A Story of Five Mexicos

Mexico is a marvelous, dissimilar, stoic, delectably unpredictable and a hardly disputed interesting country.

Mexico is a rising star for some and the country of “manana forever” to others. Mexico scores high in macroeconomics but flunks micro. Mexico is a great place to live but has a huge number of migrants.

A kaleidoscope of idiosyncrasies

Mexico is very rich in natural resources but it is a large importer of basic foods and fuels. Mexico is a fair democracy in the popular vote and a cartoonish play in the legislature. Mexico boasts the richest man in the world and one of the largest segments of poor in emerging countries.   

And yet it thrives and escalates among world economies, albeit slower than most of its competitors.

Mexico is ambivalent in many aspects, but it is polyvalent in its composition. Indeed, there is no single Mexico, not even two Mexicos, there are actually at least five Mexicos. 

Mexico is of course an independent, constitutional and free country with a central government and clearly defined borders, but it is a country with five very different groups or segments whose traits and practices are quite contrasting, thus our conjectural denomination of “Five Mexicos”, an editorial metaphor that we will journey through in this article in no particular order.

Los Pobres

The first Mexico is represented by the largest population segment which includes those living in poverty. 

The “National Council for the Evaluation of Social Development Policy” (CONEVAL) is a public but autonomous organization that measures poverty in Mexico. Its latest statistics for 2012 show that 45.5% of the population are poor and includes 53.3 million people.

CONEVAL measures the poverty level considering per capita income and six social needs (Deprivations): Level of education, quality of housing and access to health services, social security, utilities and food.

 The organization defines the Economic Welfare Line as a threshold level of income to fulfill basic needs, and together with the social needs it defines poverty as: “People with an income below the wellbeing threshold and with one or more social deprivations.”

For 2012 CONEVAL placed the income poverty line at about US$180 per month in cities and US$115 in rural areas.

CONEVAL also defines “Extreme Poverty” as people with monthly income of US$87 in cities and US$61 in the countryside and three or more social deprivations. In 2012, about 9.8% of Mexico’s population, or about 11.5 million were in this group. This number is part of the total 53.3 poor in Mexico out of 117 million total in 2012.

Can the other 55% of Mexicans be classified as middle-class? Not quite because according to CONEVAL statistics there are 33.5 million or 28.6% of the population that are above the Economic Welfare Line but have an average of 1.8 social deprivations and are thus vulnerable having the potential to join the poor group.

Also, another 7.2 million do not classify as poor because they have no social deprivations but their income is below the threshold level, so they are also vulnerable and close to joining the poor. Please see Exhibit #1 which shows the social breakdown of Mexico’s population.

Only about 20% of Mexicans, currently at about 24 million, are not poor and not vulnerable due to income or deprivations and thus can be considered the real middle-class in Mexico.

 And of course, at the top of the social ladder we have “The 1%” who own over 60% of the wealth in Mexico where economic inequality is among the largest in the world.

The World Economic Forum has identified economic inequality as a major risk to human progress. Extreme economic inequality and political capture are too often interdependent. Left unchecked, political institutions become undermined and governments may overwhelmingly serve the interests of economic elites to the detriment of ordinary people.  

Without further recourse, Mexico’s poor look for mobility, in the least bad of cases by migrating or joining the informal economy and in the worst by engaging in criminal activities.

On the positive side, the numbers show that for the first time since CONEVAL began measuring, less than 10% of the population of Mexico is in extreme poverty and the number of people with multiple deprivations has diminished, continuing a slow but long-term decline. 

Los Paisanos

According to our projections and analysis of Census Bureau data, there are currently about 34 million Hispanics of Mexican origin residing in the U.S. This represents about 10.6% of the 320 million total population of the U.S.

Mexicans are by far the largest Hispanic-origin population in the U.S. accounting to nearly two-thirds of all U.S. Hispanics, currently at about 53 million.

More impressive is the fact that the 34 million people of Mexican origin in the U.S. are over one fourth (27%) of the current Mexicans residing in Mexico (About 120 million).

The “Paisanos”, as countrymen are colloquially referred to as in Mexico, with their huge population, their Hispanic-American cultural mix and their unique socio-economic condition represent the “Second Mexico” in our metaphor.

The Mexican origin population in the U.S. which has experienced notable growth since the early 1970’s includes 11.5 million immigrants born in Mexico and 22.5 million born in the U.S.

About one-half of the 11.5 million Mexican immigrants are illegal or undocumented aliens, about a third are legal residents and the rest are naturalized U.S. citizens.  

The economic impact of the Mexican Paisanos on their country of origin is significant. Paisano emigrants are among the largest senders of remittances in the world. According to the Bank of Mexico, in 2013 the country received US$21.6 billion worth of remittances, a figure that was 3.7% down from 2012.

But remittances are likely much larger than what official figures reflect. MexicoNOW estimates that the actual amount is very close to US$30 billion per year. Consider that a lot of cash crosses the border from the hundreds of thousands of informal and formal workers (maids, gardeners, peasants and others) who make it to work daily or seasonally to the U.S. And large amounts of value are also disguised in the form of jewelry, used appliances and many other items.

The cost of sending remittances is relatively high. The average remittance in Mexico in 2013 was $292 and the sending cost varies from2% to 5%, so remitters definitely prefer to hand carry the money home.

The role of remittances in the Mexican economy is often downplayed, but they are a huge pillar that sustains many families and the peso as a stable currency itself.

Remittances sent by Paisanos are the country’s second largest source of foreign exchange only behind oil. Remittances do not have the “financial glamour” of foreign direct investment, exports of goods or tourism and they are given a lower profile in government reports and media announcements.

But remittances are definitely an important “social stabilizer” element in Mexico.  Were it not for remittances, millions of families more would be under the poverty level, since for many, the money from abroad represents up to 20% of their income.

Furthermore, according to the Inter-American Development Bank, there is a linkage between the percent of households receiving remittances in Mexico and a lower homicide rate. Indeed, higher incomes deter people from committing crimes and lead to more education and job opportunities.

Los Politicos

In our metaphor, the third Mexico is represented by the public sector, which includes the federal government as well as the states’ and municipal administrations and the public corporations (Pemex, CFE, IMSS, etc.).

About 5 million people, or 10% of all employees in Mexico, are in government payrolls. Notwithstanding standards of living and demographic composition, this is actually not a bad number if compared to some Nordic countries where 30% of the workers are in public jobs, or even to the U.S. at 15%.

Mexico’s political system has a three tiered power structure, with a bicameral legislature as in most democratic countries.

 But a political tripartite arrangement, the lack of re-election and a blurry line across the board between parties and the government branches of power make it quite difficult to have effective “checks and balances” and factual representation of the people in the government. 

The political parties and not the electorate dominate public affairs in Mexico. There are indeed fundamentally clean and fair elections and power is won or lost at the ballot box. But the next phase is completely dysfunctional, as for the most part, elected politicians look forward to their next political position courting their party’s wishes and not the voters’.

 Unfortunately, Mexico’s ratings through blue or green administrations at various government levels are mostly unchanged for the last few decades.

In the most recent Global Competitiveness Report 2014-2015 by the World Economic Forum, Mexico’s overall rank is #61 among 144 nations. But the worst performance indicators and evaluations are related to its public administration. Some examples include: Public trust in politicians(Rank#114); diversion of public funds (Rank#119); burden of government regulation (Rank#118); irregular payments and bribes (Rank#99); favoritism in decisions of government officials (Rank#99), and so on.     

The renowned report cites the three most problematic factors for doing business in Mexico as: Corruption, tax regulations and inefficient government bureaucracy. Crime and theft come in fourth place.

Corruption in Mexico may be explained through the concept of “The culture of franchising”.

 Political franchising is an empowering political or economic position of strength granted by the system to an individual or organization. Generally, if the “franchise” is used for their own benefit by the franchisees, the system tolerates the wrongdoing. 

Political franchising may take the form of appointments for public office, union leaderships, licenses to operate media or telecommunications, political candidacies and many others.

But the political system is not necessarily to blame despite what many may have long believed. The culture of franchising first emerged in Colonial times with the Spanish Conquistadores and the Colonial governance when it was licit to auction off high public positions.

Since, through the independence, the revolution and modern public administrations, many of Mexico’s major political, social and economic developments have been franchised.

From time to time the government does terminate franchises such as the recent dethroning of the formerly powerful teachers union leader. But doing so is not an easy task because there is, of course, a political and social cost.

Political and economic franchising is deep and spread out in the Mexican way of life; it is part of the Mexican culture.

Franchising in Mexico takes its own relative shape in the different levels of the “food chain”. This culture is practiced from Mexico’s political and economic helm all the way down to the street policeman, rural teacher, public office receptionist and customs official.

Paradoxically, when the “franchisees”, get to “work” and
exercise their franchise for their own benefit, in general, they actually do not think they are doing something wrong. They view the empowering franchise as an “earned right”, and even if it is used for technically illicit purposes, since society tolerates such behavior, many franchisees do not actually experience any remorse.

Franchising in Mexico is somewhat like intellectual property in China. The world rages China for its unstoppable copying and infringement of intellectual and industrial property rights. But for the Chinese,
there is nothing wrong with copying somebody else’s design.

For the Chinese, everything belongs to the people and copying is fair, it is part of their culture. Most technical universities in China actually include in their curricula “Reverse Engineering” courses, and some even offer master degrees on this subject major.

Many examples of franchising in Mexico can be found by tracing the practice of bribery or “mordida”. Traffic cops, public utilities’ clerks and inspectors, customs officials, buyers of public and private institutions and others have made this practice popular in Mexico to
bypass the law and “get things done”.

Not everybody in a position of power or in possession of a franchise is at fault in Mexico. There are millions of honest public workers that keep things working under the law.

Unfortunately, the ill of franchising is a strong trait in Mexican culture. And it is like an elephant in the room that we need to talk about and find a remedy for, otherwise the elephant will not go away.

After all, the culture of franchising is not resistant to change. The solution can certainly be accomplished by transforming the country’s perception of the law, creating and practicing values of respect for it at all levels, even if it takes a long time.    

Los Perversos

The darkest side of Mexico is represented by the so called “Organized Crime”. This highly undesirable sector of Mexico, unfortunately, has a large impact on the socio-economical composition of the country.

Educated estimates indicate that this “Industry” has annual revenues of approximately US$50 billion and employs in excess of 500,000 people.

There are about 12 known large groups at the top of the echelon and thousands of “Tier 1, 2 and 3” suppliers and independent operators that engage in drug production and distribution, extortion, kidnapping, trade of counterfeit goods, auto theft, prostitution and illegal gambling among other criminal activities.  

Their huge monetary resources allow them to infiltrate and gain the collaboration of corrupt public officials and they easily recruit youngsters and families to work for them as the pay is high and tax-free.

Their main business, the trade of drugs, has an immense market in the U.S.  Mexican cartels have evolved to not only controlling production in Mexico and South America but also to managing their own distribution networks in the main export market.

Their alliances and struggles fighting for drug routes and market territories create serious safety disturbances that often times get excessive press coverage.

Their damage to Mexico’s image in the world is significant and affects the country’s ability to attract tourism and direct foreign investment.   

According to the World Economic Forum Global Competitiveness Report for 2014-2015, unfortunately, Mexico ranks in position#140 out of 144 countries under evaluation item “1.15 Organized Crime”.

 The question executives answer in the survey to qualify countries is: “In your country, to what extent does organized crime impose costs on businesses?”

Although it is common knowledge that foreign firms and executives are very rarely, if at all, the targets of organized crime, the logical precautionary measures foreign firms take in Mexico such as guards, security systems and others represent an additional cost to their operations.

The reason organized crime and other criminals do not target foreign firms and executives is simply because they “know better”. They know that any type of international victim or event would be of high profile and the judicial system, under international pressure and help, would go to extreme efforts to solve the case.

But solving the main issue of drug trade is an extremely complex subject. Many say that it is unsolvable as long as the U.S. market continues its high demand for illicit substances.

 The Mexican government has as of late scored capturing the leaders of major cartels, but the organizations may likely continue to operate with new leaders or worse yet, the cartels may split in various smaller factions that will create even more territorial struggles.

Some experts are advocates of legalization both in the U.S. and Mexico while others recommend that Mexico host international or U.S. drug fighting forces like Colombia did. There is also the theory to fight and eliminate the most extreme cartels and let a few operate in equilibrium. Although highly controversial, one of these options may prove to be the solution.

Malaysia, a truly drug-free country, has a very simple and effective policy: There is zero tolerance and anybody guilty of drug trafficking gets an automatic death penalty sentence. 

Los Productores

Our last group, the fifth Mexico is made up of the private producers of wealth, the companies and the economically-active population that provides goods and services to the domestic consumers and export markets. “The Productores” have significant differences in their composition though.    

Mexico’s nominal GDP of about US$1.3 trillion ranks #14 (2013) in the world and average estimates predict Mexico will climb to position #11 by 2025 with a GDP of about US$2.5 trillion.

If measured by GDP adjusted by PPP (Purchasing Power Parity), a yardstick many economists prefer, Mexico already ranks in position #10 in the world. But according to the International Monetary Fund, Mexico ranks in place #68 if measured by GDP Per Capita adjusted by PPP.

Mexico as a whole has a reasonable economic position in the world but trails other economies in terms of GDP Per Capita growth rate during 1990-2012 as shown in Exhibit #2 sourced from McKinsey Global Institute’s analysis.

One conclusion is that Mexico’s overall output is growing but there are more people to share it among. So the population growth rate outpaces economic growth. But this is only a partial explanation.

 McKinsey points to a more worrisome problem: “The declining growth of Mexico’s GDP per capita reflects the dramatic drop in Mexico’s productivity growth rate, the second-lowest among the 20 largest developing economies.”

Mexico’s large domestic firms (over 500 employees) and the international firms (Maquiladoras, automotive) enjoy a global class average annual productivity growth rate of 5.8% and employ about 20% of the workforce. But the small, traditional and mostly service companies in Mexico that employ about 42% of the workforce have negative productivity of -6.5%. And the mid-size firms, which employ the rest 38% of the workers are basically flat at 1% annual productivity growth rate, explains the McKinsey report.

So the productivity gains made by the likes of CEMEX, Bimbo, FEMSA, ALFA and other large Mexican companies and Nissan, VW, Honeywell, Bombardier, United Technologies and 3,000 or so global firms based in Mexico are offset by the losses of the small (less than 10 employees), traditional, mostly unregistered and informal “companies” in Mexico, whose share of total employment keeps growing.

 The OECD estimates that Mexico’s informal employment, those that do not pay taxes nor have social security, is about 60% or greater of the total working-age population.
 

Conclusion

Mexico has a population of 120 million growing at about 1.2% per year. In order to rescue those submerged in poverty, the informal economy and crime in addition to creating jobs to employ the new workers entering the labor force and reduce migration, Mexico needs to click annual growth rates of at least 6%.

 As a result of the ongoing global economic woes and other domestic issues, the country is currently struggling to grow at a pace of between 2% and 3%.

President Pena Nieto’s reform initiatives are breaking many years of status-quo in the economic and social pillars of Mexico. The education and energy reforms will have a very positive effect on the economy but the results will be felt in the mid to long term. Unfortunately the negative effects of the tax reform that increased taxes for practically all economic sectors are already surfacing.

The opportunities for improvement in Mexico are immense. They are also very clear and should be focused on the creators of employment. Following are some of the main actions needed:
 
Facilitate the transition of small operators from the informal to the formal economy by: Reducing the bureaucratic red tape, currently even mid-size and large firms are having a hard time coping with tax reporting requirements; reducing their income tax burden, the collection and reporting of the sales tax of 16% should be a large enough contribution from small operators; providing more employment flexibility in hiring and firing practices, today they are terrified to register employees and having to comply with extreme labor obligations.

Enable mid-size firms which are already mostly formal to reach the next level by: Substantially improving sources of capital and credit, today Mexico’s lending ratio as a percentage of GDP is only a fraction (about 35%) of other faster growing emerging countries; providing training and educational incentives and tax credits to develop vocational and training skills will help them reach their growth potential sooner.

Reinforce the competitiveness and productivity of the large employers so they can expand their operations faster by: Providing competitive priced utilities, higher R&D incentives, better and expanded logistics infrastructure and reducing their operating costs via improvements in security and reductions in corruption.

Indeed, improving law enforcement across the board is critical. If criminals, corrupt public officials and small business operators are largely unprosecuted they will simply continue to grow and will eventually fully dominate the country’s affairs.

Mexico is a kaleidoscope, a country with a complicated set of circumstances, whose actors intertwine but pull in different directions. Mexico is at the threshold of transitioning from individuality to group consciousness, at the risk of falling further behind in the race for a better quality of life for all.

By Sergio L. Ornelas
MexicoNOW Editor