Why isn’t Mexico growing more rapidly?

by on August 12, 2017 at 2:37 am in Economics, Law | Permalink

From Levy and Rodrik:

What is striking is that this dualism has worsened during the period of Mexico’s liberalizing reforms. Research by one of us (Levy) shows that informal firms have absorbed a growing share of the economy’s resources. The cumulative growth of employment between 1998 and 2013 in the informal sector was a whopping 115%, compared to 6% in the formal economy. For capital, cumulative growth was 134% for the informal sector and 9% for the formal sector.

The short article is interesting throughout.

1 Brett August 12, 2017 at 2:51 am

I think it’s a legacy of the state’s over-dependence on oil revenue. It’s limited the need to build out a viable apparatus to actually bring firms into the formal sector for tax and regulation purposes.

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2 prior_test3 August 12, 2017 at 3:44 am

Yep – any article talking about Mexico and its economy that does not once refer to Pemex or oil is not to be taken seriously.

Particularly in light of this – ‘Energy trade between Mexico and the United States has historically been driven by Mexico’s sales of crude oil to the United States and by U.S. net exports of refined petroleum products to Mexico. Through 2014, Mexico’s exports of crude oil to the United States were the most valuable component of bilateral energy trade, with the overall value of Mexico’s U.S. crude oil sales far exceeding the value of U.S. net sales of petroleum products, primarily gasoline and diesel fuel, to Mexico. From 2006 through 2010, for example, the value of U.S. energy imports from Mexico were two to three times greater than the value of U.S. energy exports to Mexico.

The bilateral energy trade situation with Mexico has changed significantly in recent years. In 2015 and 2016, the value of U.S. energy exports to Mexico, including rapidly growing volumes of both petroleum products and natural gas, exceeded the value of U.S. energy imports from Mexico as volumes of Mexican crude oil sold in the United States continued to decline. For 2016, the value of U.S. energy exports to Mexico was $20.2 billion, while the value of U.S. energy imports from that country was $8.7 billion.

Import and export values each reflect commodity volumes and their prices. Monthly trends in volumes through 2016 showed increasing U.S. petroleum product and natural gas exports to Mexico, with a generally declining trend in U.S. crude oil imports from Mexico.

Mexico is second only to Canada in energy trade with the United States. Based on the latest annual data from the U.S. Census Bureau, energy accounted for about 9% of all U.S. exports to Mexico and 3% of all U.S. imports from Mexico in 2016.’ https://www.eia.gov/todayinenergy/detail.php?id=29892

One can also see how actual Mexican oil production has declined by a third in a decade here – https://www.indexmundi.com/energy/?country=mx&product=oil&graph=production

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3 GoneWithTheWind August 12, 2017 at 10:16 am

The answer is easy; the Mexican government is corrupt and they steal everything that isn’t nailed down.

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4 Ray Lopez August 12, 2017 at 10:02 pm

+1, seems like oil is a driver, as was Nafta. See this chart: MXF (Mexico Fund) on Google Finance, and note the peaks in the mid-1990s (NAFTA) and 2002-2007 (oil).

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5 Falstaff August 12, 2017 at 3:47 am

Do the authors contend that Mexican institutions are conducive to robust economic growth and thus should be not be considered as a possible cause of the country’s anemic growth?

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6 Anon. August 12, 2017 at 8:42 am

And where do the institutions come from?

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7 Steve Sailer August 12, 2017 at 4:07 am

Former Mexican foreign minister Jorge Castaneda’s 2011 book “Mañana Forever?” has some interesting reflections on the perpetual mediocrity of Mexico. He is frustrated with how Mexican anti-gringoism keeps Mexicans from emulating their more accomplished Northern neighbors. (In fact, he views the most important reform as being that Mexicans should stop using the “gringo” ethnic slur.)

My guess is that Mexican anti-Americanism is a fairly rational strategy to avoid being turned into a banana republic like Honduras. Mexico has an extremely desirable piece of real estate, but they can keep American retirees, snowbirds, and corporations from over-running the place via a passive-aggressive strategy of shoddiness: bad roads, ugly sprawl, large number of accidents, general negligence, etc.

It seems to be working. Mexico has increasingly receded from American consciousness over the course of my lifetime.

Here’s my review of Castaneda’s book:

http://www.vdare.com/articles/jorge-casta-eda-on-mexicos-eternal-ma-ana

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8 Massimo August 12, 2017 at 4:41 am

This defensive mechanism, exploited by Latin America Populist left for at least a century, has originally been developed by the great Venezuelan Carlos Rangel, with his seminal book “Del buen salvaje al buen revolucionario” (from the good savage to the good revolutionary). It is at the base of the toxic socialism cum nationalism that you see now in Venezuela or Cuba, but was there, for example, in Peron’s Argentina, or in the military juntas of Peru and Brasil.

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9 Jan August 12, 2017 at 4:52 am

“In fact, he views the most important reform as being that Mexicans should stop using the “gringo” ethnic slur.” Yeah, that’s very likely the biggest thing holding Mexico back.

FWIW, Castaneda was a member of the Mexican Communist Party.

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10 Axa August 12, 2017 at 9:06 am

Mr Castañeda is a source of funny anecdotes. Precisely in that book the guy says Mexicans are not good for team sports. While being interviewed on the radio for the book, the mexican football team below 17 yo won the world cup.

Castañeda just recycles stereotypes, describes situations with academic words……but no data at all. A way of writing good enough for the second half of 20th century but not for 2010s

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11 Steve Sailer August 12, 2017 at 9:17 am

Mexico does about as well in the World Cup tournament as the U.S., which notoriously doesn’t care much about soccer. Mestizo Argentina with 35% of the population of Mexico does much better in the World Cup.

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12 P Burgos August 14, 2017 at 9:58 am

Why call Argentina Mestizo? Some of their best soccer players aren’t mestizo, but people of Italian ancestry like Lionel Messi or Gabriel Batistuta. Or was that supposed to be sarcasm?

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13 Massimo August 12, 2017 at 4:31 am

Of course Mexicans prefer informal enterprises. Not only there are explicit costs for formal enterprises, mentioned in the article, but there are also the continuous blackmail of government bureaucrats. They invent fines on taxes, contributions to workers (pensions, health-care, public housing, professional development, etc), minimum wage, infinite regulations, although with a 2-5% bribe these fines disappear. I have a group of medium-sized companies operating across Central America and Southern Mexico, a few fairly large for the local standards. We pay all the taxes. We pay expensive local fiscal lawyers and international auditing firms to make sure we do not make mistakes. We even pay the usual all-encompassing fiscal amnesty every 4-5 years. Still they come, like coackroaches impervious to any insecticide. They make up a ludicrous fine out of nowhere (in the last example they said we made 35% in ebt out of a FMCG distribution company: not even Apple has an ebt of 35%, forget a wholesaler of shampoos and tampons) and ensnare you in 3-4 years administrative and legal proceedings, that cost tens or hundreds of thousands dollar in lawyers fees. We, as foreigners, do not pay bribes, because it is too dangerous to be made an example by politicians and end up in jail, so we are condemned to go through the process. Another example, Honduras, with a 2200$ GDP per capita, has a minimum salary of 450$ per month, equivalent to 70$ per hour in the US.

The result is that companies with, say, 20-30 employees, have a huge advantage over larger companies, they fly under the radar and pay a fraction of minimum salaries and taxes, so you find big companies only in heavily regulated industries (banking, telco, energy generation, airports…), where economies of scales are huge and they are protected from imports (some ag plantations, some food processing,…), in very labor-intensive industries dedicated to export (commodity textiles, for example), and of course in State-owned companies. Construction? Never seen a crane in Honduras. Retail? 70% in Central America is still mom-and-pop single stores.

Forget education, despite the complete uselessness of public schooling, people learn by themselves, with the web or with private, skill-based courses. Forget “the need to finance strategic industries”, in Mexico there are plenty of venture or private equity funds. The only thing we need is for the bastards to leave us alone.

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14 JWatts August 14, 2017 at 8:58 am

+1, informative

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15 laying it on thick August 12, 2017 at 6:31 am

The American Drug War has the same effect on Mexico as the sanctions do on North Korea, and we’re surprised that it’s effecting their industrial growth?

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16 DJF August 12, 2017 at 7:11 am

If drugs were legal in the US I would bet that the US would out produce Mexican drugs and Mexico would lose most of its drug profits.

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17 Massimo August 12, 2017 at 7:43 am

Not heroin: opium cultivation is extremely labor-intensive. As soon as it becomes legal, I’ll switch from cukes and squash to poppies.

Btw, and totally off-topic: do any of you know why there is no coke cultivation outside the Andes? Is it some agronomy stuff?

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18 RW Force August 12, 2017 at 3:12 pm

It’s not cultivated elsewhere because of legal restrictions. In the early 20th century, Java out-produced Peru, and Coca was grown in Formosa under the Japanese. In the Andes, ancient tradition overrides legality. https://en.wikipedia.org/wiki/Coca

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19 rayward August 12, 2017 at 7:22 am

In the article “formal” firm and “informal” firm don’t mean what they typically mean, the former meaning “large, modern firms that are integrated into the world economy” while the latter are the residual firms, mostly in services and retail. The paradox is that the “[e]vidence shows that many low-productivity [informal] firms survive, while high-productivity [formal] firms die.” One need not go to Mexico to observe this dualism, as the economies of the high-growth sunbelt cities in the U.S. are built on informal firms, mainly in services (especially in construction) and retail, the growth of each dependent on population growth. If the population growth stops, the economy collapses, as happened during the great recession, with the worst performing areas in the U.S. being located in the sunbelt. Of course, population growth in the sunbelt is made possible by population decline elsewhere (the sunbelt’s good fortune comes at the expense of someplace else), and economies built on population growth are like being on a treadmill: if the population growth stops, the economy collapses. I often observe that the most important (and largest) sector in the sunbelt is growth, reflected in the large number of construction jobs, especially housing construction, and retail jobs, two of the least efficient sectors in the economy, with little if any productivity growth (houses today are built like houses yesterday and retail stores today are built like retail stores yesterday). It’s no coincidence that many construction jobs in the U.S. sunbelt are filled by Mexicans. I have a home in the low country, in an area with few “formal” firms and the economy dominated by construction, mainly second homes. It won’t surprise anyone that the housing market, and the economy, collapsed during the financial crisis. The local newspaper included a Saturday supplement with foreclosure notices that at the height of the crisis was far thicker than the newspaper. Local banks failed, as did developers, builders, contractors, brokers, everyone related to construction. But that reality is a distant memory, as the boom in housing construction today far exceeds the boom preceding the financial crisis. Yet, everyone is confident today that we won’t repeat the collapse that occurred less than ten years ago because, well, this time it’s different.

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20 Roger Sweeny August 12, 2017 at 10:52 am

houses today are built like houses yesterday

Not completely. There are lots more pre-assembled parts, e.g., roofing triangles. Even little stuff like four foot by eight foot sheets with grids printed on them, eliminating the need to measure when you cut one down or cut out a rectangle for a window or door.

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21 JWatts August 14, 2017 at 9:07 am

“houses today are built like houses yesterday”

Well of course it depends on what you mean by yesterday. But assuming that rayward isn’t being literal, then this statement is completely wrong.

There hasn’t been a lot of automation growth in housing construction in the US over the last 20 years, due to large amounts of illegal immigration depressing the labor costs. However, there have still been numerous improvements.

A few obvious ones:
Increased use of nail guns and cordless drills
Increased use of manufactured trusses for both roofs and sub-floors
Use of adhesives (glue) in addition to nailing
Use of blown and sprayed insulation
Use of PVC piping for pressurized lines
Use of small diggers
Use of small battery powered tools for numerous tasks

None of these are huge, but there’s clearly been steady progress.

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22 Thiago Ribeiro August 12, 2017 at 7:54 am

“Why isn’t Mexico growing more rapidly?”
It is populated by Mexicans. The fact it is growing at all is a miracle.

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23 Massimo August 12, 2017 at 10:10 am

GDP per capita, ppp, 2016, $ 2016.

Brazil 14.800, Mexico 18.900

Source: CIA World Factbook.

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24 Thiago Ribeiro August 12, 2017 at 10:48 am

Our neighbours are Bolivia, Venezuela and Colombia (and a few others). Drugs, guns and refugees, not dollars. We can’t dump our humiliated and insulted on our rich neighbour. Also, we couldn’t count on oil to fund our projects. And yet, despite of being surrounded by hostile regimes, Brazil is still richer than Red China. Evidently, we never murdered young American soldiers and we do not imposemon our brothers and sisters a totalitarian fascist regime for the benefit of American companies. We do not starve our people to lend money to America’s wasteful government, we do not support a mad regime that threatens the world peace. For all those reasons and many others, we are obviously in the wrong.

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25 JWatts August 14, 2017 at 9:09 am

““Why isn’t Mexico growing more rapidly?” It is populated by Mexicans. The fact it is growing at all is a miracle.”

Thiago Ribeiro: Noted Communist scholar and racist.

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26 P Burgos August 14, 2017 at 1:43 pm

Don’t forget he is also a noted Brazilian.

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27 Sandia August 12, 2017 at 8:41 am

“By contrast, when firms and workers are informal, workers receive a similar bundle of health and pension benefits for free. The result is that formal employment is unwittingly penalized, whereas informal employment is subsidized. ”

This sees important but how does this actually work?

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28 Axa August 12, 2017 at 8:52 am

Social security is provided by two institutions: one aimed at salaried workers and one for every individual that signs up.

The former (IMSS) relies on salary deductions from workers. The later (seguro popular) on taxes from somewhere else and it’s purpose is to avoid extreme poverty. A noble goal but it may be a subsidy to informal employment.

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29 chuck martel August 12, 2017 at 10:09 am

Mexico, as seen by its decaying infrastructure, has a long head-start on the US in adopting an informal economy in the face of bureaucratic domination. What we see there is a preview of events sure to occur further north. A gray market economy is an increasing part of US life, particularly in the service sector. It’s taken almost 500 years for this to occur in Mexico, it will probably happen much faster in the US.

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30 Paul Holden August 13, 2017 at 6:41 am

One of the underlying pieces of research (Busso, Fazio & Levy, 2012) documents the costs of social protections. Obviously the benefits of being formal and legal are insufficient. It also points to the futility of trying to legislate higher worker benefits that increase formal labor costs unsupported by productivity improvements (proponents of the $15 minimum wage in the US, please note!). I do not see, however, where the recommendation that Mexico needs “a strategy to promote new activities, policies that favored the real economy over finance, and sequential reforms that emphasized high-productivity employment” (whatever these are) comes from. The distortions in the labor market and elsewhere need to be addressed first.

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31 JWatts August 14, 2017 at 9:27 am

Two points that seem relevant to the US:

1) Obamacare may have a tendency to increase the value of firms in the US that don’t provide health insurance versus those that do.

2) The $15 per hour minimum wage is the wrong approach. Instead the US should increase the EITC and use some kind of broad based tax (consumption? ) to fund it.

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32 James Anderson August 14, 2017 at 11:46 am

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33 jorod August 14, 2017 at 9:32 pm

In other words, does socialism work?

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