Mexico’s lost century?

Mexico is slated to grow at somewhat over four percent this year (this popped up in the Mexican edition of the Miami Herald last week, no link handy). It has responded to the Chinese challenge by retooling its export base toward higher quality and quicker response times; the maquiladoras are once again growing. Higher oil prices do not hurt either. Of course four percent is a rate that most countries in the world would envy.

In the twentieth century Mexico grew at a rate above what the U.S. did (sorry, my exact figures are at home!). Mexican performance would be even better if we take out the disastrous 1980s. And in early colonial times, at least once Mexico recovered from various plagues, Mexico was arguably richer than the British colonies to the north. As late as 1820, Mexican GDP per-capita was in the same ballpark as that of the United States ($1287 U.S., $893 Canada, $760 Mexico, in 1990 dollars as estimated by Angus Maddison). So what went wrong?

The nineteenth century was an absolute, complete disaster for Mexico. By 1870, US per-capita had just about doubled but Mexican per-capita GDP had fallen to $710. Crime was rampant and the so-called infrastructure was a disaster. Many goods were carried on foot across rocky paths, not fit to be called roads. At the same time North Americans were building railroads, canals, and factories. Only late in the nineteenth century, under the regime of Portfirio Diaz, did Mexico start constructing a usable transportation network.

I can think of a few ways of interpreting these facts:

1. Mexico had one very unlucky century. In reality Mexico is better suited to grow than is the U.S.. Mexican government is low in quality, but in many ways it is very small. And perhaps you need big government more in some centuries than others.

2. The superior Mexican performance of the twentieth century represents “catching up,” sometimes called “growth convergence.” This sounds the most intuitive, although it implies that one bad century has kept Mexico captive in poverty for a long, long time. How long did it take Germany and Japan to recover from Allied bombing and losing the War? You can claim that these countries had superior institutions, but Mexican institutions have allowed for rapid growth for a long time. Note also that the evidence in general does not favor growth convergence, although you can come up with something if you leave Africa out of the growth equation.

3. Something about the Mexican economy is not robust to very bad times. Mexico has a higher variance economy than does the U.S., and the distribution of these growth rates is not normal. The Mexicans (implicitly) accept this high variance to enjoy a higher mean growth rate. But every now and then they pay a very steep price for this tradeoff.

4. We do not understand something fundamental about growth. We like to think of growth rates and income levels as conceptually separate to a greater degree than they are. The Solow model in particular shows us how to decompose changes into “once-and-for-all” and “growth-affecting” perturbations in growth. Perhaps this distinction can mislead us into looking for separate “causes of growth,” as distinct from our analyses of levels.

Am I allowed to vote for all four hypotheses? Even if they contradict each other to some extent?