Why hasn’t Mexico done better?

by on October 17, 2006 at 6:06 pm in Economics | Permalink

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.

1 Elambend October 17, 2006 at 6:23 pm

Boy, is the last line of #4 and understatement.

2 Kevin Nowell October 17, 2006 at 7:31 pm

Tyler’s #4 is by far the most important factor.

3 The Chieftain of Seir October 17, 2006 at 8:26 pm

Number 4 is a large part of the reason why number 7 is true.

4 MexicoLover October 17, 2006 at 8:52 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.

5 99 October 17, 2006 at 9:23 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.

6 Steve Sailer October 17, 2006 at 10:03 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).

7 Martin October 18, 2006 at 1:25 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.

8 jn October 18, 2006 at 7:42 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?

9 Slocum October 18, 2006 at 8:14 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.

10 Cyrus October 18, 2006 at 11:24 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.

11 mickslam October 18, 2006 at 1:29 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.

12 Mr. Econotarian October 18, 2006 at 2:20 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.

13 Hector M. Padilla October 18, 2006 at 4:41 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.

14 Steve Sailer October 18, 2006 at 5:58 pm

Occam’s Razor: On a scale where Americans average 98, the Asian tigers have national average IQs in the 105 range. Mainland China appears to be a little lower, but still a little higher than America. Mexico appears to be around 90, which is about the world average. In 2002, Lynn & Vanhanen found a 0.73 correlation between national average IQ and national average per capita income in purchasing power terms. And that’s with lots of noise in the IQ data — with better IQ data, the correlation would likely be even higher.

http://www.vdare.com/Sailer/wealth_of_nations.htm

http://www.vdare.com/sailer/lynn_and_flynn.htm

15 waiv October 19, 2006 at 8:10 am

According to Lynn, mexican mestizos have an iq of 94.3, pretty much the same as the irish (GDP per capita $40,000), so I guess that’s not the problem.

Source

16 Peter Schaeffer October 20, 2006 at 1:04 am

Barkley Rosser,

Thank you for your praise, although I would hardly describe my comments as “brilliant†.

However, I am confused. Please indicate where I have described Mexicans as “lazy†. Mexico does have a different culture, value system, and attitudes than does the United States and yes, differences do have consequences. Might I recommend the 95/07 article “Ferocious Differences† in The Atlantic Monthly by Jorge G. Castañeda.

Please indicate where I have described Mexicans as “stupid†. However, I would suggest you study the NAEP data before offering any more comments about attitudes towards education. I would also suggest you read the 1992 Scientific American article about “Indochinese Refugee Families and Academic Achievement” by Caplan, Choy, and Whitmore. You will find detailed information about how some groups (Asian) thrive in public schools alongside groups that are not doing as well.

Please indicate where I have described Mexicans as “sex-crazed†. The prevalence of out-of-wedlock pregnancy reflects societal tolerance for such conduct, not sexual promiscuity however measured.

Please indicate where I described Mexicans as “drug addled†. Mexico does suffer the baneful consequences of drug trafficking. The impact of drug consumption in Mexico is unknown to me and I have avoided commenting on it.

Please indicate where I have described Mexico as authoritarian. I believe I was careful to refer to Singapore and Malaysia as authoritarian.

Please indicate where I have described Mexicans as corrupt, unimaginative, and all-around worthless. These words do not appear in my post, directly or indirectly.

If you wish to refute any of my six points on a factual basis, please do so. It appears that you have a problem with someone suggesting that the culture, values and history of a nation might impact its economic performance. Why is that?

17 Dobeln October 20, 2006 at 11:46 am

“It is not pretty and in the end not very defensible.”

Just a few short comments:

1. If it’s pretty or not is not really relevant to the subject at hand.

2. Point-by-point discussion does have the virtue of preciseness – I.e. I will take NAEP over your general impressions regarding various US cities any day.*

* Evidence by anecdote alone is hard to summarize – my Lonley Planet guide for LA advised me not to travel by foot after dark in the heavily Latino areas of LA, for instance…

18 Peter Schaeffer October 20, 2006 at 2:33 pm

Barkley Rosser,

Please note that the title of this post was/is “Why hasn’t Mexico done better?†. This is a valid question that I have attempted to address, although clearly not in a sufficiently PC manner.

The question of how well Santa Fe and San Antonio are doing is largely irrelevant. The issue is explaining Mexico’s performance both before and after NAFTA. However, I would note that neither city is majority Chicano according to the 2000 census and Santa Fe is not majority Hispanic (as of 2000). Notably, both cities have levels of nativity (percent born in the United States) comparable to the US average.

If you are interested I would be glad to engage in a detailed review of each communities performance and the relevance of such data to the overall immigration debate. However, Mexico remains the topic at hand.

The presence of positive trends in Mexico is of no importance (to the debate at hand) unless those trends can overcome/counteract the underlying problems of Mexico. So far, that does not appear to be the case. You will note that I did refer to the (apparently) changing work ethic in Mexico. You are correct in noting the demographic transition in Mexico. However, the Asian Tigers achieved the same result one or two generations earlier (China under Mao being an important exception). Had Mexico successfully promoted family planning after WWII, the Mexican people would be considerably better off today.

Please note that there are also unfavorable trends in Mexico, some of them germane to economic growth. For example, search the http://www.mexidata.info site for information about kidnappings and crime. Like it or not, the movie “Man on Fire† was an accurate (actually understated, see http://www.economist.com/world/la/displaystory.cfm?story_id=E1_NSGGQTG) portrayal of some aspects of life in Mexico city.

Your comment about Mexico’s economic growth would be funny if it wasn’t so sad. Mexico’s growth performance (6.136%) was far better in the period from WWII to 1982. Mexico’s growth (2.751%) since then has been less than half of the earlier period. For better or worse, neoliberalism hasn’t worked for Mexico. Note that I excluded the crash year of 1983 from both averages. The data is from the Penn World Tables and closely matches the WEO data from 1980.

It appears that your real objection is that I have violated one of the cannons of political correctness. I have offered adverse factual observations about a country that Americans aren’t allowed to criticize. As always, I welcome detailed refutation.

19 Dobeln October 20, 2006 at 4:28 pm

Hi again!

1: NAEP was mentioned by Peter in the post you replied to – I.e. National Assessment of Educational Progress. (Bullet point 1.)

2: True (to a degree), but the problem is that assimilation trends regarding for instance income and education aren’t that hot even after three generations. Which is bad. (Tyler did link some stats that were supposed to show decent progress a long while back – but the data he cited didn’t really back him up.)

20 Peter Schaeffer October 22, 2006 at 1:16 pm

Barkley Rosser,

Mexico growth’s rate from 1980 to 1989 was 2.34%. This includes the crash (-4.2%) of 1983. Mexico’s growth rate from 1980 to 1993 (the last pre-NAFTA year) was 2.74%. Since 1994, Mexico’s growth rate has been 3.0%. Since 2000, Mexico’s growth rate has been 2.89%.

A few notable points, Mexico underperforms the world (3.33, 3.043, 3.85, 3.99) for every period in question. Mexico also underperforms the US (3.07, 2.743, 3.41, 3.00) for all of the timeframes in question. Developing Asia far surpasses Mexico (6.85, 6.99, 7.15, 7.09) as does the ASEAN-4 (5.14, 5.54, 4.22, 4.97). Chile outperforms Mexico, but by less (3.73, 4.88, 4.91, 4.41). All of the data is from the WEO. I can provide the spreadsheet if you are interested.

Mexico has both positive and negative trends. None of the data shows that Mexico is overcoming its historical obstacles to fast growth. Indeed, the shift towards neoliberalism (including NAFTA) appears to be an obstacle, not an aid.

America does subsidize various crops. However, neoliberal theory holds that such subsidies are a net benefit to the importing nation (I don’t buy this by the way). Indeed, China’s overvalued currency is usually defended as “helping” US consumers by making imports cheaper (which is true). Why shouldn’t cheap(er) food imports be a plus for Mexico? I can think of lots of reasons. However, neoliberal dogma rejects them all.

A larger point is that corn is a global crop. Do you really think that American subsidies dramatically influence the global price of corn? Cotton is much more heavily subsidized than corn. However, most estimates show that cotton prices would only rise by 11% if all (not just US) cotton subsidies were abandoned. See the FAO report on this subject (http://www.fao.org/newsroom/en/focus/2005/89746/article_89759en.html). The same number for corn would be considerably lower.

21 Randall Parker October 22, 2006 at 10:02 pm

NAFTA did little to raise Mexico’s economic growth rate. That hardly speaks to the efficacy of lowered trade barriers to solve what ails Latin America.

Being below world average growth rates for a less developed country is a sign something else is wrong. If you have a highly developed economy then you have to innovate to increase productivity. But in theory a less developed country just has to accumulate more capital to raise its productivity.

Of course Mexico has problems that prevent that. There are the liberally acceptable problems that do not get the dander up of the commissars who enforce political correctness. But mention that populations differ in average IQs or cultural qualities that do not reflect well on the less developed countries and then the thought crime enforcers get upset.

Lots of things about reality are repugnant to modern liberal sensibilities. Sorry, reality isn’t going to change. You gotta choose between ugly truth and pretty lies.

22 Barkley Rosser October 23, 2006 at 9:37 am

Peter,

Yes, I noted your comments. I will simply note here that if you or anybody
else is interested in my broader analysis of the Mexican economy, go read
the chapter on Mexico in _Comparative Economics in a Transforming World
Economy_, 2nd edition, by me and Marina V. Rosser, MIT Press, 2004.

23 Anonymous October 14, 2008 at 2:09 am

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