Mexico Atop the Volcano

At a recent U.S.-Mexico conference, one expert on the drug scene explained that the drug cartels have better and more weapons and better and more intelligence sources and equipment than the government. Parenthetically, he noted that the weapons come mainly from the United States where they are readily available at gun shows and through mail order. He further emphasized that Mexico’s municipal and state police are inoperative when it comes to drugs. Thus the Federal Police and the Army have to carry the full brunt of the fight, but they are heavily outnumbered and can control only a few states at one time. So the government appears to be losing ground day by day in the battle with the drug cartels for control of the country.

That being a trend too dreadful to contemplate for a long time, the conversation at our luncheon table shifted to another major item in the news – Mexico’s energy policy, or lack thereof. Although Mexico has long been a major oil exporter and a prime supplier to the United States, its main oil fields are old and production is declining rapidly. Without development of new fields, Mexico will become a net importer within the next ten years. The good news is that there are potential new fields and Mexican reserves appear to be quite large. But the national oil company, Pemex, has not been able to invest in new drilling or in the new technology development necessary to drill in the deep water of the Gulf of Mexico where the remaining reserves are located. A major part of the problem is that the constitution forbids Pemex to do joint ventures or collaboration of any kind with foreign companies. The government has recently introduced reform legislation, but the opposing left wing PRD party seized the congress for several days in response. The media and academic commentators say they expect part of the bill to be passed but far from all of it. The commentators at my table were unanimous in the view that the problem is not being solved. If they are right, you can kiss goodbye to Mexican oil in the near future. Since fully 40 percent of the Mexican government’s revenues come from Pemex, you have to wonder if the government will be evaporating along with the oil.

Now let’s get to the real problem. The Mexican economy is growing at a 2-3 percent rate that will probably fall to 1-2 percent or less in response to the recession in the U.S. economy. This low growth rate means no jobs, no opportunities, and no future for millions of Mexicans. It is what makes jobs with the drug cartels attractive, especially because they are increasingly the only jobs available. This low growth rate is also very puzzling. Over the past twenty years, Mexico has faithfully followed the prescriptions of the so called Washington Consensus of the leading economic institutions and thinkers on development policies. Accordingly, it has been aggressively deregulating, privatizing, democratizing, creating greater transparency and a rule of law, negotiating free trade agreements like NAFTA, and achieving admirable fiscal soundness. According to all the conventional wisdom, Mexico should be booming.

Yet the fact is that thirty years ago Mexico was richer than Korea and Taiwan and Singapore. Today it is poorer, even though the Asian countries were far less faithful followers of the Washington Consensus. Indeed, as Cambridge University economist and former Korean professor Ha-joon Chang has noted in his new book, Bad Samaritans, Korea and the other Asian tigers did the opposite of the Washington Consensus. As a result, the kids who try to sell you items through your car window as you stop at red lights in Mexico City are only selling stuff made in Asia. Nothing in their bags seems to be of domestic origin.

Maybe what Mexico needs is less of the Washington Consensus and more of the Asian Consensus. In any case, as I watched the diners begin to leave at around 4:30 p.m, I couldn’t help thinking that while globalization is obviously doing great things for India, China, and many other developing countries, it is clearly not now working for Mexico. I wondered how many of those strolling along the Campos Elisios realized that this means they could be walking on top of a smoking volcano. Then I wondered how many in Washington or New York realize this.