Brookings Institution

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.

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