January 5, 2014
Mexico's Economic Reforms
Mexico's Economic Reforms—Posner
Mexico has been undergoing rapid economic growth since NAFTA (the North American Free Trade Agreement) went into effect in 1994. But as Becker explains, the very recent economic reforms in education, energy, and telecommunications, and also in the political structure of the country, could do a lot to accelerate Mexico's transition from a developing to a developed country. Mexico has a large population (almost 120 million) and Mexicans are famously hard working (in California if you want to say that a person works too hard you say he works like a Mexican). It has been handicapped, however, by, among other things, a very poor education system, a state monopoly of oil production, and monopolistic conditions in telecommunications, and all these are drags on growth that the new reforms aim to eliminate. (There also tax and banking reforms, though these don't seem to be amounting to much.)
How successful will the reforms be? How much real impact will they have? I don't think anyone can know at this point. Implementation is everything, and, as of now, is lagging. The aim of the education reform, for example, seems quite modest--increasing the percentage of Mexicans with a high school education from 36 to 40 percent—yet may not be achieved because of resistance by high school teachers and their powerful union; and the reform may spend itself on correcting the most extreme malfunctions, such as passing teaching jobs by inheritance, which may not however be the most serious ones. The attempts of the United States at educational reform seem to have been largely a flop; how likely is it that Mexico's will be more effective? I have no idea.
As for energy (which means oil), it will be opened to competition, but the huge government oil company, Pemex, will continue to be government-owned. Will it have the power to block effective competition from private companies? Who knows. And there is concern that oil production doesn't do a great deal for an economy because it doesn't provide widespread employment.
As for telecommunications, I would expect more competition to produce a more efficient telecommunications system, but I don't have a clear idea of what contribution an improvement in telecommunications makes to economic output. That presumably depends on how great the improvement is.
I don't see anything in the Mexican administration's reform program concerning drug violence. There is an extraordinary level of drug violence in Mexico resulting from what amounts to warfare among the numerous drug cartels, and it is abetted by widespread public corruption. The drug wars, which appear to kill about 10,000 Mexicans a year, must be a drag on economic output. The annual number of murders in Mexico is almost twice the number of U.S. murders, even though the U.S. population is more than two and a half times the Mexican population.
Recent Mexican Reforms and the Impact on the United States-Becker
The President of Mexico, Enrique Pena Nieto, is a member of the Institutional Revolutionary Party (PRI) that traditionally has had a leftist agenda. Yet in the short period since his election, Pena Nieto has managed to gain the cooperation of the other 2 main political parties in pushing through a series of remarkable changes that may transform Mexico into a world-class nation with profound implications for the United States.
The reform that recently received great attention is the opening up of the energy sector to private capital and private companies. With great fanfare, the PRI in 1938 nationalized Mexico's oil fields. Since then, the national oil company, Pemex, has had a monopoly of the oil sector, and not surprisingly, the company has been behind world standards in efficiency and innovation. As a result, Mexico's oil production has been badly lagging in recent years, and Pemex has not developed new sources of oil, including shale. The introduction of foreign capital and enterprise should shake up a seriously underperforming sector that could greatly raises Mexico's production of oil and natural gas.
A second major reform is the attack on the teachers union that has had a stranglehold on K-12 education in Mexico. The result of their control is a weak system of public education that has especially shortchanged the bottom half of the population who cannot afford private education. This caused sizable inequality in access to education, and has contributed to the large spread in the distribution of Mexico's income. It takes years before reforms in a country's education system bear fruit, but these first steps to rein in the teacher's union monopoly is necessary to allow the next generation of young Mexicans to have much better education and earnings prospects.
Another reform is to allow much more competition into the largely monopolized telecommunications industry. This should greatly reduce the price of cell phones and charges for phone calls, and allow the poorer families of Mexico to have much easier communication with others and with the outside world.
Other reforms in Mexico are still necessary and are pending, including greater competition in the financial sector, and continuing the efforts to give employers greater ability to layoff workers. Still, what has been already accomplished, and the new attitude toward reform, gives hope that Mexico will move toward a faster rate of growth in aggregate income, and improvements in the earnings of Mexicans at the lower end of the income distribution.
Advances in the Mexican economy will not only be of the utmost importance to Mexicans, but also to the United States. They will reduce illegal and legal immigration from Mexico to the United States. Much evidence from other countries, such as South Korea, shows that immigration from a country declines greatly when its economy is growing faster, and when there is increased optimism about the economic future. Young persons tend not to leave, even to countries with much higher incomes, if there are good job opportunities, and if they expect to improve their economic situation as they get older.
Net immigration from Mexico to the US ceased during the past five years as a result of the Great Recession (see my post "The decline of Illegal Immigration From Mexico"). If Mexico begins to boom, this situation might persist even after the US fully recovers from the recession. The end of immigration from Mexico would not be good for the American economy, but it would certainly tame one of the most divisive issues among the American public: how to handle illegal immigrants, and the inflow of additional illegal immigrants. Attitudes toward illegal immigrants in this country will change if there is a general expectation of a modest number of future illegal immigrants.
The market for American capital and enterprise in Mexico's energy sector, telecommunications, and in other industries will improve as Mexico becomes more welcoming to foreign capital and businesses. The US is by far the major trading partner of Mexico, and reforms in that nation will improve opportunities for both countries to import and export a greater collection of goods and services.
Both Canada and Mexico are adjacent to the US, but while Canada's and America's per capita incomes are similar, Mexico's per capita income is only about 30% of the American level. I believe this major difference in productivity is mainly due to Mexico's tradition of favoring public and private monopolies over private competition, Mexico's failure to improve the education of most of its population, and the price and other restrictions imposed in labor, financial, and other markets.
For the first time in a hundred years there is real hope that Mexico is getting its act together. Mexico might even eventually join its North American neighbors in doing justice to its people and natural resources, and attaining top-level economic status. This will have a major impact on the US, especially through reduced immigration from Mexico, and from having a much stronger neighbor.