Robert Samuelson
Real Clear Politics
June 28, 2006

The subtext for the United States' immigration debate is Mexico. Why doesn't its economy grow faster, creating more jobs and higher living standards? That's the question that inevitably confronts the winner of this Sunday's Mexican presidential election, but it is also a critical question for Americans. A more prosperous country would not be sending so many of its poorest citizens north. Since 1990, about 20 percent to 25 percent of U.S. immigrants have come from Mexico.

Here is an illuminating comparison. In 1970, average incomes in South Korea were about half those of Mexico. By 2004, average per capita Korean incomes ($19,148, expressed in constant "2000 dollars'') were more than twice Mexico's ($9,178).

It's not that Mexico has made no progress. Its economy was once crisis-prone, inflation-ridden and heavily insulated from foreign trade. Now it has quelled inflation (about 4 percent, down from 17 percent in the late 1990s), controlled government spending and opened up to trade. Before adoption of the North American Free Trade Agreement in 1994, tariffs on covered imports averaged 12 percent (and were much higher in the 1980s); by 2001, they were 2 percent. In recent years, its economy has grown almost 4 percent annually.

But that growth doesn't suffice for a poor country whose population is increasing by more than 1 percent a year. In China, economic growth averages about 9 percent to 10 percent annually; in India, about 6 percent to 8 percent. Mexico isn't in the same league.

Economies advance through the adoption of better technologies and business methods. Production and efficiency improve. Prices go down or incomes go up. Either way, people can buy more -- more old stuff (say, food or housing); or more new stuff (say, Internet connections or iPods). In Mexico, this process is weak. To simplify slightly: its economy consists of two vast sectors, each slow to adopt better technology and business practices.

One sector involves large, modern firms in semi-protected markets that limit the pressure to improve efficiency or lower prices. "Mexico's business sector is risk-averse. It's never had to operate in a true competitive environment,'' says Pamela Starr, an analyst for the Eurasia Group, a consulting firm. "It's operated with monopolies and oligopolies (markets dominated by a few companies) encouraged by the government.''

An extreme case in point is Pemex, the state-owned monopoly oil company. Without competitors or complaining shareholders, its operations are lax. In 2004, Pemex had $69 billion in sales and 137,722 employees, according to its Web site; in the same year, Exxon Mobil had $291 billion in sales and 85,900 employees.

The other part of the economy is usually called the "informal sector.'' It consists of thousands of small firms -- street vendors, stores, repair shops, tiny manufacturers -- that theoretically aren't legal, because they haven't registered with the government and often don't pay taxes or comply with regulations on wages and hiring and firing. Almost two-thirds of Mexico's workers may be employed in the informal sector.

Its size might suggest great entrepreneurial vitality. The trouble is that these firms are virtually compelled to remain small and inefficient. Because they're technically illegal, they can't easily get bank loans and can't grow too large without being forced to pay taxes or comply with government regulations. In Mexico, companies with fewer than 10 workers account for almost two-fifths of all employment. In the United States, such firms represent one-ninth of total jobs.

All this frustrates rapid economic growth -- though the obstacles have diminished as Mexico has opened to foreign trade and investment. The harder question is what created this system. Lawrence Harrison, an economic development expert at Tufts University, blames culture. Latin American values, he says, have resisted change and encouraged "rent-seeking'' by business elites --vying for government favors that provide protected markets. Asian societies, he argues, have been more accepting of change.

Economist William Easterly of New York University is skeptical of the cultural explanation and argues that de-emphasizing trade protectionism and government intervention requires time. "Advocates of free trade and free markets overpromise what can be accomplished in a short time,'' he says. Attitudes and institutions change slowly.

On paper, the leading candidates for president advocate different economic policies. Former Mexico City mayor Andres Manuel Lopez Obrador of the center-left Party of the Democratic Revolution urges more government activism. Felipe Calderon of the center-right National Action Party -- the party of the incumbent, Vicente Fox -- favors "the market.'' But each might have trouble enacting his agenda without a legislative majority, with the once-dominant Institutional Revolutionary Party (PRI) controlling swing votes. At best, economic growth might improve slightly; at worst, it might decrease.

For Americans, the implications are sobering. Mexico has long regarded immigration as an economic safety valve. Whoever wins, that won't change.