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Behind Success: Lessons from Mexico

February 20, 2013

The previous post tried to spell out what are the igniters of a success story such as Mexico. It argues that looking at the ingiters of GDP growth today helps to undertsand if GDP growth today will be sustained in the future. A diversified manufacturing base is one of such igniters. The rest of this post will look at other of such factors.

Feeling Safe? Since 2008 the murder rates in Mexico more than doubled as a result of violent confrontation between the drug cartels. In 2012 these levels leveled off for the first time thus giving hope that insecurity is soon to be curbed. The spike in murder rates was spurred by drugs cartel competing to take over respective areas of influence. The government acted tough on the matter, made punishments harsher and was successful in arresting the major drug lords. Insecurity however continues to be a problem with a corrupted local police unable to cope with the problem and normal citizens taking their defense into their own hands.

Murder rates subsidizing for the first year after their spike offer definitely room for optimism yet insecurity as measured by murder rates today offer little insight into the capacity of the state to curb this widespread violence in the future. One indicator of the state capacity to contain violence is its strength vis-à-vis other non state actors (such as cartels) to monopolize the means of violence. There are other indicators too, as shown by the research of the Crisis State Research Centre at LSE. The first is the ability of the state to monopolize the collection of taxes: the more rival actors such as cartels carve out economic spaces which are not taxed by the state the more they are likely to access resources which finance their revolt against the state and therefore fuel widespread violence. The second indicator is the extent to which the state exercises control on the entirety of the territory: the more cartels-controlled territories are outside the law of the state the more the latter is incapacitated to curb widespread violence. If one asks whether growth (indicaor of success) will be sustained by security (the ingniters) one then has to look beyond the trend in murder today: the monopoly of the state over violence is good starting point to understand if the state will curb violence in the future. There are other indicators too: monopoly over taxation and control over the entirety of the territory beef up the capacity of the state to curb violence and therefore one should pay considerable attention to them.

What Success? (source life-lenses.com)

Going South. Between 2005 and 2010 1.4 million Mexican moved to the United States while 1.4 millions returned to Mexico. For the first time in the last 40 years the number of newcomers in the United States matched the number of back comers to Mexico. For many the migration gone into reverse is what was making Mexico a success story.  Yet the slump in outmigration is more the consequences of success (GDP growth) than its cause. It is also linked to factors external to Mexico such as the availability of jobs in the US (decreasing) and the security measures at the border (increasing) and to shift in the number of children that Mexican women are having in Mexico.

From Dividend to Curse. Fertility rates in Mexico are approaching 2.1 children per woman when at the same time life expectancy climbed to 77 years. The dramatic drop in fertility rates preceded by high fertility rates created a big cohort of working-age population. If one asks whether this cohort sparks or hampers economic growth the answer depends on how much Mexico will be able to attract manufacturing jobs. More people working are able to subsidize those who do not work (children and old) thus reducing the drain on a country’s economy. The bottom line is that the demographic profile of a population is a neutral factor, it does not spark growth by itself. Countries all over the world are going through a demographic transition which abates the dependency ratio (dependent as percentage of working age population aged 15-64) at the beginning and then increase it later on: some countries reap the dividend, other squander it. The demographic transition spurs economic growth when countries reap the dividend and this happens largely when they are able to transfer skills to the workforce and create jobs for them.

In sum, high GDP growth rates over a limited period are often assumed to be the beginning of a long-lasting leap towards economic prosperity. Yet, to distinguish between causes, symptoms and accidental circumstances of GDP growth is pivotal in gauging whether growth observed today will turn out ephemeral in the near future. Mexico’s growth is fueled by a manufacturing sector which assembles and export a variety of goods: this in most of the case underpins growth experiences which are longer than those based on commodity exports. The duration of success is also a factor of the state ability to curb widespread violence. One of the indicators of state resilience is the ability of the state clamp down on the rivaling  violence of organizations such as drug cartels. Yet, it should be measured as well against other indicators i.e. monopoly over taxation and exclusive control over the entirety of the territory. How a state is faring on all these dimensions can give a better sense of how much the state is able to ensure security (the igniters) and sustain growth (the success). Migration in the country is often assumed to be a cause of economic success yet it is more the consequence and it is linked to many other factors. Lastly, the demographic transition which reduces the dependency ratio can spur growth yet it can also not be influential: it depends on the ability of a country to reap the dividend.

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