Oil Wars

Over the past several years it has become clear to me that the Chavez administration in not pursuing a successful development strategy.

However, as much as I think the Chavez government has been stupid, incompetent, and indifferent to really developing the country it must also be remembered taking what is presently an underdeveloped country and moving it to developed status isn't easy. Further, there is more than one way to fail at it.

Take the case of Mexico. While Venezuela could be the poster child for the "resource curse" or "Dutch Disease" Mexico is the poster child for the failure of neo-liberal policies or the "Washington Consensus".

Lets take a look at some of Mexico's problems as described by the New York Times:

Mexico’s former president, Carlos Salinas, used to promise that free trade and foreign investment would jump-start this country’s development, empowering a richer and more prosperous Mexico “to export goods, not people.”

Fifteen years after the North American Free Trade Agreement took effect, only the first part of that promise has been realized.

Mexico’s exports have exploded under Nafta, quintupling to $292 billion last year, but Mexico is still exporting people too, almost half a million each year, seeking opportunities in the United States that they do not have at home.

Secretary of State Hillary Rodham Clinton will arrive in Mexico on Wednesday and President Obama will visit next month. Both are expected to emphasize the successes of American-Mexican economic cooperation, but it will be hard to ignore how much in Mexico has not changed under Nafta.

Economists here say much of the blame lies with Mexican leaders, unable or unwilling to take on oligarchs and unions controlling key sectors of the economy like energy and telecommunications. But they say some blame goes to the unintended consequences of Nafta.

In some cases, Nafta produced results that were exactly the opposite of what was promised.

For instance, domestic industries were dismantled as multinationals imported parts from their own suppliers.

Local farmers were priced out of the market by food imported tariff-free. Many Mexican farmers simply abandoned their land and headed north.

Although one-quarter of Mexicans live in the countryside, they account for 44 percent of the migrants to the United States. The contradictions of Nafta are apparent in Guadalajara and the rich farmland around it.

On the road from the airport to the city, Mexico’s second-largest, a well-worn sign welcomes visitors to Mexico’s Silicon Valley. After Nafta went into effect, the comparison seemed ambitious but not out of reach.

Global giants spent billions of dollars turning Guadalajara into a manufacturing hub for the information technology industry. The industry boomed, spurred by cheap labor and the sense that Nafta guaranteed investor-friendly policies. Today the city is ringed with low-slung factories that churn out everything from BlackBerrys to digital tape storage libraries for Sun Microsystems.

But investors came because the city was already a center of technology. I.B.M, Hewlett-Packard and others had come in the 1960s and 1970s when Mexico’s market was closed.

After Nafta, the new factories imported parts from their global suppliers, wiping out local companies that had sold printed circuit boards or assembled computers under tariff protection, said Kevin P. Gallagher, a Boston University professor who has written about the Guadalajara information technology industry.

Here is aptly described the results of Mexico's number one problem. It thought it could develop through free trade - open your borders, open your markets, welcome foreign investors, and development will automatically follow, or so goes the thinking of some.

In reality nothing of the sort happens. As happened in the case of Mexico foreign companies come looking for a new market and to exploit cheap labor. They have no interest in truly helping the host country develop, they transfer no technology, they very much remain foreign companies to the host company, and they wipe out already existing local industries.

Sure, there are plenty of car factories and semi-conductor foundries in Mexico. But there is no Mexican ability to design either cars or semi-conductors much less to build their own car or semi-conductor factories. Being nothing more than a cheap labor workshop for foreign companies only gets you so far - just as limiting itself to selling only oil only gets Venezuela so far.

Developing your own local industry is absolutely key to true development. And it is absolutely critical that that local industry be assisted by the government and protected from outside competition during its initial phases of development.

Sure that makes local consumers somewhat worse off initially but lets remember that before you can be a consumer you have to be a producer and fostering companies that will provide gainful and high wage employment is what will ultimately make a nation of happy consumers.

Things grew worse when the tech bubble burst, the American economy cooled and the companies moved to China, where they could pay even lower wages. Once China entered the World Trade Organization, Mexico lost much of the edge in exporting to the United States that Nafta had given it. Employment in Guadalajara’s I.T. factories dropped 37 percent in 2001 and continued to slide for two years.

That is the problem with trying to compete solely based on low wages. Once you develop even a little bit and your wages rise slightly your un-rooted foreign industry moves elsewhere.

“The agreement could have brought investment with more value here,” including research, testing and design, said Jesús Palomino, the general manager at Intel’s design center in Guadalajara. “But we did not know how to define or negotiate or take advantage of it.”

Mr. Palomino argues that attracting multinational manufacturers was too limited a focus. He oversees about 300 young engineers who test future Intel products and carry out research and development. The sophisticated Intel design center is an exception to the city’s assembly plants. Those factories mostly hire low-wage labor.

“A new phenomenon has grown up under Nafta — high-productivity poverty,” said Harley Shaiken, chairman of the Center for Latin American Studies at the University of California, Berkeley.

Low wages means low purchasing power. “It is not a successful strategy for globalization,” Mr. Shaiken said.

Again, Mexico thought others would develop it when in fact they would do no such thing. If you want to develop you have to do it yourself - with your own capital, your own educated workforce, and by fighting hard to obtain new technologies.

Even Nafta’s greatest success — exports — has become a liability, as Mexico feels the full brunt of declining consumption in the United States. The auto industry, for example, which has flourished under Nafta, has ground to a virtual standstill. Over all, Mexican auto exports fell more than 50 percent in the first two months of this year compared with 2008, and production dropped almost 45 percent.

The central bank forecasts that as many as 340,000 people could lose their jobs this year, and some investment banks predict the economy could contract as much as 5 percent.

That weakness has driven down the peso, which has lost about a quarter of its value in the last six months. Foreign direct investment fell last year to $18.6 billion from $27.2 billion in 2007.

Still, economists here say much of the responsibility for the lack of development in the last decade and a half lies largely with Mexican leaders and their unwillingness or inability to enact real reforms. “We have an economy that has atrophied because of the lack of reform,” said Gerardo Esquivel, an economist at the Colegio de México.

Other developing countries benefited from globalization, particularly in Asia. But in Mexico, economic growth has averaged about 3 percent a year since Nafta took effect, far below what is needed to create jobs for the million young people who enter the work force each year and the millions more who barely scrape by.

Here the Times mistakenly fails to see the link between problems. They point out that Mexico's economy is now in decline because of its dependence on exports to the U.S. Fair enough.

But there are other countries that depended even more on exports to the United States and yet are still growing. The prime example is China. Why is China doing better than Mexico?

Simple, by fostering domestic industry, protecting its own market, mastering technologies, and having very high rates of investment it has had a growth rate MUCH higher than Mexico's (10% versus 3%) and has built up huge cash reserves which it can now use to invest and maintain its economy even through this recession.

Mexico's problem isn't the current recession. It is its failed development strategy that led to a paltry 3% annual growth over the past 15 years.

Summarizing we can clearly see that the path followed by Mexico (and note this is the path advocated by most of the Venezuelan opposition) fails for the following reasons:

1) Emphasizing foreign investment rather than investing in yourself. This leaves the country's industrial base at a very primitive assembly plant level with technology and high value added processes dominated by others. Instead of following this route countries must insist on building up their own local companies which will over time control all facets of design and production.

2) Your own domestic market must be protected if you don't want to see your own local industries and agriculture wiped out by vastly more efficient competitors before they have a chance to become more efficient themselves. What we saw above with Mexico very clearly illustrates the importance of this. Yes, many people may not initially like buying inferior locally produced products but that is a price that must be paid at least initially if you want the long term gains that come only from true development.

3) You must work very hard at improving the educational level of your population and in particular building up a highly trained workforce capable of mastering and developing new technologies. Doing points 1 and 2 will be impossible without this.

4) You must have very high rates of investment. The 3% annual growth Mexico has had over the past 15 years is obviously inadequate. You must have higher rates of growth and getting that requires very high rates of investment.

Just as there is more than one way to skin a cat there is more than one way to screw up a country's development. We've been watching the slow motion self-destruction of Venezuela's economy on this blog for some time. Today we glimpsed Mexico's different path but similar failings. Although they have very different circumstances and are taking different paths they are almost certain to wind up in the same place - perpetual underdevelopment.
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