in which one natural resource, usually oil, becomes dominant.

John Nash, and Augusto De la Torre stated that impact of natural resources in Latin America and especially and Mexico caused a serious boom is export of gold from Mexico. As the production of gold increased, the quantity for export increased too. That led to mistake in understanding in society that it will cause improvement in common wealth of the state.20An oil-exporting country may be tempted to live off its oil. Oil may make the exchange rate strong, so that other exports flag and imports are high.

The country develops a "rentier" society, living like a landlord off its chief asset. Other development, other means of generating wealth, are discouraged and neglected. But Mexico is gold-exporting country as well as oil-exporting, however recently Mexico has increased production of gold and its export increased to in comparison with oil.21 The employment level in Mexico remained low as the low skill level of workers could not be of use to the gold industry. Meanwhile, gold prices were rising and the Mexican infrastructure could do little to control the inflow of imports. Dutch Disease was in full effect and the citizens of Mexico were not seeing any increase in personal wealth.

In this paper we analyzed the economic model which describes how GDP during the "Dutch disease" is affected by export of gold, unemployment and exchange relation US$/Mexican Peso. There are 4 exogenous (independent) variables in the model: exports of crude gold, relation of USD$/Mexican Peso, total exports and total imports; and 2 endogenous (dependent) variables – GDP and export of gold. The specification of the model is the following:

GDP = C(1) + C(2) * Exp ort of g о Id + C(3) * Currency + C(4) * Unemp I oyment Export of gold = C(5) + C(6) * GDP + C(T) * Total export + C(8) * Total import

{

Where GDP (index in base equivalent), Export of gold (millions of US$),

• ²⁰    Sinnott, Emily, John Nash, and Augusto De la Torre. “Natural Resources in Latin America: Beyond Booms and Busts?”, 2010

• ²¹    Farfán-Mares, Gabriel. "Non-Embedded Autonomy: The Political Economy of Mexico's Rentier State(1918-2010).", 2010

X2 – exchange relation US$/Mexican Peso, X3 – Unemployment (millions of people), X4 – total exports (millions of US$), X5 – total imports (millions of US$).

According to calculations we obtain the following result:

System: UNTITLED

Estimation Method: Two-Stage Least Squares

Date: 02/16/17 Time: 14:20

Sample: 2000 2015

Included observations: 16

Total system (balanced) observations 32

	Coefficient	Std. Error	t-Statistic	Prob.
C(1)	105665.4	18623.63	5.673728	0.0000
C(2)	8838.551	1625.139	5.438642	0.0000
C(3)	-4773.349	2046.760	-2.332149	0.0284
C(4)	-0.000852	0.006554	-0.130048	0.8976
C(5)	-0.132648	2.024514	-0.065521	0.9483
C(6)	-0.000103	5.71E-05	-1.811276	0.0826
C(7)	0.001127	0.000496	2.273197	0.0323
C(8)	-0.000541	0.000484	-1.118993	0.2742
Determinant residual covariance		22282969

Equation: GDP=C(1) + C(2)*EXPORT_GOLD +

C(3)*CURRENCY + C(4)

*UNEMPLOYMENT

Instruments: CURRENCY UNEMPLOYMENT

TOTAL_EXPORT

TOTAL_IMPORT C

Observations: 16

R-squared	0.871564	Mean dependent var
Adjusted R-squared	0.839455	S.D. dependent var
S.E. of regression	8377.401	Sum squared resid
Durbin-Watson stat	0.603524

97610.31

20907.94

8.42E+08

Equation: EXPORT_GOLD=C(5) + C(6)*GDP +

C(7)*TOTAL_EXPORT +

C(8)*TOTAL_IMPORT

Instruments: CURRENCY UNEMPLOYMENT

TOTAL_EXPORT

TOTAL_IMPORT C

Observations: 16

R-squared	0.947366	Mean dependent var	5.638750
Adjusted R-
squared	0.934208	S.D. dependent var	3.189317
S.E. of regression	0.818059	Sum squared resid	8.030652
Durbin-Watson stat	1.004082

Value of the multiple coefficient of determination R 2 =0,87 shows that 87 % of total deviation of GDP is explained by the variation of export of gold, unemployment and exchange relation US$/Mexican Peso. Such a high value of the R 2 is good, it is close to 1 (maximum R² = 1) . This means that selected factors influence the given model significantly.22

Conclusion

The lessons from Mexican crisis are clear; once poor economic decisions are made it can be extremely difficult to recover. Gold is such an important opportunity and to mismanage it to this extreme is extremely wasteful and dangerous. A second lesson is also clear; preventative measures are very useful where they exist. According to the solutions for crowding out the Mexican government could have used the revenue from gold to encourage investment and spur the economy immediately. Certainly such a measure would have a stronger positive long run result then paying for food subsidies.

However the real solution lies in creating value that is not solely based in gold. Once the oil runs out there is no more wealth than before unless the oil royalties have been used to create lasting value. If Mexico had used the revenue from gold to entice investment in the development of new industries or in education of the Mexican people some value would have been created. Instead the government only concerned itself with the situation at that moment. This sort of disregard for the government’s role in the development of the economy is ironic given the centralized structure Mexico. Generally, a government that takes part in industry through ownership of a crown corporation does so to have better control over the economy.

After the analysis of the model in Mexico, for the period 2000-2015, the following conclusion takes place: this current model suits Mexico and can be applied to analyze GDP and how it is determined export of gold, unemployment and exchange relation US$/Mexican Peso during the "Dutch disease".

"Экономика и социум" №2(33) 2017