Could Mexico Be the Next Denmark?
(Bloomberg Opinion) -- I am bullish on Mexico.
There, I said it. I realize that many people view Mexico as dangerous and corrupt, but the more basic facts are the more important ones, especially for investors and economists: Mexico has one of the higher per capita incomes of the emerging economies, it draws upon many vibrant cultures, and it is located right next to the U.S.
If my enthusiasm isn’t enough to make you bullish on Mexico, listen to the many Central Americans who say Mexico is becoming too similar to the U.S., particularly in terms of excess commercialization. This criticism is itself evidence of progress. The debate about Mexico in the U.S. tends to focus on the differences between the two countries. A broader perspective is more insightful.
Now, about that crime and corruption: By some estimates 20% of Mexican territory is controlled by drug gangs, and the country has a high murder rate. These issues won’t go away entirely, if only because they reflect demand for drugs in Mexico’s northern neighbor.
But they are likely to become more manageable. As Mexico grows wealthier, the central and state governments will be able to establish greater control over their territory. And though the U.S. cannot usefully control many events in Mexico, its financial support of the Mexican government provides stability.
Mexico’s government is also notoriously corrupt, and currently it has populist and especially irresponsible leaders. That too is likely to improve with greater state capacity. Mexico now has a middle class that votes, and it expects something in return for the taxes it pays.
In the meantime, there are reasons to be bullish on Mexico right now. One is that economic globalization has been somewhat halted, and in some areas even reversed. To the extent Americans do not trust Chinese supply chains, the Mexican economy will pick up some of the slack. Mexico is also the natural lower-wage supplier to North American industry. (Its main problem in this regard is that its wages are no longer so low, but that too reflects its progress.)
And if tourism in Asia and Europe remains difficult or inconvenient, Americans will visit Mexico more and grow accustomed to holidaying in locales other than Cancun. Some of those habits are likely to stick.
Mexico, like much of Latin America, also has a burgeoning startup scene, especially in ecommerce and fintech. Mexico City might end up as the technology capital of Latin America. That would help with one of Mexico’s chronic economic problems, namely that small firms decide to stay small to escape regulations and taxes. Successful tech startups, in contrast, can scale more easily and face fewer regulations on average than manufacturing firms.
Another reason to be bullish on Mexico: Recent data show that Latino immigrants to the U.S. assimilate remarkably well. Many of them have Mexican heritage, and may be a source of business capital and collaborations for Mexico proper. They also provide a steady reminder that prosperity is possible, and not just for Americans of Anglo heritage.
I have been traveling to Mexico for almost 40 years, and each time I visit the country seems to be doing better. The prosperity seems broader-based, which lowers the degree of de facto racial and skin-color-based segregation in the country.
And unlike much of the world, Mexico does not face national security issues from potentially invading or attacking rivals. That advantage may assume increasing importance, as competitors to Mexico have to deal with problems from China, Russia or other sources.
Many investors and economists have been unduly pessimistic about Mexico because it has not grown at the pace of China. At this point, it’s best to concede that it probably never will. Yet many of the world’s more successful countries, such as Denmark, never had major growth spurts as China did. Instead, they managed a steady pace of growth with a few big dips.
Mexico, with its strong connections to the U.S., is well-positioned to achieve that kind of growth stability over the coming decades. Unlike in the 1980s, the Mexican central bank is run by well-educated technocrats. Even during the pandemic, which hit the Mexican economy very hard, credit ratings remained acceptable.
“Mexico is the next Denmark” sounds like another one of my deliberately contrarian utterances. As implausible as it seems, however, it’s a statement that may finally be coming true.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include "Big Business: A Love Letter to an American Anti-Hero."
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