It is not that Mexico has failed to modernize its export industries. It is losing ground to China primarily because China has changed even faster and more broadly, particularly in educating knowledge workers. As business consultant Daniel H. Rosen pointed out in an essay in The International Economy journal (Spring 2003), Mexico and China both saw their share of global exports grow in many of the same areas during the booming 1990s-from auto parts to electronics to toys and sporting goods-but China's share was growing faster. This was not just because of what China was doing right but because of what Mexico was doing wrong, which was not steadily honing its competitiveness with micro-reforms. What Mexico succeeded in doing was creating islands of competitiveness, like Monterrey, where it got things right and could take advantage of proximity to the United States, but the Mexican government never had a strategy for melting those islands into the rest of the country. This helps explain why from 1996 to 2002, Mexico's ranking in the Global Competitiveness Report actually fell while China's rose. And this was not just about cheap wages, said Rosen. It was about China's advantages in education, privatization, infrastructure, quality control, mid-level management, and the introduction of new technology.
“So China is eating Mexico's lunch,” concluded Rosen, “but more due to the Mexican inability to capitalize on successes and induce broader reform than to China's lower wage workers per se.” In other words, it's reform retail, stupid. According to the Doing Business in 200S report, it takes an average of fifty-eight days to start a business in Mexico, compared with eight in Singapore and nine in Turkey. It takes seventy-four days to register a property in Mexico, but only twelve in the United States. Mexico's corporate income tax rate of 34 percent is twice as high as China's.
The McKinsey Quarterly report “Beyond Cheap Labor” noted that since 2000, as China joined the WTO and started to take advantage of the flattening of the world, Mexico lost 270,000 assembly jobs, and hundreds of factories closed. But the main advice the report had for Mexico and other middle-income countries feeling squeezed by China was this: “Rather than fixating on jobs lost to China, these countries should remember a fact of economic life: no place can remain the world's low-cost producer forever-even China will lose that title one day. Instead of trying to defend low-wage assembly jobs, Mexico and other middle-income countries should focus on creating jobs that add higher value. Only if more productive companies with higher-value-added activities replace less productive ones can middle income economies continue down the development path.”
In short, the only way for Mexico to thrive is with a strategy of reform retail that will enable it to beat China to the top, not the bottom, because China is not focused on beating Mexico as much as it is on beating America. But winning that kind of race to the top takes intangible focus and will.
You cannot maintain rising standards of living in a flattening world when you are up against competitors who are getting not only their fundamentals right but also their intangibles. China does not just want to get rich. It wants to get powerful. China doesn't just want to learn how to make GM cars. It wants to be GM and put GM out of business. Anyone who doubts that should spend time with young Chinese.
Said Luis Rubio, president of Mexico's Center of Research for Development, “The more self-confidence you have, the more it diminishes your mythologies and complexes. One of the great things about Mexico in the early 1990s was that Mexicans saw that they could do it, they could make it.” A lot of that self-confidence, though, has been lost in Mexico in recent years, because the government stopped reforming. “A lack of self-confidence leads a country to keep chewing on the past,” added Rubio. “A lack of self-confidence [in Mexico] means that everyone in the country thinks the U.S. is going to take Mexico to the cleaners.” That is why NAFTA was so important for Mexico's self-confidence. “What NAFTA accomplished was to get Mexicans to think forward and outward instead of inward and backward. [But] NAFTA was seen [by its architects] as an end more than a beginning. It was seen as the conclusion of a process of political and economic reforms.” Unfortunately, he added, “Mexico did not have a strategy for going forward.”
Will Rogers said it a long time ago: “Even if you're on the right track, you'll get run over if you just sit there.” The flatter the world gets, the faster that will happen. Mexico got itself on the right track with reform wholesale, but then, for a lot of tangible and intangible reasons, it just sat there and reform retail stalled. The more Mexico just sits there, the more it is going to get run over. And it won't be alone.
Companies and the Flat World