Mexico’s Geopolitical Resurgence

For many in the United States and elsewhere, Mexico is most closely associated with poverty, illegal immigration, and drug violence. True, those are all ongoing realities for Latin America’s second giant. Foreign investors, though, are mostly focusing on one word, opportunity.

The Economist magazine recently published a special report on Mexico, to coincide with the presidential inauguration of PRI leader Enrique Pena Nieto on December 1^st. The report is truly eye-opening for those who only see America’s southern neighbor as a violence-wracked state on the verge of state failure. In fact, Mexico is moving in a positive direction, propelled by recent strong economic growth and a political system that is maturing.

Skyline of Mexico City. Photo credit: rutlo, via Flickr (Creative Commons license).

As Shannon O’Niel wrote in 2009 in Foreign Affairs, the surge in drug violence during the presidency of Felipe Calderon (2006-2012) was a sign of better governance in Mexico. For too long, the one-party system of the Institutional Revolutionary Party (PRI) colluded with the drug cartels. When new federal leadership pushed back against this corruption, the cartels lashed out at the central government. Fortunately, drug-related violence has begun to abate somewhat. The bigger political story, though, is the consolidation of democracy in Mexico, which is further confirmed by the PRI’s return to power.

Though Mexico has registered under-appreciated gains in the political sphere, the country’s impressive economic resurgence seems to have particularly impressive forward momentum. Here the key development is a revitalization of Mexican manufacturing. After some struggles in the decade of the 2000s, the newest OECD member in the NAFTA region is returning impressive industrial growth. Here are a few of the key factors:

• Free trade deals with 44 other states, which is the largest total for any country in the world.
• Mexico’s proximity to the United States market, which affords quick and low-cost access to American consumers.
• An average manufacturing wage rate ($2.10 per hour in 2011) that is now comparable to China’s rate ($1.60 per hour). (In 2000, these rates were $1.50 per hour in Mexico and $0.30 per hour in East Asia’s biggest tiger. Sources: HSBC, The Economist.)
• The relative dependability and productivity of Mexican workers.
• Higher energy prices, which reinforce Mexico’s position relative to Asia’s emerging markets, due to higher transportation costs from Asia to North America.

Mexico’s geopolitical resurgence is supported by other economic strengths. International tourism arrivals have remained strong, despite the drug violence. The country is still a significant energy producer. And Mexico’s agricultural sector continues to show signs of dynamism.

Mexico is rising. Arguably the clearest indication of this is the confidence that international investors are placing in the country. World leaders like Siemens, LG, Nissan, and Ford are voting with their dollars, euros, and yen. The Pentagon’s 2009 warning about Mexico becoming a failed state is not coming true.

Geopolitics and American Economic Competitiveness

When I was in high school, I read the classic book The Rise and Fall of the Great Powers by Paul Kennedy. In the early 1990s, Kennedy and others were focused on the rise of Japan and the presumed geopolitical decline of the United States. These predictions of imminent American decline were of course wrong, or at least premature.

Earlier this week, I wrote about the effects of automation on the U.S. and global economies. The key point was that contemporary technological innovations are tending to make many workers redundant. Travel agents, secretaries, legal assistants, factory workers, and many other groups of workers are being replaced by computers and robots. Rising productivity is not leading to net growth in jobs, and many economists are warning that we should get used to a “new normal” of higher unemployment (and lower economic growth rates). For the sake of argument, let’s assume that these trends do persist over the next few decades.

If these problematic economic trends persist in the United States, what will that mean for global geopolitics? Here are a few key possibilities:

1. Military spending in the U.S. will inevitably decline, as even many influential Republicans recognize. Future American leaders will be much less likely to engage in long-term military campaigns like those in Iraq (2003-2011) and Afghanistan (2001-present). The prospects for Pentagon-led “nation building” missions will decline significantly. NATO’s capabilities will dwindle even more than they already have.
2. Sluggish economic growth and political gridlock in Washington could lead to lack of action on the public debt. In last night’s debate, Mitt Romney aptly used the phrase “on the road to Greece” to refer to America’s fiscal ill health. Though the U.S. has key advantages over Greece, the performance of American political elites over the last 12 years does not bode well for the future. If holders of U.S. public debt demand higher returns and provoke a sovereign debt crisis, the world’s superpower could enter into a period of rapid global retreat, just as Britain did in the 20^th century.
3. Anemic, jobless growth could lead to trade protectionism and economic nationalism reminiscent of the pre-World War II period. True, the Great Recession (2007-) was remarkable for its lack of economic nationalism. But if economic conditions do not improve significantly in the next decade, the World Trade Organization and free trade agreements could become big targets, especially for the Democratic Party.

Just as Paul Kennedy’s prediction of American decline in the late 1980s was wrong, contemporary pessimists could be very wrong about imminent U.S. decline. Economists, after all, do not excel at long-term prediction, despite the grander claims of some. What are your thoughts about recent economic trends in the United States?

Globalization and the U.S. Economy (Labor Day in the U.S., part II)

As the U.S. election season heats up, most attention is being directed at the performance of the American economy. From the fourth quarter of 2007 – the official start of the Great Recession – the U.S. economy shed millions of jobs and the unemployment rate rose to almost 10 percent. Candidates and the public have rightly focused on job creation, or the lack thereof. What has largely been missing from the public debate about the health of the American economy is a concern for income growth.

It is hardly shocking that the vast majority of U.S. workers have not seen much real growth in their wages since 2007. (Some who have kept their jobs – including many government workers – have experienced pay cuts.) What is more unsettling is the longer term trend of stagnant wages for a large share of the country’s workers. A recent series of posts on the blog Economix addresses this stagnation in the context of freer international trade.

A recent Economix post, “Behind the New View of Globalization,” is a political bombshell. In short, globalization – as embodied in trade liberalization and better communications and logistics – has led to the disproportionate loss of well-paying jobs in the United States. A growing chorus of economists is now rejecting the view that technological changes have been the major agent of “creative destruction” in the manufacturing sector and beyond. Instead, competition from China and elsewhere has led to a huge hit for the American middle and working classes. (The Economix post provides numerous references to mainstream economic studies that now support this view of the effects of international trade on the U.S. economy.)

As the Economix post makes clear, the WTO and lowered tariffs are not the only reasons for income stagnation in the U.S. The United States is not sufficiently investing in basic infrastructure such as highways, airports, and urban public works. American schools are producing mediocre results, when compared to the country’s international competition. And, political gridlock in Washington calls into question the ongoing suitability of our constitutional framework.

From a global perspective, though, the benefits of freer trade are clear. Emerging markets like China, Brazil, India, and others are benefiting from a more open international economic system. And, critically, tensions among the world’s major states are decidedly low by historical standards. The relative harmony among the world’s established and emerging state powers is in large part a result of global economic integration. The world’s most troublesome states – countries like North Korea, Zimbabwe, and Afghanistan – are some of the least integrated in the global economy.

So, as we mark another Labor Day in the U.S., the answer to the challenge of wage stagnation is not protectionism. The benefits of freer trade – both economically and geopolitically – are immense. Nonetheless, strong pressures are clearly building in American society (and Europe), as manifest by movements like the Tea Party, Occupy Wall Street, and the anti-government militias. The U.S. is far from being a failed state, but more and more Americans are losing trust in the ability of government to facilitate economic outcomes that are deemed fair. The legitimacy of American political institutions is in decline. One need not be a radical leftist to point out that the main financial rewards of this era of globalization have largely gone to those at the top of the American class structure, and that long-term trend is leading to huge dissatisfaction across the society.

*** Did you like what you read here? You might be interested in the new book by this blog’s author, Failed States: Realities, Risks, and Responses.