Development

The two Mexicos

With its combination of modernity and

poverty, Mexico provides lessons for all
emerging markets
Sep 19th 2015 | From the print edition

IN ESTABLISHING the rule of law, the first five centuries are always the hardest. For
much of the past two decades, that quip by Gordon Brown, a former British prime minister,
has seemed not just dour, but wrong. Buoyed by China, by trade growth and capital
inflows, by talk of new middle classes and the bottom billion, it was easy to forget old
truths about how hard it is for poor countries to become rich. A breezy assumption took
hold: that emerging markets would surely follow the likes of South Korea and Taiwan on
the path to wealth.

That view of development has crumbled of late, along with emerging markets growth rates.
China, the locomotive to which many are still hitched, is slowing. Russia, South Africa and
Brazil (see article) are in reverse gear. Their currencies drop with every fall in commodity
prices; they will no doubt weaken further if the Federal Reserve raises American interest
rates in a meeting due to end after we went to press. Trade is growing more slowly than
global GDP, a trend that seems unlikely to reverse soon (see article). All of this makes the
trajectory taken by the East Asian tigers seem ever more exceptional.

A more realistic model of development is Mexico, a country that has parlayed its
considerable advantages into patches of modernity but has singularly failed to eradicate
poverty nationwide (see article). Some of its disappointments can be laid at the door of
specific policies. But they also reflect the difficulties countries face throughout the
emerging world.

Duet for one

Mexico has a lot going for it just now. Its economy is tied to Americas rather than Chinas:
in a week it sells more exports to the worlds largest consumer market than it does to China
in a year. Once dependent on oil, it has Latin Americas largest and most sophisticated
industrial base, exporting more cars than any country except Germany, Japan and South
Korea. For two decades its macroeconomic management has been impeccably orthodox.
Recently, it has thrown open its oil industry to private investment, and has tackled private
monopolies. A vibrant Mexican middle class prospers along an industrial corridor running
from the American border down to Mexico City. Its political system is essentially stable.

Yet despite decades of reformsat times half-hearted, at times full-throttledMexico has

failed to bridge the gap between a globalised minority and a majority that lives in what
Enrique Pea Nieto, the president, admits is backwardness and poverty. Since 1994,
when Mexico joined the North American Free Trade Agreement, income per head has
grown by an annual average of barely 1%. About half the population remains stuck in
poverty; another quarter risks slipping back into penury. Lawlessness, corruption and
conflicts of interest prevail among the police, courts and politicians supposed to care for the
marginalised.

Mexicos duality shows that getting macroeconomic policy right is necessary to success,
but not sufficient. The difficulties it still faces are a cautionary tale. The first lesson, and
easiest to learn, is the centrality of urbanisation. Cities offer people opportunities to prosper
that cannot be found in the countryside: about 120,000 people in Asia are migrating to cities
every day, for example. But unless cities provide transport, power, sanitation and security,
they will fail to fulfil their economic potential. Violent, drug-related crime stalks Mexicos
scruffy barrios, where city-dwellers live. In South Africa the lack of public transport
obliges slum-dwellers to take expensive minibus-taxis to work. Cities in Pakistan and the
Philippines are plagued by blackouts. Slums ought to be every modernisers priority. They
are where most people live, and where jobs, schools and technology are closest to hand.
Roads and rails

The second is the importance of infrastructure, and not just in the cities. Many of the
foundations of the modern Mexican economy were laid a century ago, in the form of roads
and railways tying its industrial heartland to its ports and the northern border. That leaves
swathes of the country unconnected. Centralisation breeds anomalies: beach resorts often
buy their seafood in Mexico Citys wholesale market, hundreds of miles from the coast. Yet
linking up parts of a country is not easy. It takes both investors willing to bear risk and also
politicians prepared to take on the status quo. In India, for example, plans for big
infrastructure projects have been frustrated by squabbles over land and a dearth of long-
term financing.

A third lesson from Mexico is the need to bring the informal economy into the light. Small,
unregistered firms provide employment to most of the labour force, but are shunned by
banks and anxious to remain below the taxmans radar. That saps the domestic economy. In
the past decade and a half, while the productivity of the biggest Mexican companies has
grown by 5.8% a year, that of the smallest has plunged by 6.5% a year. This problem is as
prevalent in Mexicos changarros, where tacos sizzle alongside every bus stop, as it is in
the shops and stalls of India, where only 2% of food and grocery retailing is in the formal
sector. Electronic invoicing, which creates digital trails for the taxman, and mobile banking,
which brings poor people out of the cash economy, both offer promise.

But the ubiquity of informal firms also points to a final lessonthe corrosive effects of a
general lack of trust. Without enforceable laws and contracts, public services that make
taxes seem worth paying and a political establishment that serves the national interest, the
only institution that most people can rely on is the family. As Mr Brown hinted, it can take
generations to build institutions that enable people to trust arms-length transactions. But it
is not impossible. Witness the confidence now invested in Mexicos and Brazils central
banks, or South Africas tax authorities.

Even the boldest reformer could not rapidly resolve all of these problems. This is the less
cheering message of the two Mexicos: for all but a handful of countries, the road to
prosperity is hard and long. But Mexicos successes also demonstrate that it does exist.
Even if the gains must be measured in decades, perseverance eventually brings rewards.