Download Emigration and Educational Attainment in Mexico

Why Isn’t Mexico Rich?
GORDON HANSON
UC SAN DIEGO AND NBER
INTRODUCTION

Mexico’s ambitious record of economic reform

Mexico modernizes its banking system, 1984

Mexico lowers trade barriers and signs the GATT, 1986

Mexico privatizes 1000 state-owned enterprises, 1988-1992

Mexico liberalizes rules on foreign investment, 1989

Mexico signs North American Free Trade Agreement, 1994
2
INTRODUCTION

A major source of frustration for Mexico and a puzzle for
international policy makers is that Mexico’s record of
economic growth has been anemic

If Mexico has followed the recipe for economic
development, why has it not panned out?

Arguments that lack empirical support

Resource curse (dependence on oil is declining)

Legacy of colonialism (shared by countries that have done well)

Drug violence (did not accelerate until recently)
3
Growth rate of GDP in middle income countries
Country
Argentina
Brazil
Bulgaria
Chile
Colombia
Czech Republic
Hungary
Indonesia
Malaysia
Mexico
Peru
Philippines
Poland
Romania
Thailand
Turkey
Venezuela
Average annual change
log per capita GDP
1985-2008
2001-2008
0.016
0.032
0.014
0.023
0.022
0.062
0.042
0.031
0.019
0.031
0.020
0.040
0.018
0.035
0.035
0.038
0.035
0.031
0.011
0.013
0.015
0.044
0.013
0.028
0.039
0.042
0.012
0.068
0.045
0.037
0.027
0.033
0.008
0.027
4
-.5
0
.5
1
Mexico’s growth in GDP per capita, comparison (1)
1980
1985
1990
1995
year
Mexico
Brazil
Venezuela
2000
2005
Argentina
Chile
5
-.5
0
.5
1
1.5
Mexico’s growth in GDP per capita, comparison (2)
1980
1985
1990
Mexico
Malaysia
Thailand
1995
year
2000
2005
Indonesia
Philippines
6
-.2
0
.2
.4
.6
.8
Mexico growth in GDP per capita, comparison (3)
1980
1985
1990
1995
year
Mexico
Hungary
Turkey
2000
2005
Bulgaria
Romania
7
I. Mexico’s lack of financial development

The intermediation of credit from savers to investors is
fundamental for the process of economic growth

In Mexico, the provision of credit works poorly

Mexico’s government has expropriated assets of private banks
twice in the last 40 years (1970s, 1982); banks collapsed in 1995

Despite reform of the banking system, 80 percent of Mexican
households are not linked to formal financial markets

Access to capital for investment happens through large firms

Mexico’s bankruptcy laws overprotect borrowers (making lenders
reluctant to make loans; auto, home loans are exceptions)
8
Credit to private sector as % of GDP
Country
Argentina
Brazil
Colombia
Czech Republic
Hungary
Indonesia
Malaysia
Mexico
Peru
Philippines
Poland
Romania
Thailand
Turkey
Venezuela
1991-2000
20.2
56.4
32.7
65.7
27.8
45.7
163.4
25.6
19.1
42.1
21.7
9.3
127.6
19.9
16.9
2001-2008
13.8
36.9
27.0
39.3
49.2
24.2
130.9
17.9
21.2
33.6
32.8
20.9
103.0
21.9
14.6
9
II. Mexico’s informal sector is too large

In 2004, 22% of manufacturing employment was in firms
with under 10 workers (and 36% with under 50 workers)

Many of these firms are informal: they don’t pay social security
taxes or abide by regulations on firing or severance pay

Informal firms gain by remaining small through avoiding taxation
but as a consequence of staying small have low productivity

Mexico offers health and retirement benefits to workers in
informal firms, meaning formal workers subsidize informal ones

Mexico mas a “missing middle” of productive medium size
enterprises that help propel innovation and growth
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III. Many markets in Mexico are uncompetitive

Telmex has a monopoly in telecommunications


Electricity production is controlled by powerful unions



Mexico has very high fees for broad band, cellular service, land
lines (helping make Carlos Slim the world’s richest man)
Mexico’s electricity prices are much higher than in the US
Wages for Mexico’s electrical workers far exceed those in the rest
of the economy (and there is excess employment in the sector)
Mexico’s schools are controlled by a powerful union

Mexico has low enrollment in post-secondary education and low
scores in math and science (w.r.t. Brazil, Chile, Hungary, Korea)
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IV. China’s impact on Mexico

Mexico has the bad luck of competing directly with China
in global export markets

Mexico produces the goods China produces rather than
the goods that China buys

The consequence has been downward pressure on the
international prices for Mexico’s export products
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.02
.04
.06
.08
.1
Share of US manufacturing imports
1990
1992
1994
1996
1998
2000
Year
Mexico
2002
2004
2006
2008
China
13
Conclusion

The news isn’t all bad



Yet, Mexico’s underperformance is over-determined





Mexico now has a functioning democracy
Mexico’s innovative social policy has helped reduce poverty
Weak financial system
Uncompetitive input markets, entrenched special interests
Large and unproductive informal sector
Competitive threat from China
Which problem(s) to tackle first and how?
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