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Wednesday, July 09, 2003

Now It's Labour Reforms in Mexico

David Hale is arguing that Mexico is now too expensive for it's own good. Solutions: among other things labour market reforms. Germans, are you ready for another round?

The point of my irony is not that some labour market reforms which improve mobility, flexibility and efficiency may not indeed be welcome and necessary, but that we need to look very carefully at what lies in the small print of all this. Simply setting the wage rate in China as a standard, and moving the whole world towards it, is not a reasonable policy for anything. So we need to take a second look at growth, how to achieve it, and why we may be having difficulty doing so, and not simply fall into universal mantras. This, I think, is my point.

The shock that may help to break prolonged political gridlock is the rise of China. There is now a widespread fear among Mexico's elite that China will soon displace it as America's second largest trading partner. For this reason, Mexico was the last country to approve China's entry into the World Trade Organisation in 2001.

Mexican concerns about China are legitimate. The manufacturing companies in the maquiladora assembly zone have lost more than 200,000 jobs since 2000, in part because of companies transferring production to Asia. Mexican labour costs are three to four times as high as China's. Mexico's electricity costs twice as much because of a lack of foreign investment in the energy sector. Mexico depends heavily on exports of traditional cyclical goods, such as cars and television sets, while Taiwanese companies are rapidly expanding China's high technology exports. Foreign direct investment into Mexico amounts to $12bn-$14bn a year. China's FDI is now running at nearly $55bn a year, with $16bn in the information technology industry alone. A growing number of Japanese, US and European companies now regard China as an attractive manufacturing base for global exports, not just a robust market for domestic consumption. They will ensure that China continues to expand its share of world trade at the expense of other countries.

The question for Mexico is whether China will precipitate as dramatic a change in economic policy as Mr Salinas' trip to Davos. He was able to promote Nafta at home because Mexico was still a one-party state. But today the PAN, the PRI and the leftwing Democratic Revolutionary party (PRD) must find common ground on electricity privatisation, tax reform and labour market deregulation in order to reduce Mexico's manufacturing costs. If they fail, not only will Mexico lose market share in the US but there will also be a continuing exodus of manufacturing jobs and rising unemployment.
Source: David Hale, Financial Times

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