Think Tank contrasts Mexico and China

By Michael Hissam

As current-day nations ponder the possibilities of trade agreements, specifically the Trans-Pacific Partnership, one wonders as to the potential upside for the dynamic, yet developing economy Mexico has.

Manuel Molano, Deputy Director of the Mexican Institute for Competitiveness thanks that Mexico has positioned itself well for the long haul, while China’s strategy has voids.

How would you rate Mexico’s progression when it comes to strengthening its competitive position?

We have done some of the important structural reforms that were pending. The political pact that we had in the current administration has yielded some results and I certainly see a much brighter future ahead for the Mexican economy.

How competitive is Mexico in terms of wages?

If you are thinking of relocating to Mexico because of low wages, then you have to think again. You are not in the kind of industry that would thrive in this country.

What we found is that the real wage in manufacturing especially expert like manufacturing has increased steadily over the years and this has to do with a steady increase in the productivity of workers in those segments of the economy.

Like what has happened in China with the increase in real wages except for the fact that we do not have an artificially valid currency. If you are looking for more qualified workers, which you would expect to get a lot of productivity from them, we are a much better bet than China.

Many applaud Mexican competitiveness and part of the reason more than 40 trade agreements. What impact do you see on the upcoming Trans-Pacific Partnership having on Mexican competitiveness?

Trade pacts do not mean disequilibrium or instability, they mean that countries have an opportunity to discover what their advantages are -- what are they good at. Mexico being overlapped over so many trade areas actually makes us a hub that can connect Europe with the U.S.; we can connect Asia with U.S.

We needed a closer relationship with Asia, we really needed to bring a lot of the components that are produced in the Pacific and integrate them into the production chains and actually do that together with the U.S. so we do not run into any issues with Rules of Origin and those kinds of problems. Trans-Pacific partnership is a very good idea for Mexico.

What is your take on China’s export model?

What we see is that China had an export model that was very much led by geopolitical reasons, not so much cost and not so much logistics. You think of basic inputs for industry, such as steel, what you will see is that the Chinese have created a production hinterland that brings iron ore from Africa and Australia and coal from Australia and oil from Venezuela and Saudi Arabia. That is just not sustainable. You need to have some of these inputs, some of these raw materials in your country.

They have been able to produce very low-cost steel because China is still a
Centrally-planned economy. In the year 2016 the World Trade Organization will have to decide whether China is a market economy or not, if it had graduated from its transition period. The answer is no.

When we look at the actual integrated prize that China is going to get from bringing raw materials from so many places in the world we are going to find out that the real cost is a lot higher than it actually is. That probably happens with other things less basic than steel, probably happens with a lot of the new electronics and a lot of the rare minerals and other inputs.

NAFTA on the other hand looks very competitive in some of these industries and we should make sure we are producing some of these commodities that went two decades ago to China.

We have seen this progression over the past 40 years: Simple assembly, then we started to see some heavier manufacturing. Now we are seeing design and engineering. What needs to be done in Mexico to sustain that trajectory on a positive track?

In the past we thought that you only needed trade and some money and that would take care of everything. Now the thinking is there are other things that need to be worked on. Education is one of them.

We do believe that you do not need a radical transformation of the education system to make things work. We are trying to advocate with the Mexican government to build skills on a larger segment of the population, in the realms of English, math, sciences, and ethical behavior. If we can help people with those soft skills, we will be able to succeed going forward. It is interesting how the economy becomes complex.

That is one consequence of trading internationally. A lot of people do not see that, people think that when we trade we lose the jobs. But they do not see all these choices the consumer is getting, all these better prizes, all this enhanced capacity to save and invest in the economy. That is exactly what Mexico has experienced over the last 20 years.

Is demography an asset or a liability for Mexico? What about China?

When you look at Mexico’s population pyramid you see a lot of young people at the base and that is very important because those are the people who are going to be sustaining the economy and the pensions and the stability over the mid-term.

Few countries in the world have that sort of population pyramid, Turkey and a few others but very few. In population size we are a 120 million inhabitant country, so that is pretty large. When you look at it in contrast to China and you look at the demographic pyramid of China in the year 2050 what you will find is that the one- child policy has actually killed the possibility of China renewing their labor base. They are going to have to bring in younger immigrants from other places in the world.

The bad thing is that most of the Chinese workers will not be rich enough to sustain themselves over their retirement period. The one- child policy means that the Chinese are going to be aging and are not taking care in terms of their needs. That is the big difference with Mexico. China will have to embrace automation on a scale that only nations like Japan have seen but still there is a technological gap between Japan and China. I am not sure they are going to succeed at it.

What sectors in Mexico for the next 30 years would you characterize as high growth?

There are two of them: The industrial businesses linked to NAFTA and our trade agreements, and of course all the services and all the supply chains that orbit around those. These are the network businesses.

The network businesses in Mexico have been immensely successful. This has to do with the fact this is a large country with a very disperse population, where transport, banking, telecoms and domestic trade actually add a lot of value.

There are some things in terms of policy that can be done in order to reduce the weight on these network businesses, things like higher population density in cities and better public services in cities to invite more migrants from rural areas. A network of intermediate cities, not only the really large urban centers that have very particular problems but smaller cities such as in the U.S. after the Second World War. There is going to be a lot of change going on in Mexico.

Let me paint a picture, when I was a kid my father was a sewing machine salesman, we would take the car from Mexico City to Monterrey and on the way to Monterrey in San Luis you would see a landscape that would fit perfectly in Sub-Saharan Africa. You would find famished people trying to sell you snakes and stones to make the day’s food. That does not happen any more in San Luis Potosí. It probably happens in some parts of Chiapas, it probably happens in some parts of Oaxaca, but that is not the true story of Mexico right now. The people have moved on, they moved to highly-profitable industries, they moved to urban services, they moved to do something else. That is the trade story that will make NAFTA or is making NAFTA successful.

We would not think of car factories happening in places like Alabama or Mississippi and they are happening there too. Trade is definitely not lost jobs, it is creation of opportunities.

Based on all the data you have, what is your confidence level for Mexico’s future using a scale of 1 low and 10 high?

I would grade it between a 9 and a 10. One of the reasons is that I live here. I probably could live elsewhere, but I have a lot of faith in what is going on in this country. There are some hurdles and there are some difficulties and we are trying to advocate for things to happen a lot faster. It is definitely my favorite place in the world.