Watch This Space: Mexico

According to a leaked letter from Britain's Home Office to Prime Minister Gordon Brown, crime levels in the UK are set to rise on account of the economic downturn. Similar forecasts have been made in the US, as major cities face the prospect of swelling unemployment rolls and financial hardship. Indeed, the grimmer economic outlook across the globe has a knock-on effect on existing social problems.

Mexico is a particularly interesting example. On the one hand, there are some positive statistics on the Mexican economy that should allow the government to manage the current financial meltdown. The fifth largest country in the Americas ran a balanced budget in 2007 and a modest national public debt, which is about 23% of Mexico's GDP (compared to more than 60% in the US). Mexico also began to diversify its export markets in 2007, which bolstered economic security against oil market fluctuations.

Nevertheless, there are two critical forces at work that threaten to undermine recent gains. First, government revenues are highly dependent on taxable profits in the oil market. As the price of crude falls, Mexico's largest oil producer, Pemex, is cutting back production. Through August, yearly production had fallen close to 10%, a move that will likely cost some $20m. Production shortfalls have a downstream effect on the federal government, which sees 40% of its revenue come from Pemex royalties. 

In April, President Felipe Calderón sent his Congress an energy reform bill, which would have allowed private foreign oil companies to operate refineries in Mexico. The legislation would have brought much needed capital into the country and helped offset high input costs in the energy market. Instead, members of the Senate energy committee voted earlier this week to block Mr Calderón's plan. The prevailing sentiment among opposition lawmakers was that the deal would send too much of Mexico's oil wealth to foreign business elites. 

Second, Mexico's private sector is intimately connected to the US economy. More than 80% of Mexico's exports are sold to American consumers, and with its neighbor sliding into recession commercial traders are sure to encounter slumping demand. Mr Calderón's government recently injected billions of dollars into the economy to sure up the peso and guarantee commercial paper. Mexico has a mere 7.4% external debt (when measured as a percentage of GDP), which means that the country is largely protected against rapid peso devaluation. Still, the global economic contraction will bear its toll.

When he assumed office in 2006, Mr Calderón made drug interdiction a high priority for his administration. As is often the case in Mexico's counter-narcotics effort, the results are patchy. Mr Calderón is now fighting a drug war against well-organized, well-financed cartels across the entire country. And the social backdrop against which this struggle takes place may well deteriorate. As US companies cut low-wage jobs, many migrants are likely to return home to Mexico. The influx of young, unemployed men and women could be soaked up by drug traffickers and ultimately destabilize the country.

On a tactical level, Mexico will have to reëvaluate its national security priorities. Emergency monetary policies might trump drug interdiction. At some point, Mexico may inform the US that it is happy to assist in such operations, just not willing to pick up the tab. Recent drug-related killings in Tijuana (where victims showed signs of torture), attacks by cartels at the US-Mexican border, and a high-profile prison escape in May all portend major problems for governments in Mexico City and Washington alike. 

For the moment, world leaders are focused on how to rescue the financial system. It will not be long, however, before they are called to fix a host of simmering social problems.