Mexico Is Solidly Middle Class (No Matter What Trump Says)

(Bloomberg Opinion) -- When Americans think of Mexico, many may envision an impoverished country with millions of people desperate to flee to the north. But this picture -- made prominent by President Donald Trump -- is out of date. Steadily and quietly, Mexico has grown into a moderately prosperous nation.

Economists usually model economic growth as a rising curve. Mexico’s growth looks more like a straight line. Growth in recent years has been slower than in the 1960s and '70s, but Mexico keeps chugging along:

For a poor country, this would be disappointing progress. But while plenty of poverty remains in Mexico, the country as a whole is now firmly within the echelons of what the World Bank calls upper-middle-income countries. After adjusting for purchasing power parity, according to the International Monetary Fund, Mexico’s per capita income in 2018 was about $20,600 -- just ahead of Argentina. And inequality, though still high, is declining:

Mexico’s performance becomes even more impressive once the country’s structural shifts are taken into account. In 2006, Mexico was the world’s sixth-largest oil producer. But its biggest petroleum deposit, the massive Cantarell field under the Gulf of Mexico, went into a steep decline around the middle of last decade. By 2018, Mexico’s total crude oil production was down by about half, and there are reports that the country may already be a net oil importer.

The loss of the oil industry would be a huge challenge for any economy. It means the government must search for alternative sources of revenue, and Mexico must seek different products to exports in order to secure foreign exchange. Most of all, it means retooling much of the economy from the capital-intensive business of pumping oil out of the ground to the labor-intensive business of making goods in factories and providing services in office buildings.

Mexico is handling this transition skillfully. It has more than doubled the percent of its gross domestic product that it spends on education since the 1990s, and its literacy rate has risen to an all-time high of 94.9%. As a 2014 report by the Boston Consulting Group showed, Mexico has also done a great job of maintaining manufacturing cost competitiveness in recent years after being caught flat-footed by a surge in Chinese competition in the early 2000s. Although Mexican manufacturing wages have risen, strong productivity gains, trade deals and a modest depreciation of the peso have kept costs down even as production in China has become more expensive. As of 2018, BCG ranks Mexico as the second-most competitive manufacturing destination, after Indonesia.

Meanwhile, foreign investment has been rising despite declining oil output:

This investment, most of which is going to manufacturing industries, is both a result of Mexican productivity gains and an enabler of further gains. The foreign companies that invest in Mexico, like Foxconn, General Motors and Samsung, bring advanced technology into the country.

As a result, despite the oil decline, Mexican exports have risen steadily:

Most of these exports are manufactured products. BCG reports that electronics exports -- traditionally a mainstay of advanced economies -- more than tripled between 2006 and 2013. The auto industry is a big driver as well. Between 2011 and 2018, Mexico’s exports of new vehicles to the U.S. increased by 93%.

So the GDP numbers don’t tell the whole story about the Mexican economy. Instead of a slow-growth basket case, Mexico is an upper-middle income country rapidly retooling itself to compensate for a decline in natural resource wealth. It’s little wonder, therefore, that the flow of workers from Mexico to the U.S. has reversed in the years since 2007:

What’s more, the shift from oil to manufacturing should prove healthy for Mexico’s governance, given the well-known tendency of resource-dependent countries to grow more slowly. Forced to rely on human capital and entrepreneurship for growth, the Mexican government has all the more reason to sustain the recent positive trends in education and productivity.

This is not to downplay the big challenges that still remain for Mexico. The country's crime rate, driven by a destructive drug war, is extremely high. Although inequality has fallen, it remains at very high levels, meaning growth and jobs will need to be spread out more from big cities and flagship industries. Social services for the poor will need major improvements. Mexico needs to diversify its export destinations, so that it’s less at risk from a downturn in trade relations with the U.S. And finally, it needs to invest in creating globally recognized brands, so that it can capture more of the value from manufacturing supply chains.

So Mexico still has an uphill struggle ahead of it. But the country is doing much better than many realize.

To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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