You are missing a homegrown hypothesis, which is that the regulatory environment favours the least productive enterprises in the country. It’s not overregulation per se, but the government really does (functionally) subsidize the least productive parts of the economy.
Put simply: there are two more or less as crappy social security systems in the country. One of them is available to everyone, the other is only available to formal workers. Formal workers pay for the privilege of using their system. Everyone else pays nothing to use the other one. Big, formal enterprises therefore pay extra for labour. Big formal enterprises therefore dont employ as many people as they should. They therefore dont use as much capital as they should either. The big problem here is that big formal enterprises are the most productive part of the economy, by far. Their share of economic activity has been *shrinking*, and smaller informal enterprises have been increasing their share of the pie for the past few decades. These enterprises are incredibly low productivity, so the country has seen basically zero TFP growth the last decades.
Overregulation, which only hits the big formal enterprises (nobody scrutinizes the taco truck), also acts as a functional tax (so a de-facto subsidy on the least productive enterprises). Labour regulations are pretty bad, just in general. The financial system is underdeveloped and rule of law is functionally nonexistent (95%+ of crimes go unsolved, contracts are breached, etc).
All the stuff I mention is not my original diagnosis. Its associated with Santiago Levy, who was a senior government bureaucrat and now works at some development bank in Washington. His book, Esfuerzos mal recompensados (“Badly Rewarded Efforts”), lays all Ive said in much, much more detail. Dani Rodrik wrote the preface for that. If you care for Mexico, you should read it, Im sure the translation is there somewhere.
Thanks for taking yet another stab at trying to understand Mexico's development. As someone who was born and raised in Mexico, I was surprised corruption was not mentioned. It imposes a significant burden on everything from bloating needed projects to inefficient though well designed public policies to the rule of law.
Another element perhaps worth looking at is wages. Work family balance is close to non existent (crazy number of hours and days folks are expected to work) yet salaries are low. This is driven by oligopolies, a result of what some political scientists have called "capitalism for friends" (capitalismo de cuates) akin to what happened in Russia when the Soviet Union collapsed. I would also look at engineers and other professionals per capita, myself being one. I believe it is not far behind from developed countries. I gather the lack of opportunity is holding them back causing them to migrate to other countries (like me).
Lastly, I would like to talk more about the insecurity/crime. It has become really bad since Calderon's war. I guess it is the price you pay for sharing a land border with a country that consumes lots and lots of drugs. In the end, drugs flow north while weapons and cash flow south with no clear strategy to address both consumption and weapon sales while hundreds of thousands of mexicans die.
To conclude, you have a country that simply cannot leverage its relatively young population and diversified economy for more productive uses battling strong headwinds (crime, corruption). As mentioned in other comments, distrust in government is high (especially when it comes to managing funds). This in turn leads to people finding ways to not contribute (taxes) to what it seems like an endless pit of corruption (preferring to be part of the informal economy) and struggling to find decent paying jobs.
Seems like you have a typical textbook example of a country that has followed what it has been advised without considering its specific context.
Having access to the United States is both a boon as you point out, but it does have its drawbacks as well.
Organized crime is big, because of the United States. It thrives based on the movement of drugs over the border. If Mexico was an island, the Cartels wouldn't thrive like they do.
The other issue is brain drain. Due to it's proximity and close connection with United States. A significant number of bright or ambitious Mexicans are going to have family ties to the United States, which smooths immigration. (note how well Mexican immigrants do in the US). Even on the lower skilled / less educated side, a certain portion of hardworking labor can simply cross the border to the US and work undocumented. I know several undocumented workers, just hardworking great people, who tell me that they can make so much more money in the US. This has changed a little in the last few years... less Mexican migration, more Central American, but in the past I have to imagine that the US poached quite a bit of talent via illegal immigration.
I do work in Mexico quite a lot, and in the last decade I have seen lots of progress. Some places match the US with middle class lifestyle. The poorest places aren't as poor as they use to be. More Mexican immigrants who have been successful in the US are moving back.
High power prices are a killer for manufacturing, which reminds me of factors that are thought to be holding back India. If I were a state governor in Mexico I would be looking to situate a large special economic zone right next to a large renewable energy zone. This would give the factories access to clean, possibly behind-the-meter clean power, while cutting regulation and increasing agglomeration. Then scarce government resources could be directed to transit, water and other infrastructure to integrate local labour into the SEZ.
Read through the comments, didn't see a key point mentioned.
The North (call it Queretaro/Leon/Celaya area on up through Monterrey and the border) has grown exceptionally quickly since 1990. The center has posted okay growth. The south has not done anything (believe it has shrunk in real terms since 2000 though I don't have the data in front of me). People wondering why trade hasn't made more of an impact are somewhat missing the point. The border states have seen tremendous upside, but in many cases they are sucking away talented workers from southern states like Oaxaca, Chiapas, and the Yucatan which are in many towns nearly as impoverished as neighboring Guatemala.
What to do about the struggling south is an interesting question. A place like Monterrey or Queretaro (where I Iived for years) is positively booming though and will likely overtake poorer U.S. states in QOL indexes within the next couple decades. Monterrey's GDP per capita (PPP adjusted) is already over $35k, for example.
The difference I noticed when I travelled to Mexico compared to other countries in Asia or South America or Europe is that levels of English speaking were much, much lower.
If you got a taxi or stayed in a hotel in (say) Peru they’d know English but they wouldn’t at all in Mexico. Even in China where the taxi drivers weren’t great at English (probably because there was more domestic trade) the hotel and hostel staff were all fluent.
The cartel problems can’t be underestimated either. Fundamentally all the other countries you speak about are safe to travel around - Mexico isn’t anywhere near as safe.
I’ve heard it said that “everything is illegal by default“ and must be permitted. The permitting process is rife with corruption; you have to bribe your way through everything. I can see it putting a damper on development.
I agree that the low level war with the cartels is the primary cause. That has an immense negative effect on everyone.
And there’s an easy solution - legalize drugs. That won’t fully solve the problem, but it will eliminate most of the cartels profit and make it a lot easier to then take them down.
Low state capacity seems to me to be Mexico’s primary issue. The state can’t enforce safety, provision goods, regulate business effectively, educate its people, etc. etc.
It’s better to understand Mexican cartels as insurgencies in competition with the state rather than illicit drug runners. Avocados, oil, and limes are just as important to the cartels as drugs.
When I was an undergraduate in 1970 I had a professor who was an advisor to the the Mexican government. He stated unequivocally that Mexico would be a developed country within 10 years. It’s like fusion power, within 10 tears. They have an ambitious work force, a well educated middle class (and a great cuisine), but I believe they have an entrenched class that extracts the benefits of the state controlled enterprises from the rest of the populous. I don’t have anything to back up my theory. But, T he continued immigration represents a vote away from Mexico
Masking enormous subnational variation. Historically entrenched regional inequalities have deepened in last decades with very uneven integration into international markets, mainly US economy. The domestic market is too weak to complement export-led growth, due to decades-long efforts to keep wages down, in addition to very low (and mostly inefficient) public investment. Tax-to-GDP ratio is ludicrous for a country at this level of development, feeding a negative loop of poor public goods provision--low and unequal growth--low tax collection--government poverty--public poverty. Market economy cannot properly function with a weak state.
I'm not an economist (always feel I have to say that before I write a comment here) and have never been to Mexico, but I live in Texas and read a lot of books. I'm guessing it is really hard to analyze the data because so much "income" is unreported from the drug trade and cash sent back into the country from migrant workers in the US. Who really knows what Mexico's GDP is? Also, much of the legal agriculture economy has been ruined due to the war on drugs, largely thanks to the US. Mexico's problems seem to be from historically bad relationships with the Spanish and then the Americans, who exploited them, and corrupt politicians influenced by organized crime. It's all such a big shame, as Mexico is a beautiful country with great people and an advantageous geography. It once was a wealthy society. It is just hard to unwind all of the problems that started with colonization.
But for those who are interested here are a few nuggets
4. Monopolies and oligopolies dominate the economy, pushing costs up (telecom/energy/retail/transport/media/banking) wherever you look the fix is in... just ask AT&T
5. Income tax collection way below other middle income countries
6. Poor governance, little direct political accountability (e.g. no re-election for elected officials)
7. The current president's wife thinks getting children to read will halt the violence, her husband says hugs will reduce crime
If you think mexico is bad now, be aware that it is headed in reverse and will only fall farther behind.
I think part of the problem, as with other big complex countries is that you've got to do it by sectors, and I say this in the most general sense, starting by the relatively high base at the beginning of the per capita income graph: that is in the 80's and 90's, in that time Mexico's main export was by far oil, it was administrated ruthlessly by the single party system and mostly expend on the Capital, so for years it grew fast and attracted a lot of people from the interior to the periphery, places like Ciudad Nezahualcoyotl or Ecatepec, so they could enjoy the only place with good public transportation, public education and advancement opportunities. Well, that changed in the 90's and the economic complexity of Mexico took off, a new cohort of highly dynamic industrial cities in the northern part of the country rose up, places like Monterrey, Tijuana, Queretaro or Guadalajara suddenly had the opportunities to grow throught export and to build their own infrstructure, in fact check the progress of the BRT and metro lines in the Monterrey and Guadalajara metros, or how recently Jalisco state managed to bring fiber optic connectivity to all its municipalities, they start in the 90's and continues to go on. Meanwhile the core of the country has weakened, as of today Mexico City's economic activity is 11pp bellow prepandemic levels, it has broad public failure, as seen in the collapse of the metro system and has generally lackluster employment creation(they are still over 100k formal jobs from pp levesl), the same can be said of the nearing states of Veracruz or Puebla, both heavy population centers stagnated. Part of the south never really had the chance to join the export boom like Oaxaca or Chiapas, and the oil states of Campeche and Tabasco have see decline, which has fueled populism, the current president is from Tabasco btw. So the slow growth me thinks is the aggregate of the deep structural transformation Mexico has had in the las 30 years and no so much a unified story. I think this is obvious, but Mexico is much bigger and less concentrated geographically and culturally than Poland, South Korea or Malaysia, so this sort of thing happens. This of course doesn't mean that Mexico should be doing nothing, the federal government has to bring the benefits of industrialization to the states bellow the 20 parallel via infrastructure spending and education, and yes, pacify the country.
You are missing a homegrown hypothesis, which is that the regulatory environment favours the least productive enterprises in the country. It’s not overregulation per se, but the government really does (functionally) subsidize the least productive parts of the economy.
Put simply: there are two more or less as crappy social security systems in the country. One of them is available to everyone, the other is only available to formal workers. Formal workers pay for the privilege of using their system. Everyone else pays nothing to use the other one. Big, formal enterprises therefore pay extra for labour. Big formal enterprises therefore dont employ as many people as they should. They therefore dont use as much capital as they should either. The big problem here is that big formal enterprises are the most productive part of the economy, by far. Their share of economic activity has been *shrinking*, and smaller informal enterprises have been increasing their share of the pie for the past few decades. These enterprises are incredibly low productivity, so the country has seen basically zero TFP growth the last decades.
Overregulation, which only hits the big formal enterprises (nobody scrutinizes the taco truck), also acts as a functional tax (so a de-facto subsidy on the least productive enterprises). Labour regulations are pretty bad, just in general. The financial system is underdeveloped and rule of law is functionally nonexistent (95%+ of crimes go unsolved, contracts are breached, etc).
All the stuff I mention is not my original diagnosis. Its associated with Santiago Levy, who was a senior government bureaucrat and now works at some development bank in Washington. His book, Esfuerzos mal recompensados (“Badly Rewarded Efforts”), lays all Ive said in much, much more detail. Dani Rodrik wrote the preface for that. If you care for Mexico, you should read it, Im sure the translation is there somewhere.
Thanks for taking yet another stab at trying to understand Mexico's development. As someone who was born and raised in Mexico, I was surprised corruption was not mentioned. It imposes a significant burden on everything from bloating needed projects to inefficient though well designed public policies to the rule of law.
Another element perhaps worth looking at is wages. Work family balance is close to non existent (crazy number of hours and days folks are expected to work) yet salaries are low. This is driven by oligopolies, a result of what some political scientists have called "capitalism for friends" (capitalismo de cuates) akin to what happened in Russia when the Soviet Union collapsed. I would also look at engineers and other professionals per capita, myself being one. I believe it is not far behind from developed countries. I gather the lack of opportunity is holding them back causing them to migrate to other countries (like me).
Lastly, I would like to talk more about the insecurity/crime. It has become really bad since Calderon's war. I guess it is the price you pay for sharing a land border with a country that consumes lots and lots of drugs. In the end, drugs flow north while weapons and cash flow south with no clear strategy to address both consumption and weapon sales while hundreds of thousands of mexicans die.
To conclude, you have a country that simply cannot leverage its relatively young population and diversified economy for more productive uses battling strong headwinds (crime, corruption). As mentioned in other comments, distrust in government is high (especially when it comes to managing funds). This in turn leads to people finding ways to not contribute (taxes) to what it seems like an endless pit of corruption (preferring to be part of the informal economy) and struggling to find decent paying jobs.
Seems like you have a typical textbook example of a country that has followed what it has been advised without considering its specific context.
Having access to the United States is both a boon as you point out, but it does have its drawbacks as well.
Organized crime is big, because of the United States. It thrives based on the movement of drugs over the border. If Mexico was an island, the Cartels wouldn't thrive like they do.
The other issue is brain drain. Due to it's proximity and close connection with United States. A significant number of bright or ambitious Mexicans are going to have family ties to the United States, which smooths immigration. (note how well Mexican immigrants do in the US). Even on the lower skilled / less educated side, a certain portion of hardworking labor can simply cross the border to the US and work undocumented. I know several undocumented workers, just hardworking great people, who tell me that they can make so much more money in the US. This has changed a little in the last few years... less Mexican migration, more Central American, but in the past I have to imagine that the US poached quite a bit of talent via illegal immigration.
I do work in Mexico quite a lot, and in the last decade I have seen lots of progress. Some places match the US with middle class lifestyle. The poorest places aren't as poor as they use to be. More Mexican immigrants who have been successful in the US are moving back.
High power prices are a killer for manufacturing, which reminds me of factors that are thought to be holding back India. If I were a state governor in Mexico I would be looking to situate a large special economic zone right next to a large renewable energy zone. This would give the factories access to clean, possibly behind-the-meter clean power, while cutting regulation and increasing agglomeration. Then scarce government resources could be directed to transit, water and other infrastructure to integrate local labour into the SEZ.
Read through the comments, didn't see a key point mentioned.
The North (call it Queretaro/Leon/Celaya area on up through Monterrey and the border) has grown exceptionally quickly since 1990. The center has posted okay growth. The south has not done anything (believe it has shrunk in real terms since 2000 though I don't have the data in front of me). People wondering why trade hasn't made more of an impact are somewhat missing the point. The border states have seen tremendous upside, but in many cases they are sucking away talented workers from southern states like Oaxaca, Chiapas, and the Yucatan which are in many towns nearly as impoverished as neighboring Guatemala.
What to do about the struggling south is an interesting question. A place like Monterrey or Queretaro (where I Iived for years) is positively booming though and will likely overtake poorer U.S. states in QOL indexes within the next couple decades. Monterrey's GDP per capita (PPP adjusted) is already over $35k, for example.
The difference I noticed when I travelled to Mexico compared to other countries in Asia or South America or Europe is that levels of English speaking were much, much lower.
If you got a taxi or stayed in a hotel in (say) Peru they’d know English but they wouldn’t at all in Mexico. Even in China where the taxi drivers weren’t great at English (probably because there was more domestic trade) the hotel and hostel staff were all fluent.
The cartel problems can’t be underestimated either. Fundamentally all the other countries you speak about are safe to travel around - Mexico isn’t anywhere near as safe.
Corruption seems to be missing from the explanations
I’ve heard it said that “everything is illegal by default“ and must be permitted. The permitting process is rife with corruption; you have to bribe your way through everything. I can see it putting a damper on development.
I agree that the low level war with the cartels is the primary cause. That has an immense negative effect on everyone.
And there’s an easy solution - legalize drugs. That won’t fully solve the problem, but it will eliminate most of the cartels profit and make it a lot easier to then take them down.
Low state capacity seems to me to be Mexico’s primary issue. The state can’t enforce safety, provision goods, regulate business effectively, educate its people, etc. etc.
It’s better to understand Mexican cartels as insurgencies in competition with the state rather than illicit drug runners. Avocados, oil, and limes are just as important to the cartels as drugs.
When I was an undergraduate in 1970 I had a professor who was an advisor to the the Mexican government. He stated unequivocally that Mexico would be a developed country within 10 years. It’s like fusion power, within 10 tears. They have an ambitious work force, a well educated middle class (and a great cuisine), but I believe they have an entrenched class that extracts the benefits of the state controlled enterprises from the rest of the populous. I don’t have anything to back up my theory. But, T he continued immigration represents a vote away from Mexico
Masking enormous subnational variation. Historically entrenched regional inequalities have deepened in last decades with very uneven integration into international markets, mainly US economy. The domestic market is too weak to complement export-led growth, due to decades-long efforts to keep wages down, in addition to very low (and mostly inefficient) public investment. Tax-to-GDP ratio is ludicrous for a country at this level of development, feeding a negative loop of poor public goods provision--low and unequal growth--low tax collection--government poverty--public poverty. Market economy cannot properly function with a weak state.
I'm not an economist (always feel I have to say that before I write a comment here) and have never been to Mexico, but I live in Texas and read a lot of books. I'm guessing it is really hard to analyze the data because so much "income" is unreported from the drug trade and cash sent back into the country from migrant workers in the US. Who really knows what Mexico's GDP is? Also, much of the legal agriculture economy has been ruined due to the war on drugs, largely thanks to the US. Mexico's problems seem to be from historically bad relationships with the Spanish and then the Americans, who exploited them, and corrupt politicians influenced by organized crime. It's all such a big shame, as Mexico is a beautiful country with great people and an advantageous geography. It once was a wealthy society. It is just hard to unwind all of the problems that started with colonization.
I'm very surprised that inequality is not even superficially mentioned as a slow growth factor. It's hard to overlook.
1. Rule of law
2. Rule of law
3. Rule of law
that's the puzzle...
But for those who are interested here are a few nuggets
4. Monopolies and oligopolies dominate the economy, pushing costs up (telecom/energy/retail/transport/media/banking) wherever you look the fix is in... just ask AT&T
5. Income tax collection way below other middle income countries
6. Poor governance, little direct political accountability (e.g. no re-election for elected officials)
7. The current president's wife thinks getting children to read will halt the violence, her husband says hugs will reduce crime
If you think mexico is bad now, be aware that it is headed in reverse and will only fall farther behind.
I think part of the problem, as with other big complex countries is that you've got to do it by sectors, and I say this in the most general sense, starting by the relatively high base at the beginning of the per capita income graph: that is in the 80's and 90's, in that time Mexico's main export was by far oil, it was administrated ruthlessly by the single party system and mostly expend on the Capital, so for years it grew fast and attracted a lot of people from the interior to the periphery, places like Ciudad Nezahualcoyotl or Ecatepec, so they could enjoy the only place with good public transportation, public education and advancement opportunities. Well, that changed in the 90's and the economic complexity of Mexico took off, a new cohort of highly dynamic industrial cities in the northern part of the country rose up, places like Monterrey, Tijuana, Queretaro or Guadalajara suddenly had the opportunities to grow throught export and to build their own infrstructure, in fact check the progress of the BRT and metro lines in the Monterrey and Guadalajara metros, or how recently Jalisco state managed to bring fiber optic connectivity to all its municipalities, they start in the 90's and continues to go on. Meanwhile the core of the country has weakened, as of today Mexico City's economic activity is 11pp bellow prepandemic levels, it has broad public failure, as seen in the collapse of the metro system and has generally lackluster employment creation(they are still over 100k formal jobs from pp levesl), the same can be said of the nearing states of Veracruz or Puebla, both heavy population centers stagnated. Part of the south never really had the chance to join the export boom like Oaxaca or Chiapas, and the oil states of Campeche and Tabasco have see decline, which has fueled populism, the current president is from Tabasco btw. So the slow growth me thinks is the aggregate of the deep structural transformation Mexico has had in the las 30 years and no so much a unified story. I think this is obvious, but Mexico is much bigger and less concentrated geographically and culturally than Poland, South Korea or Malaysia, so this sort of thing happens. This of course doesn't mean that Mexico should be doing nothing, the federal government has to bring the benefits of industrialization to the states bellow the 20 parallel via infrastructure spending and education, and yes, pacify the country.