What India can learn from Mexico’s experience
India may run into some of the problems of Mexico today, with a skills mismatch, worsening inequality, and declining labour productivity
Benito Juárez International Airport in Mexico City is an airport that shows signs of wear and tear. It serves as the gateway to most who fly into Mexico. In 2017, about 44 million passengers used the terminal, making it the busiest in Latin America (it would rank about 15th on Asia’s list, behind Mumbai and Delhi). A second airport, about 10 miles further from the city, was commissioned by incumbent President Enrique Peña Nieto (EPN). It is slated for completion in 2022 and will join a slate of other infrastructure projects—in roads, rail, ports and logistics— initiated during EPN’s six-year term that ends this year (he is not permitted another term under Mexico’s constitution).
Under EPN, Mexico has been a front-runner in reforms, according to the Organisation for Economic Co-operation and Development (OECD). Reform action was led by the Pacto por Mexico, a historic agreement between the three main parties to restore high growth after years of tepid growth. The scope and speed of reform have been remarkable and have in particular targeted Mexico’s oligopolistic sectors—telecommunications, electricity and oil. All three have been substantially deregulated and the regulatory framework for private sector participation has been established. The Pacto por Mexico has been complemented by reforms aimed at improving the quality of education and healthcare, enhancing the effectiveness of the judiciary, boosting female participation in the workforce and reducing informality.
Mexico goes to the polls in July. EPN and, consequently, the PRI party (Institutional Revolutionary Party), which has held power for all but 12 of 90 years, is deeply unpopular in Mexico. The field has several candidates, with Andres Manuel Lopez Obrador, popularly known as Amlo, of the MORENA party enjoying a sizable lead in the run-up to the election. Amlo is a populist who is likely to halt or reverse several of the reforms put in place by EPN. His closest competitor is Ricardo Anaya Cortes of the centre-right PAN party, which is also against the PRI.
The resource-rich Mexican macro-economy is very stable, with a primary fiscal surplus and low inflation helped along by a credible central bank. The industrial base is diverse, with oil, oil products, cement, automobiles and manufacturing. The manufacturing base is dominated by the maquiladora, companies that import raw materials and export finished goods under the North American Free Trade Agreement (Nafta) back to the US and Canada. The Mexican service sector, at around 60% of gross domestic product (GDP), is strong, led by a robust tourism industry. There remain several challenges. Mexican productivity is a major issue. According to the OECD, productivity suffers under the constraints of excessively strict local regulations, weak judicial institutions, deep-rooted informality, lack of human capital, corruption and inadequate financial development. Mexico has the lowest labour productivity amongst OECD countries. A second challenge is the uncertainty surrounding Nafta. There are five parallel track discussions going in the Nafta dialogue and one of those tracks is to sunset the agreement altogether in five years, with death-rebirth only possible if all countries agree. US trade representative Robert Lighthizer is trying to push through the negotiation before the mid-term polls for the US legislature in October this year, though it may well be delayed by the Mexican election.
Mexico’s challenges are compounded by a high crime rate, widespread corruption, and large and rising inequality. Drug trafficking and organized crime are a major reason why Mexico leads in violent crime. In just one deadly month, October 2017, Mexico initiated 2,371 murder investigations. Even though Mexico’s per capita GDP in purchasing power parity terms has climbed gradually over the years, making it an upper middle-income country, it is in the grip of a middle-income trap. While there is much debate in academia about whether a “middle-income” inevitably produces a trap, there is agreement that middle-income countries need to transition their growth strategies and policies to maintain growth and become high-income. In Mexico, this trap arises mostly because it has not transitioned to higher value-added industry and did not invest in the creation of human capital that would lead to Mexican innovation, Mexican brands and generally Mexico-led development. The external investment model has led to jobs that involve making for others but that advantage has not been parlayed into a national innovation model from the education system onwards. Mexico’s macroeconomic stability and its success with public health make the case for an escape upward from middle-income; its inequality, poor overall higher education system and low total factor productivity argue against this.
India would do well to learn from the Mexican experience. While there is nothing to suggest that India will inevitably hit a wall at middle-income, it can sow the seeds to “escape” a potential pause. These seeds must include an emphasis on primary and higher education, and a major push in public health. Nurtured today, that will result in the opportunity for an India-led innovation phase 10-15 years from now. Without that long-term focus, India may run into some of the problems of Mexico today, with a skills mismatch, worsening inequality, and declining labour productivity.
P.S. “Deserve your dream,” said Octavio Paz, a Mexican poet and Nobel laureate.
Narayan Ramachandran is chairman, InKlude Labs. Read his earlier columns at www.livemint.com/avisiblehand
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