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Why hasn't Mexico done better?
After all they have NAFTA and democracy, sort of. Here are the thoughts of Brad DeLong. I don't disagree with Brad's discussion, here are my ideas:
1. The North of Mexico would have done far better, if not for adjusting to brutal competition from China. They are in fact coping better than most people had expected.
2. The North has in any case done remarkably well. This implies that the main problems are not of policy per se.
3. Mexico has had a serious internal "immigration" problem, as it tries to digest massive migration from rural areas into urban areas. Many of these migrants do not have the appropriate cultural capital to support Mexican economic growth. But this problem will ease over time as the country becomes more integrated.
4. The costs of crime and corruption are significant. These costs skyrocketed as Mexico became a prime route for cocaine transport to the United States. Not everything we have done for (to) Mexico has been positive.
5. Mexico will undergo a demographic transition. Rising population will soon cease to swallow up so many of the per capita the gains from rising total income.
6. The available data significantly understate the standard of living gains in rural Mexico. Incomes go underreported, or unreported, and new commodities are being introduced all the time.
7. Policy matters less than we economists like to think.
Posted by Tyler Cowen on October 17, 2006 at 06:06 PM in Economics | Permalink
Comments
Boy, is the last line of #4 and understatement.
Posted by: Elambend at Oct 17, 2006 6:23:11 PM
I'd add a few items to the list:
1. Mexico's banks basically stopped lending for 7-8 years after the 1995 crisis, hindering investment.
2. A monopolic/oligopolic structure in many markets (i.e. telecommunications)
3. The labor market is very dysfunctional: high social charges paid by employers and high firing costs
imply that less than 50% of the workforce is in the formal sector.
4. Public sector productivity is very, very low in all areas (not just in education and law enforcement).
Posted by: Andres at Oct 17, 2006 7:15:39 PM
Tyler's #4 is by far the most important factor.
Posted by: Kevin Nowell at Oct 17, 2006 7:31:21 PM
I worry about #4. I rarely hear people talk about it, but I think the United States' war on drugs is hurting Latin America. I must admit, I don't really know how much of a factor it is, but my gut feeling is that its big.
It seems like drugs are a major problem for Afghanistan as well.
It seems like creating such a large black market is a major problem for democratic countries with small economies and developing justice systems. My feeling is that totalitarian governments and larger economies can deal with the black market in drugs with less problems.
I might support the libertarian approach of legalizing and regulating drugs since you really only hurt yourself.
Posted by: eric at Oct 17, 2006 7:37:46 PM
Number 4 is a large part of the reason why number 7 is true.
Posted by: The Chieftain of Seir at Oct 17, 2006 8:26:05 PM
Ending the War on Drugs would do more for Latin America than any free trade agreement ever could.
Posted by: Kevin Nowell at Oct 17, 2006 8:42:36 PM
The large majority of crime and corruption in Mexico has nothing to do with the drug trade. Petty theft is considered by many to be, well, petty. "Criminals need to earn a living, too," it is sometimes said. This same rationale is applied to excuse bribery by the police. Mexicans are increasingly fed up with these attitudes, but they persist.
As a result, security is a big cost of doing business. So is government bureaucracy.
Posted by: MexicoLover at Oct 17, 2006 8:52:23 PM
I have a hard time believing any story that involves country A determining country B's fate for good or for ill, whether the intervention is Nafta or the drug war or Chinese competition or anything else. Too many people's lives, too much of trade, and too many of the cultural and political factors in growth are still local and domesticc. And too many counterexamples exist -- did the US drug war ruin Canadian growth? Did other countries with per capita income similar to Mexico's 1990 levels lose out to Chinese competition?
Invasions are an exception in that they can cause significant destruction. But most invasions fail to accomplish the invaders' goals -- they are a demonstration of the limits of one nation's ability to change another, not a counterexample.
Posted by: DK at Oct 17, 2006 9:19:02 PM
It seems like creating such a large black market is a major problem for democratic countries with small economies and developing justice systems.
Indeed.
Rich countries that can afford lots of well-trained police and high tech prisons can at least tolerate the pernicious side effects of drugs prohibition. But poor countries (and indeed the poorer residents of the rich ones) aren't so fortunate.
Posted by: 99 at Oct 17, 2006 9:23:15 PM
DK,
While I am a defender of free trade, I would never deny that trade in automobiles has had a serious impact on the lives of people living in Detroit. As is generally the case, some win and some lose but the loss of manufacturing certainly did lead to radical changes in the local economy.
The drug lords in Mexico are not making huge sums of money by selling drugs to Mexicans. They are shipping the drugs to the U.S., making a huge profit for themselves and using part of that money to buy influence among local officials. There is anecdotal evidence that NAFTA coincided with a decline among Colombia's drug lords and a rise in the prominence of Mexican drug lords. When you have a firmly entrenched industry in a country with a young democracy and weak legal system, that industry is going to get its way much of the time.
Posted by: Mark at Oct 17, 2006 9:58:42 PM
A good list, but it glosses over a major factor -- that the rich (of which Mexico has an extraordinary number) refuse to pay their taxes. So, there isn't enough money for decent public education and honest policemen and low level bureaucrats. Thus, Mexico is undereducated relative to its national average income (which, at $10k, is a little above the world average) and its national average IQ (which is pretty close to the world average of about 90).
Posted by: Steve Sailer at Oct 17, 2006 10:03:09 PM
I'm surprised nobody has mentioned English. If I were a drinking man, I'd bet that there are more Chinese with at least rudimentary English language skills than Mexicans in total. Having a semblance of language compatibility makes it easier to do business, especially for small and medium firms that are outsourcing manufacturing. Of course, there is no shortage of Spanish speakers in the United States.
Posted by: Brad Hutchings at Oct 18, 2006 12:09:44 AM
Tyler,
On May 19 this year you wrote a post entitled 'Which Mexicans end up coming here?'
http://www.marginalrevolution.com/marginalrevolution/2006/05/illegal_mexican.html
In that post you linked to two papers by Gordon Hanson of the University of San Diego -
http://irpshome.ucsd.edu/faculty/gohanson/NBERImmigrationHanson0405.pdf
and
http://irpshome.ucsd.edu/faculty/gohanson/JEL_Mexican_Immigration_0306.pdf
Although many of your and your commentors' observations would be germane to any discussion of those defects in Mexican culture which have fructified into stagnation, poverty and crime, they fail to take into account that western and central Mexico is neglected even by Mexican standards - the north has the maquiladoras, the south is more agrarian. Develop the centre and west of the country and Mexico might eventually become a slightly different type of place - if the Mexicans want it to be.
Posted by: Martin at Oct 18, 2006 1:25:31 AM
"7. Policy matters less than we economists like to think."
Do bad Policy matters less or Sound Policy matters less.
or does #7 just apply to mexico. Please Clarify
Posted by: Anonymous Coward at Oct 18, 2006 3:04:55 AM
Brad's comments seem naive.
I continue to believe that free trade matters at the margin. But there is no question that political institutions and culture -- including the culture of corruption, unreliable courts, the low levels of human capital and a culture that doesn't make learning as central for Mexicans as for East Asians, and the low social capital that makes social agreement difficult and politics divisive -- matter much more than any local policy. Bad macro policy can destroy, but good macro policy can only help a little.
Isn't this the point of the horse race regressions by Rodrik, et al vs. long-term institutions a la North, Acemoglu, Johnson, and Robinson, etc?
Posted by: jn at Oct 18, 2006 7:42:49 AM
Well, I shall add a comment I made on Brad Delong's original posting.
(BTW, he has now plugged this posting onto his blog.).
The US did a bad deal to Mexico in the corn (maize) sector by
increasing our subsidies. This was the traditional poor sector
of the Mexican economy, and they took their subsidies off. Maybe
it would have happened anyway, and maybe ultimately it is a Good
Thing, but in the short run there has been a massive migration of
people out of that sector as it has collapsed. This has depressed
industrial wages severely, and is an important factor in why things
have not gone as well post-NAFTA as many of us expected. This
subsidy was also sharply criticized by Presidente Fox at the Cancun
WTO meetings, which broke down over the issue of rich countrie's
ag subsidies, and for good reason I would say.
BTW, it is somewhat of a mystery why the opening of all of Mexico
to FDI in NAFTA did not encourage much investment there and rather
simply reinforced the tendency to invest in the maquiladora zone,
which was already open.
Posted by: Barkley Rosser at Oct 18, 2006 7:57:49 AM
> Brad's comments seem naive.
Uh, oh.
I fear his comments are political rather than naive. Free-trade is not very welcome these days in Democratic circles, and I suspect DeLong wants to remain welcome, so he's hedging.
I think this kind of thing is another sign that 'fair trade' will be the mantra of a new Democratic majority (should one come to pass). Fair trade meaning, "paying lip service to the value of trade while imposing so many conditions that, in practice, no trading partner would agree to them".
Delong, himself, points out:
"Since NAFTA, Mexican real GDP has grown at 3.6% per year, and exports have boomed, going from 10% of GDP in 1990 and 17% of GDP in 1999 to 28% of GDP today. Next year, Mexico’s real exports will be five times what they were in 1990."
That's what NAFTA was expected to do -- not, in the same time frame, to solve Mexico's demographic, education, and corruption problems. What would have happened if there'd been an annual 2.5% population growth combined with a *stagnant* economy? Subcommandante Marcos might be running the country.
A much longer period of increasing trade with China has not brought democracy, a free press, or ended problems with corruption and the environment there. Would the Chinese, then, like the Mexicans have been better off without the trade?!? Nonsense.
Posted by: Slocum at Oct 18, 2006 8:14:48 AM
1. Does anyone here know which other countries were close to Mexico's per capita income in 1990 and 1994, and where they are now? I've been looking for statistics online but I haven't been able to find any, in part b/c those were pre-net years.
2. Mark, I didn't say that trade had no effect, or that specific industry/regions (Detroit) were unaffected, but that I don't believe Country A ever has that much effect on Country B as a whole, short of invasion. The rest of the US did quite well while Detroit was declining. And it's not clear that a specific country can be blamed for Detroit's decline -- if Japan hadn't done it South Korea and Germany would have. So yes I am opposed to the idea that Japan crushed the US auto industry, as opposed to globalization in general or terrible management and labor practices in the US auto industry in particular.
Posted by: DK at Oct 18, 2006 8:26:06 AM
Two features of development in many Latin economies are (1) at the beginning of demographic transition, let's say median age 18 or so, they were much richer than other countries (say in Asia or Africa) with similar demographics; and (2) entering the demographic transition has given them a relatively unimpressive demographic dividend.
From 1987-2006, the median Mexican aged from 19 to 25 years, while real per captia income increased from $7400 - $9300 (basis year for inflation adjustments, 2000). Let's call this demographic dividend $320 per year of aging.
During the 1970s, Brazil was developing nicely while retaining young demographics, but from 1982-2004, the median Brazilian aged from 20 to 27 years, while real per capita income increased from $6400 - $7500, for a demographic dividend of $160 per year aged.
For comparison, Japan and the Asian tigers were getting around $900 per year aged for this phase of development, China between $500 and $600 per year aged, and India around $300. Mexico isn't doing badly, but it's not on its way to OECD levels of wealth, even with a demographic transition.
Posted by: Cyrus at Oct 18, 2006 11:24:33 AM
In addition to the internal "immigration" problem, I believe that Mexico also has to deal with an influx of poor illegal immigrants from Central America.
Posted by: Peter at Oct 18, 2006 12:55:47 PM
Cyrus,
You've hit Brads point on the head. Its not that NAFTA is all that bad, it just doesn't seem to have had a significant impact on the rate of growth. 3.6% for an economy that:
1. Is right next to the largest economy in world history
2. Is at 1/4 of the level of that economy
3. Has a free trade agreement with that economy
is ok, and not great. China doesn't have any of those advantages and many of the corruption, demographic, and education disadvantages that Mexico has - and China did far, far better with a largely command economy and no free trade agreement.
Its not a political stance by Brad, its hubris. He is admitting being wrong. His statements are ones that recognize the facts on the ground - free trade, while good, is usually swamped by other factors. We should focus on those other factors. They are more important.
Posted by: mickslam at Oct 18, 2006 1:29:37 PM
In my opinion, the easiest and best way to understand why Mexico has failed to attain/sustain a high rate of economic growth is to compare Mexico to the Asian Tigers that have. The comparision isn’t that hard and the results are significant. A few key differences:
1. Every successful Asian Tiger has a fantastic education ethic and great schools. Note that the ethic came first, the schools followed. A long standing Chinese saying is “there is Gold in books”. Unfortunately, this means that investing in Mexico’s schools won’t help make Mexico a Tiger. Mexico’s people would have to value education first. They don’t and nor do Mexican immigrants in the United States (check out the NAEP data, take your valium first).
2. Every successful Tiger has a strong family system with low (very low) levels of illegitimacy. Restricting reproduction to families (you know, the kind with a father and a mother) adds structure, discipline, and resources to child raising. Boys probably gain the most, although both sexes benefit. Mexico has a very high level of illegitimacy (38%) and appears to have always tolerated out-of-wedlock pregnancy.
3. Every successful Tiger has a strong work ethic. While some Mexicans in the United States may work hard (although not harder than white Americans), the Mexican work ethic in Mexico is not legendary. Clichés about siestas and “manana” didn’t arise entirely by chance. While work attitudes may be changing in Mexico, nobody compares Mexican workers to the Chinese or the Japanese after WWII.
4. With only a few exceptions, Tigers are homogeneous. China, Japan, Taiwan, South Korea, and Hong Kong have only one ethnicity to speak of. Ethnic homogeneity avoids all sorts of social conflicts that bedevil more diverse societies. It may not be PC to say it, but diversity is better formula for Beirut than fast economic growth. Amy Chua (“World on Fire”) has written extensively about the adverse impact of diversity on stability and economic performance. Recommended reading. It is worth noting, that Singapore and Malaysia are not homogeneous and both have good growth records. However, they are also quite authoritarian. This is a key point, diverse societies can prosper, but only by sacrificing freedom, liberty, etc. Helmut Schmidt, the former liberal/left-wing German chancellor has stated the “multiculturalism can only work under authoritarian regimes” and advocated Singapore’s type of government for Europe.
5. All of the Tigers have a very high savings rate. Mexico doesn’t. Mexico’savings rate has historically been well below 20%. By contrast, the Tigers have maintained at least a 30% savings rate and sometimes exceeded 50%. Of course, a high savings rate finances economic development internally and avoids the need for a trade deficit and foreign debt. At a deeper level, a high savings rate demonstrates the ability to defer consumption and invest in the future. This has not been a historical characteristic of Mexican society. Of course, America today is the “black hole” case of nation that can not defer consumption for a nanosecond.
6. All of the Tigers (with one exception) are highly entrepreneurial. Chinese entrepreneurship is the stuff of legends, both in Asia and around the world. Korea is justifiably well regarded as well. By contrast, entrepreneurship is not a core characteristic of Mexican society. One useful metric is high many high tech companies in the US have been founded by Asian immigrants versus Mexicans. However, I should say that the entrepreneurship may be overrated. Japanese business culture is dull and bureaucratic and always has been. Somehow this didn’t prevent Japan from being the economic superstar of the 50s and 60s and becoming the second largest economy on earth (until surpassed by China).
To be honest, the limitations of Mexico’s economy reflect the limitations of Mexico’s society. Mexico was founded by Spanish conquers, not settlers. As such, they created a nation divided by aligned fault lines of race and class. To this day, Mexico suffers the consequences. This is not likely to change soon.
P.S. It may be good libertarian fun to make drug laws the culprit for Mexico's economic performance. However, reality is different. Singapore and Malaysia are close to the epicenter of global drug production and yet have only minimal drug problems. 19th century China succumbed to opium and Japan did not. Japan enforced its laws and China didn't. Mexico chooses to tolerate drug trafficking and suffers the consequences. So does the US. Also note that China, which practiced de facto drug legalization in the 19th century, collapsed. Japan became an industrial superpower.
Posted by: Peter Schaeffer at Oct 18, 2006 1:35:07 PM
It's all in the economic freedom.
From "Doing Business In..." (http://www.doingbusiness.org)
Difficulty in hiring: Mexico 33, US 0, Chile 33
Rigidity of hours: Mexico 40, US 0, Chile 20
Difficulty of firing: Mexico 40, US 0, Chile 20
Rigidity of employment: Mexico 38, US 0, Chile 24
Hiring cost (% salary): Mexico 23.9%, US 8.5%, Chile 3.4%
Firing cost (% salary): Mexico 74.3%, US 0%, Chile 52%
Chile now leads Latin America in GDP per capita of $8,569. It also leads Latin America in the Fraser Institute Economic Freedom Index. Mexico is at 60.
Posted by: Mr. Econotarian at Oct 18, 2006 2:20:43 PM
Mr. Econotarian,
Your numbers may all be correct. However, why does Mexico have so much less economic freedom than Chile or the US? Please note that the shift towards economic freedom in Chile came under a harsh dictatorship. By contrast, Mexico's laws reflect the will of Mexico's people.
Posted by: Peter Schaeffer at Oct 18, 2006 2:32:03 PM
In B. Lonergan's expression is Scotosis, which means " an aberration from undestanding of what has to be undestood". Now, why is it that for over 30 years the political desicion making in economic matters has been systematically missing the point? Simply because there is an "overpowering" amount of noise in the enviroment or to put it bluntly: generalized corruption. Thus, what is needed is to hit the mark right on the CENTER and from that point of reference start shooting and getting feedback on the deviation to correct the following moves, but the center has to be essential and most relevant which means: a clearly articulated vision for Mexico for the next 20 years stating measurable objectives in the short and medium terms; and that is precisely what Mr. Calderon is doing, good start in the right direction. What next, reducing the "noise or generalized corruption" with accountability on performance.
There are urgent problems that have been postponed and are pressing like the differences in earnings between the south and north, and a way of integrating woud be to make Mexico an international logistics hub with Foreing Trade Zones in the maritime,terrestrial and key southern cities, reducing the cost of freight and globalization. Having 4 or 5 basic objectives in each branch of goverment would facilitate focusing and getting results.
Posted by: Hector M. Padilla at Oct 18, 2006 4:41:40 PM
