Becoming Mexico

It could take thirty years for the Philippines to catch-up to where Mexico is.

A growing middle class, a net migration rate falling below zero, a major manufacturing power-house, these are outcomes that any developing country would happily aspire to deliver. They are what Mexico has achieved over the past decade. The Philippines can only dream of attaining them at this point.

To use a boxing analogy, the two nations Mexico and the Philippines may have started out in the same economic class back in the 1960s, but they are miles apart now. One is sparring as a welterweight, while the other is still stuck in the flyweight division. A change of regiment is needed for the latter to catch up with the former.

According to a World Bank report released in October, about 17 per cent of Mexico’s population of 115 million entered the middle class between 2000 and 2010. This means that close to 20 million began earning between $10 and $50 a day, the minimum standard for the global middle class.

The Pew Hispanic Center also showed that in 2012, net migration flows from Mexico to the US slowed, falling below zero for the first time in four decades, resulting in overseas dollar remittances to Mexico reaching a plateau following the Great Recession. This has not dampened consumer spending though as the Brookings Institution ranked its middle class within the top 10 list of “new big spenders”.

In fact, as the recession deepened in many parts of Europe, Latinos returned home joined by their Spanish compatriots to either work or start new businesses. In 2011, more than 9,000 from Spain moved to Latin America, up from about 3,600 in 2006. Between 2007 and 2011, the number of Spaniards emigrating to Mexico increased by 129 per cent.

Not only that, but the Spanish PM Mariano Rajoy went cap in hand to a Latin American summit of the Inter American Development Bank to seek investments from the former colonies to the Iberian peninsula as it reels from the EU debt crisis. This represents a reversal of fortune from the 1990s when Spanish companies took over prime assets in the region.

Jim O’Neill, the Goldman Sachs executive who coined the term ‘BRICs’ in 2001 has included Mexico in a new investment portfolio called ‘MIST’ which stands for Mexico, Indonesia, South Korea and Turkey. They comprise the four biggest markets invested in by the Goldman Sachs N-11 Equity Fund, which includes countries like the Philippines.

With the rising cost of wages in China, many manufacturers are considering re-locating production to Mexico. The country has turned into a powerful exporter and an unlikely challenger to the Middle Kingdom. As China’s working population ages, due to the one child policy instituted in the 1970s, the demographics ofMexico’s younger workforce seem to act in its favour.

The Philippines is about 30 years behind Mexico. Back in 2007, Goldman Sachs predicted that at current growth rates of 5-6 per cent, the Philippines would catch up to Mexico’s per capita income of about $8,000 by 2037. By then, Mexico would have achieved a per capita income of US$34,000 similar to what it is currently for France, Germany and Japan.

By 2050, the Philippines would attain a per capita GDP of around $20,000, around the same level as South Korea back in 2010, meaning it is about forty years behind its East Asian neighbour to the North. By then, Mexico will have attained a per capita income of $63,000, while Korea would have reached $90,000 having caught up completely with the West.

According to an Asian Development Bank report, only 4.5 per cent or 3.9 million out of a population of 93 million Filipinos back in 2006 earned $10 or above per day. About 23 per cent or 20 million live below the poverty line of $1.25 a day, while a similar amount earned between $1.25 and $2 a day and risked slipping into poverty. The remainder, about 50 million, earned between $2 and $10 a day, the ADB’s definition of middle class.

The same report says that in the two decades leading up to 2008, “the Philippines appears to have stagnated” as China zoomed past it in reducing poverty and increasing the middle class. In fact by 2030 under its most optimistic projection for developing Asia, only the Philippines along with India, Indonesia and Bangladesh would still have a significant proportion of people living in poverty.

If the growth of the middle class in Mexico is helping it avoid the “middle income trap” a term economists use to denote a country that can neither compete with low wage countries nor leapfrog into higher value economies, slow upward mobility in the Philippines is keeping it there.

Last week, the government announced that the economy had beat expectations and grown at 7 per cent in the third quarter, the fastest in Southeast Asia. Cielito Habito, a self-proclaimed professor of ‘Aquinomics’ was quick to point out however that though the GDP growth figure was stellar, jobs growth in the year remained dismal as only half a million net new jobs were created between 2011 and 2012, half of the targeted 1 million.

For the Philippines to become more like Mexico, it will have to foster growth in its manufacturing sector. Habito supports this view. Only sectors like tourism and manufacturing employ low-skilled workers who form the bulk of the unemployed and underemployed, according to him.

To reverse the premature stunting of our industrial sector, Raul Fabella, former dean of the UP School of Economics says that something will have to be done to limit the rise of the peso. This he says is causing severe stress to our exporters.

My question to these experts is given that the Philippines has lost its competitiveness in low skilled manufactures such as textiles and footwear and is focused more on elaborately transformed manufactures such as electronics, how will the low-skilled unemployed land a job in this sector assuming it is revived?

In boxing terms the two countries might be competitive, but economically, Mexico packs a much larger punch.

In Mexico the return to power of the PRI which ruled the nation for 71 years prior to 2000 after spending just 12 years in opposition is a stunning turnaround. Many had thought that this party which managed the country with an autocratic, transactional approach would be consigned to political oblivion for much longer.

From 2000 to 2012, the rise of China and the recession in America began to hit the Mexican economy hard. Having lost its majority in Congress, the successor to the PRI failed to pass structural reforms, and focused its energies on waging war with the drug cartels which has left 60,000 casualties in its wake. As a result, growth averaged a mere 1.8 per cent per annum. The newly installed president ran under a pledge to restore that growth to 6 per cent.

At his inaugural address the incoming president Enrique Peña Nieto departed from tradition by avoiding grand symbolism or rhetorical flourishes and honed in on two specific areas: education and competition policy. This signaled his willingness to take on the powerful teacher’s union and the two largest business groups that control the media.

The 46-year-old former state governor then went on to forge a pact with the five major political parties in congress to support his road map for the development of Mexico around five broad themes. There was no beating around the bush, here. No spending the first 100 days to settle in, no six to nine months to develop his legislative priorities. This president wasted no time in laying down a plan, spending political capital and getting the major players behind it.

For the Philippines to become more like Mexico, it will have to demonstrate the same sense of urgency at reforming itself from the top in a manner that Nieto has shown. Part of that requires arriving at a consensus on the way forward, forging an agreement around a shared set of values that would provide an organising principle to shape the development of policies and programs.

The Philippines may be thirty years behind economically, but if it reforms itself now, it might have a fighting chance to catch-up with Mexico much more quickly than previously thought. The question is whether our leaders have the courage to pass the much needed structural reforms that promote middle class values and reduce poverty before their time runs out.

Doy Santos aka The Cusp

Doy Santos is an international development consultant who shuttles between Australia and the Philippines. He maintains a blog called The Cusp: A discussion of new thinking, new schools of thought and fresh ideas on public policy (www.thecusponline.org) and tweets as @thecusponline. He holds a Master in Development Economics from the University of the Philippines and an MS in Public Policy from Carnegie Mellon University.


  • Doy,

    Something I never could figure out is why American businessmen went to China instead of Mexico from the very beginning. In addition to proximity between manufacturing plant and market, Mexico’s infrastructure was way above that of China’s.

    I lived in Mexico in the early 80s and criss-crossed that country by land. Their highway system was excellent. Their public transportation was also very good, the subway in DF is world class, I once took a 19+ hour bus trip from DF to Merida in the Yucatan and the highways were smooth. I took a train from DF to the Guatemalan border and from DF to Laredo. The trains were a bit old and rickety but it was a rail system much much better than ours. And their tourists spots had pensions all the way to 5-star hotels.

    And those were the feudal days under Lopez Portillo when PRI controlled everything. When I first arrived in Mexico I was expecting a really backward country but what I saw is exactly what you’re saying now, a country decades ahead of us. One other thing about Mexico is the gov’t support for the arts. Not only in terms of museums but actually having state-funded art schools in various states. I don’t know if they were federally funded or state funded but they were there in DF, in San Luis Potosi, in San Miguel de Allende and, I presume, in many other locales.

    Of course the Mexican economy collapsed under Portillo, Mexico defaulted and the IMF took over which is why Portillo went into exile as soon as he stepped down. I think he was also forced to commit his country’s oil and gas to the US as part of the bail-out. Maybe that could be a reason why the US never invested in Mexico as it did in China. I think those were the days of the “beggar your neighbor” policy.

    Mexico is rich in oil and gas. Its tourism is not only about beaches there is a lot of culture and archeological sites. And they have industries. But their cities had their slums and there was also real poverty out in the countryside. Maybe Mexico will always be ahead of us. By the way, Mexican politicians are like Filipino politicians – lots of big plans and big talk but very little follow through. Good things happen despite the politicians.

    • MB,

      What you saw in the 80s was the product of the desarollista state of the 70s the equivalent of the developmental state in East Asia. State capitalism led to investments in infrastructure, schools, the arts, etc. It also led to industrialisation. By 1986, Mexico’s per capita GDP was three times that of the Philippines when it was just 30% higher in 1960.

      Following the North American Free Trade Agreement (NAFTA) which came into effect in 1994, the Mexican economy really took off, and the gap between our economies widened, so that by 2011, theirs was more than four times our income per capita.

      Business investments took off in China following their accession to WTO in 2001. Low tariff barriers and relatively cheap oil, allowed the barriers and distance between the US and China to be lowered and bridged. Add to that the potential growing market access into the Chinese economy, cheap wages (at that time) and you have an irresistible formula.

      The picture changed from 2011 with crude oil priced at around $110 per barrel and wages in China fast approaching Mexican levels. Along with the gradual appreciation of the Chinese currency. Proximity has once again become important in weighing investment decisions.

      • Desarrolo means development and yes the Mexican government followed the model of intervention as a means to spur growth and investment.

    • Why China over Mexico? I’d guess: corruption and drug gangsters in Mexico along the borders where US firms operate, plus too many siestas. The work ethic differs. The scale of the market differs. Mexican political instability. Plus Mexicans were invading the U.S.; they were the enemy.

      The Philippines does not need to emulate Mexico or anybody else. It just needs to focus on continuing to get its act together. This place is about to take off . . .

      • Setting a goal of catching up to Mexico is I think much more attainable and realistic than becoming a first world country like Singapore in ten years. The latter is rubbish. At least with Mexico you have a country of similar population size, cultural heritage and historical background. The Philippines was after all an outpost of the Vice-royalty of New Spain centred in Mexico during the Spanish colonial period. The Manila-Acapulco galleon trade from 1565-1815 linked the two until the middle of Mexico’s war of independence.

        Many English speaking Filipinos who see themselves as America’s “little brown brothers” will scoff at the notion of comparing ourselves with its Hispanic southern neighbour due to the stereotypical characterisations that you mention. But as I have shown, Mexico is already miles ahead of us. So choosing to become like Mexico is in fact not only more realistic, but would also stretch and challenge us, at this point.

        • Yes, I agree with benchmarking as a discipline, and Mexico is a good one for the similarities of exodus and poverty. But I would argue that the Philippines should learn from Mexico, set its sights on besting Mexico, but not necessarily emulate Mexico. The Philippines has its own strengths (beaches and English to name two) and weaknesses, and needs to deal them and deal with them.

          • UPnnGrd

            Citing “beaches” as a metric to catch up with another country???? That’s like ranking :”getting Pinas aviaton to be certified” as among top-5 goals for Malakanyang… and not even putting NUKE power plants in top 20 goals. .

          • Perhaps my metric of “beaches” was influenced by just returning from vacation in Palawan. But you can substitute “tourist visits” if you wish. The point is that the Philippines is not Mexico . . . although in typing that, it makes me think that maybe the Philippine relationship with China is not unlike that of Mexico and the U.S., too nearby to be openly friendly. Proximity breeds envy and contempt. Except Filipinos can’t get rich by going to China to work.

          • Beaches are a good metric, Joe. If they can feed the whole country then why not? They would keep our carbon footprint small.

          • Based on the trampling herds I witnessed on Palawan, the beaches of the Philippines can feed a good share of the country if we can get more foreigners into the herd. It was amazing. Tourist vans swarm like bees around Puerto Princesa.

          • UPnnGrd

            JoeAm: I think you were definitely woozy from whatever makes you enjoy vacations. You wouldn’t see swarming tourist vans around Taguig City, and surely if you think about it —- the Taguig City with no tourist vans provides more jobs-for-Pinoys-in-Pilipinas than Palawan’s beaches. NUKE the place, that’s what I say. POWER to the Pe-yopp-ple!!! Even if it means saying “NO” to Cory saying “NO!” to Marcos legacy. POWER to the people!!!!

          • Different strokes for different places. I had to read up about Taguig City, never having been there. “The city ranked first among Philippine cities in the Ease of Doing Business Index, conducted by the World Bank’s International Finance Corporation.” says Wikipedia. Cool. And if they can make a nuke plant that will withstand a grade 10 earthquake, go for it. Otherwise, maybe harness the waves for power.

        • UPnnGrd

          What about this goal —-> increasing the gap between Pilipinas and Vietnam?

          Or this goal—-> catching up with Thailand?

      • Joe,

        Like China is not corrupt and it has no drug dealers? Mexican drug cartels are the result of the War on Drugs in Colombia. Operations moved to Mexico. And Mexico was politically stable. PRI held the presidency for 70 years. I think your view of Mexico is a bit on the stereo-type propagated by American mainstream media.

        The scale of the market does differ if you see China as one big homogenous market. However, Americans and other traders soon found out that China was a very mixed market that was not easy to penetrate. Besides, the market has always been the US. Products were made in China for export to the US.

        But I agree that we do not have to emulate. We have to get our acts together.

        • You make me realize how little I know about Mexico, so you got that right in terms of my shallow stereotyping.