What Ails Mexico’s Economy?

Did you ever wonder why Mexico can't produce enough good jobs to keep its poor from breaking our laws?

By William P. Kucewicz (National Review Online)

Labor capital flight from agrarian areas has seen the percentage of male Mexicans aged 25 to 65 employed in agriculture drop from 22 percent to 13 percent. Most of this migration has gone into the service sector, where the percentage of male workers employed has risen from 45 percent to 52 percent, while manufacturing employment overall has been flat at between 21 and 22 percent, according to Bank of Mexico data.

In skill-scarce Mexico, education is as critical as geography. “Wage gains [under NAFTA] were largest for more educated workers living close to the United States and were smallest for less educated workers living in southern Mexico,” according to Gordon Hanson of the National Bureau of Economic Research of Cambridge, Mass.

Low education levels characterize the vast majority of Mexican migrants to the U.S., according to a recent Instituto Tecnológico Autónomo de México study. In the period 1992-2002, 79 percent of all Mexican migrants and 78 percent of illegal immigrants from Mexico had eight years or less of formal schooling, with 11 percent of both groups having no education and 33 to 34 percent having only one to four years of schooling.

Wages are generally lower in poor countries than in richer ones for a simple reason: the availability of financial capital. It’s the ratio of financial capital — spent on technology, plant, and equipment — to labor capital that determines labor productivity, and labor productivity in turn determines a nation’s overall wage and salary structure and its standard of living. Indeed, capital equipment and technology can even help to offset a country’s inferior educational levels by allowing minimally trained workers to perform relatively complicated tasks. The availability of financial capital thus becomes the key to rising economic growth, labor productivity, personal incomes, and living standards...

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Besides low education levels and poor skill sets, a number of additional factors account for Mexico’s inability to reap the full benefits of free trade: Its legal system is slow and unreliable; contract law requires fixing, as does contract enforceability; Mexico’s corporate structures lack adequate financial transparency and accountability; the country’s low-paid judiciary is open to charges of inefficiency, incompetence, and corruption; and vital institutions, such as property rights, need considerable improvement.

Inadequate infrastructure, including transportation, power, and communications, plagues the nation. Supply-chain gaps in areas like freight and repair services are a major problem. The banking system, though expanded and improved, still needs more modernization, and pension and insurance reforms are also lacking. As for the cost of credit, unnecessarily strict banking regulations add significantly to borrowing expenses. It’s estimated, for instance, that if Mexico’s restrictions on banking activities were on a par with those of South Korea, its interest-rate margins would be a full percentage point lower than they are today. And Mexico is still insufficiently hospitable to venture capital.

Crime and corruption, which act like a tax, present serious impediments to new investment, both direct and portfolio. One study estimated that corruption, a lack of financial transparency, an inferior legal system, and other institutional inadequacies add 5 percent to the cost of doing business with Mexico versus the United States. Another analysis found Mexico’s level of government corruption has the same negative effect on inward foreign direct investment as raising the marginal tax rate by 42 percentage points.