Issue 10, August 2009
|Why Has Mexico Been Unable to Reap the Rewards of Globalization?|
Relative to its size and assets, Mexico’s economy underperforms in the flat world. The country enjoys numerous advantages: among them, a 2000 mile land border with world’s largest and most powerful economy and significant oil resources. However, Mexico is being overtaken by China in low-cost manufactured goods, and by India in services.
Several experts, including Thomas Friedman in his seminal work The World Is Flat, have noted that Mexico’s economic transformation to free market principles stalled before critical phases were implemented:
Put simply, Mexico failed to develop the necessary institutions and infrastructure to promote its own competitiveness in the free market it had joined. Mexico’s weak laws and culture of corruption, from its judicial to electoral systems, limited its attractiveness to investors and entrepreneurs who require that the state honor contracts, punish lawbreakers, and create an atmosphere of trust and stability. The result is that Mexico can be a difficult place to do business, severely hampering its economic growth.
Consider the findings of the World Bank and its Doing Business 2009 report. Each year the International Finance Corporation compiles a ranking of 181 of the world’s countries on several measures of business-friendliness. Countries whose institutions encourage and support entrepreneurs are compared, with a lower number indicating a higher ranking.
When other countries were lined up at the starting line as globalization took off, Mexico was distracted politically. Ironically, the political reforms that were occurring around this time were mostly positive and badly needed. The authoritarian system of the PRI was coming undone – first at the local and municipal level and finally at the federal level in 2000 when PAN candidate Vicente Fox was elected President. But economically, this was not a great time for the messiness and diffused responsibility of a young democracy. Mexico was trying to build new political institutions at the same time it needed to build new economic institutions.
Oligarchs took advantage of the uncertainty to consolidate their wealth by buying up state-owned industries as they were privatized, and foreign concessions as investors fled.
This has resulted in an increase in economic inequality which has fueled migration and organized crime and has discouraged foreign direct investment.
Mexico’s form of crony capitalism also cripples bodies that should act as checks on government and private industry. Unions have failed to develop as true arbiters of fair labor practices; the press is muted; the development of NGOs has been slow. Cronyism infects the system and perpetuates the status quo.
Mexico is also impacted by what experts have called the Resource Curse, affecting developing countries with significant natural resource reserves that can be sold as commodities on the global market (oil, natural gas, gold, diamonds, etc.). See the Global Poverty and International Development edition of the World Savvy Monitor.
Countries that possess natural resources benefit from resource wealth in the short term, but long-term economic development often suffers. Mexico’s oil is no exception. The government is highly dependent on oil income, which comprises up to 40% of all government revenues.
Mexico’s education system is lacking. See Education section for more information, but note here that its importance for economic growth is crucial.
Related to lack of investment in human resources is migration.
By virtue of the many citizens living outside its borders, Mexico has become highly dependent on remittances, or money sent home by expatriates. However, remittances from migrant workers ebb and flow with the economic situation in the host countries. The deepening US recession has already cut remittances by hundreds of millions of dollars, and this is expected to increase. In addition, as migrants become more assimilated into their host societies, remittances usually decrease.
Ambivalence about the presence of outsiders runs through Mexican culture and law. Many post-colonial societies share this ambivalence, having endured exploitation at the hands of foreign powers. For Mexico, this baggage relates to both former European empires and the United States. Anti-American rhetoric in Mexico has been known to veer into extreme nationalism and even xenophobia. Election campaigns are often run on “tough talk” toward the US.
As of yet, outside investors have not been irreversibly deterred – they generally have kept coming back even after periods of nationalization and economic crisis. But such anti-foreign sentiment contributes to Mexico’s difficulty establishing a pro-business and investment atmosphere. Moreover, the Asian alternative looms large – India and China are open for business.