What’s Holding Mexico’s Economy Back

(Bloomberg Opinion) -- With the election of Andrés Manuel López Obrador as president of Mexico, the perennial question resurfaces: Might Mexico see a higher rate of growth? Its economy has grown at a rate of about 2 percent per year for about a quarter century, about half the pace of other emerging nations. 

The sad reality is that the new Mexican regime probably cannot improve its economic performance unless it can address basic problems with education and productivity.

Mexican economic policy gets many things wrong, and the country has a high level of corruption. But these are not the main hindrances to greater growth. China, which may be at least as corrupt, has grown in the 8 to 10 percent range for a few decades and more recently has exceeded 6 percent; India, which arguably has worse and more arbitrary restrictions on economic activity, has seen some years of 6 to 8 percent growth.

Nor can the scourge of drug violence fully explain Mexico’s anemic economy. Mexico’s south sees much less fallout from that violence, which has pushed the murder rate to more than 2,000 per month, yet it is one of the poorest regions of the country. It is the north, sometimes directly in the line of fire, which has grown most rapidly and attracted the most industry.

Instead, it is education that is arguably Mexico’s most fundamental problem. In most emerging economies, if you are ambitious and seek higher wages, you will invest in more education. Mexicans have traditionally had another choice — crossing the border to work in the U.S. Mexicans who make this choice can move from earning a dollar or two a day to 10 or 15 dollars an hour, though with higher living costs. It is hard to beat that boost simply by finishing high school or even college in Mexico.

So a lot of Mexico’s most ambitious lower-income people have an incentive to stop their education rather than invest in it. That in turn has harmed educational culture, and furthermore the incoming government has promised to reverse some positive educational reforms already underway. It is unlikely that Mexico will soon become more like South Korea, for instance, with its obsession with private tutors and higher education. Near the peak of Mexican migration last decade, about 15 percent of the Mexican labor force was working in the U.S.

You might wonder whether it is economically advantageous for Mexico to send its migrants to the U.S. It probably is still a net benefit, since they can save money and also send remittances back home. Mexico is in fact one of the wealthiest of the “middle income” countries, with a per capita annual income of about $18,100 (adjusting for differences in purchasing power), above that of Brazil (about $15,500), and still slightly higher than China (about $16,800).

Mexico’s second fundamental problem is productivity at the relevant margin. A lot of Mexican companies and plants have remarkably high productivity levels, including in cement, food products, television programs and automobiles. They compete successfully with companies from the U.S. Their success contributes to Mexico’s relatively high per capita income, but it is hard to boost productivity in those companies very much because they are already on the frontier, unlike their peers in, say, India.

The more typical Mexican enterprise is smaller. These companies have fairly low levels of productivity and many do not wish to grow much larger, to avoid both regulatory and tax burdens. Admittedly, this labor can be and often is absorbed into the more formal, more productive sectors of the economy, including exports. But the rate of absorption is quite slow, which in turn helps to set the slow growth rate of the economy. And in any case neither the high-productivity nor the low-productivity firms have that much room to grow within their respective categories, a major difference from many other emerging economies.

It seems incongruous to call Mexico “the Denmark of Latin America,” a label once applied to Uruguay. But that may be Mexico’s future. Denmark is among Europe’s most prosperous countries, yet since the late 19th century it has averaged only about 1.9 percent growth with no huge positive spurts. The Danish advantage has been to avoid a lot of backsliding and to reap the gains of ongoing compound returns. Mexico tends to have recessions that mirror its neighbor to the north, but the overall growth rate is much steadier than it was in the 1980s.

Fifty or 100 years from now, Mexico may be a huge surprise, economically speaking — without ever having been seen as a miracle. In the meantime, the Mexican discontent is likely to continue.

©2018 Bloomberg L.P.