Mexico’s Hidden Success Story

Country’s Progress Calls for Broadening the Policy Dialogue

The United States needs to look at its southern neighbor in a different light given its economic strides and expanding middle class, writes Michael Werz.

Institutional Revolutionary Party candidate Enrique Peña Nieto looks the likely winner of Sunday's presidential elections in Mexico.<br /> (AP/ Dario Lopez-Mills)
Institutional Revolutionary Party candidate Enrique Peña Nieto looks the likely winner of Sunday's presidential elections in Mexico.
(AP/ Dario Lopez-Mills)

The United States is overlooking a real economic and political success story in Mexico. Our southern neighbor is going through a transformation of historic dimensions, yet a large gap remains when it comes to U.S. public perceptions of Mexico, which are too often breathtakingly simplistic views of drugs and migration combined with an un-American belief in building walls and exclusion.

Mexican society has undergone a deep change during its decade-long process of democratization. The country has enjoyed strong macroeconomic growth, and this year its GDP is growing faster than that of the United States. But the crucial dimension of Mexico’s hidden success story is the rise of a middle class that is younger, more educated, wealthier, healthier, and more able to integrate women into the labor force than any previous generation.

“Although widespread poverty still exists,” write Luis de la Calle and Luis Rubio in their seminal study, Mexico: A Middle Class Society, “Mexico is no longer a poor country.” Within a few decades Mexican society achieved what took over a century when European industrialization created the first modern middle classes in history.

Mexican voters will head to the polls this Sunday to choose a new president. The election is expected to go smoothly, without major confrontations or doubts about the legitimacy of the results. It will mark the 12th anniversary of a transparent democratic process south of the border.

This success is part of the legacy of President Ernesto Zedillo, who conceded defeat to the rising conservative National Action Party over a decade ago, thereby ending 70 years of single-party rule. For decades the Institutional Revolutionary Party, or PRI, had been a symbol of corporatism and entrenchment, but the party reinvented itself in recent years and its young candidate, Enrique Peña Nieto, looks the likely winner of Sunday’s contest.

To deliver results to an increasingly demanding domestic polity and its partners in the United States, the PRI will need to immediately address and overcome widespread concern and skepticism regarding their democratic credentials, the party’s capability of staying the course of modernization, and their ability to implement a smart, resolute policy to manage endemic drug violence.

Below we review Mexico’s economic progress and what it means for Mexico’s future, the United States, and the incoming administrations in both countries.

Mexico’s new economic opportunities

The economic growth of Brazil and the success stabilizing Colombia usually occupy the most attention in Washington, D.C. policy circles, with Mexico often the forgotten neighbor. But the economic success south of the border is not a coincidence and can no longer be ignored.

This success is built upon the innovations and progress in vibrant metropolitan areas such as Guadalajara and Monterrey. Guadalajara, the capital of Jalisco province and a metropolitan area with over 5 million inhabitants, has been called with good reason the “Silicon Valley de México.” The Financial Times’s Intelligence Magazine ranked the Catholic stronghold as a “city of the future,” and the rapidly growing region is estimated to have the second strongest economic potential in North America behind Chicago.

The evidence of this potential is overwhelming, especially in the high-tech corridor that occupies much of the municipality of El Salto, located between Guadalajara’s international airport and the main highway to Mexico City. Companies including General Electric, Motorola, Hewlett-Packard, IBM, Intel, Hitachi, Siemens, and Kodak maintain manufacturing and research centers in the area. Indeed the market research firm BMI estimates that IT spending in Mexico grew 11 percent in 2011, mostly due to cloud computing, government services, and massive infrastructure projects.

Not only is Mexico’s share of high-tech exports considerably higher than Brazil’s, but the country is also becoming a center for sophisticated car manufacturing. German producer Audi’s most ambitious project, an all-new facility to produce about 150,000 Q5 SUVs a year, saw over 20 U.S. states submit bids. Production is now due to start in 2016—in Mexico. Audi will join its parent company Volkswagen in the Estados Unidos Mexicanos, along with Honda, Nissan, and Mazda.

But Guadalajara is only one region in Mexico where the myth of the maquiladora—that Mexico uses low-wage manufacturing operations—meets reality. In Mexico City a strong creative industry has sprung up, ranging from software design to movie promotion and featuring both major players and a host of small companies.

Economic expansion combined with a stable and robust democracy has made Mexico a global commodity in itself, as it becomes an increasingly attractive place to set up a business or invest capital.

Mexico’s recent development reflects a broader shift that Eric Farnsworth, vice president of the Council of the Americas, has aptly described as “The Latin American Spring,” a decade of democratization and economic growth across the Southern Hemisphere. Farnsworth has argued that time is running out for the United States to reap the benefits of this transformation, because “Latin America is on the move, pursuing partners in Asia, Europe and Africa.”

The emergence of Mexico’s middle class due to its economic expansion has also converted the country into a sophisticated hub for high-value commodities, research, and advanced manufacturing. And the country’s educational progress, emancipation of women, and modern urban culture impact the way Mexican families plan and conduct their lives—visible, for example, in the rapidly shrinking size of families.

The rise of the Mexican middle class is the single most determining issue of the intertwined U.S.-Mexican relationship. New middle-class Mexicans are a modernizing force, demanding rule of law, quality education, and a political voice; members of this group will determine what Mexico does on the world stage, what it produces, and what it consumes.

Demographic challenges for Mexico and the United States

Partly as a result of its economic success, Mexico has one of the most rapidly declining fertility rates in the world. In 1970 an average of 6.5 children were born to every woman in Mexico; today the number is 2.05—below replacement levels and still declining. (see chart)

This means that by as early as 2030 the number of young Mexicans will begin to decline and the active workforce will shrink. Mexico will hit its total population peak in 2047 at 140 million, after which time even the overall population is set to contract.

This sudden demographic transition has severe economic implications for the United States, which will find its economy seeking other sources for labor—a transformation already visible this year as Asian immigration outpaced Latino immigration for the first time.

Several trends point to a growing U.S. need for low-cost labor. More than 75 million baby boomers will enter normal retirement age in the United States in the coming years, and declining native-born fertility rates will approach replacement level. Since native-born workers are becoming more educated every decade, the need for unskilled labor will likely grow. Between 2010 and 2020, occupations that require a high school diploma or less are projected to make up two-thirds of new jobs created, and “total employment is expected to increase by 14 percent from 2010 to 2020, with 20.5 million jobs to be added by 2020.”

But too many Americans have taken for granted that immigration from and through Mexico will continue indefinitely. Indeed, if the Mexican economy expands more quickly than expected, U.S. manufacturers and service providers will soon be tearing holes in the Rio Grande fence themselves. The United States will be exposed to a severe shortage of skilled and unskilled labor that is already affecting the most industrialized European countries today.

The new PRI

The next Mexican government will have to manage the country’s long-term demographic and economic shifts diligently and in close cooperation with the United States. Although PRI presidential candidate Peña Nieto has revealed little about his potential cabinet, he is keenly aware of the lingering criticism given his party’s history. He has thus repeatedly denied that his campaign is influenced by the “dinosaurs,” or the old PRI politicians who have ruled Mexico with a heavy hand since the mid-20th century.

In fact, his campaign staff consists of young politicians and economists that were not a part of the old regime, and they have assiduously distanced the candidate from the old guard. The campaign manager, Luis Videgaray Castro, is a 43-year-old MIT graduate, and many of his other upper-level advisors were educated abroad, at the University of Pennsylvania, Harvard, and Oxford University.

Ildefonso Guajardo has been touted as a potential minister of the economy if the PRI wins the July election. Guajardo is an U.S.-educated economist with degrees from the University of Arizona and the University of Pennsylvania. He has spent time working at the International Monetary Fund and despite a career in public service was not involved with the PRI during its final years before their 2000 defeat.

Peña Nieto often argues that the greatest difference between his group of senior advisors and the old guard of the party is that his team entered politics during the years of Mexican democracy. This generation (part of the newly emerged middle classes), he argues, is therefore wedded to the ideal of a free and fair Mexico. It looks as if this new guard will have at least six years—one presidential term–to prove their potential.

The PRI has self-confidently stated that, “For Mexico, the elections on July 1st will be a crucial moment that will set the tone for our future and define the U.S.-Mexico relationship for generations to come.” This is a tall order and setting such high expectations carries the risk that failure to overcome entrenched interests—within the party and in the country at large—could lead to disappointment.

Time to change the conversation

Mexico and the United States are so intertwined that it is a sad irony the relationship is so often reduced to drug wars and anti-immigration laws. But neither fences nor denial can reverse the nations’ shared future. Emilio Lozoya, the chief economic advisor to Peña Nieto, argued this point recently in Washington, saying that the U.S.-Mexican relationship must be “more than just drugs and migrants.”

Should he win, Peña Nieto’s administration will have a huge task ahead—including maneuvering a lengthy five-month transition period. The transition period will be a precarious time to set a new agenda, send signals to Washington and the Western Hemisphere, and actively engage in a broad conversation about the future of North America. But it is made even more complicated by not knowing what sort of partner the new president will find to the north—the U.S. elections are scheduled a month before the Mexican president takes office in Los Pinos in December.

Mexican policymakers seem to understand these challenges. But in the United States, what is commonly presented as a full agenda for bilateral cooperation with Mexico usually addresses only trade, drugs, and migration. This focus must be broadened to include the hidden part of the Mexican story. Ignoring critical aspects of this complex relationship makes no sense. Like it or not, Mexico is a large part of the future of the United States—and vice versa.

Michael Werz is a Senior Fellow at the Center for American Progress where his work as member of the National Security team focuses on the nexus of climate change, migration, and security and on emerging democratic powers in Turkey, Mexico, Brazil and India.

For an overview of the elections see the Mexico Institute’s Elections Guide here.

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Michael Werz

Senior Fellow

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