Good Neighbors, Good Competitors?

What’s wrong with Mexico?

Both Canada and Mexico border the US. But while Canada’s economy is very similar to the US in terms of income and structure, per-capita income in Mexico is 30% that of the US. Mexico is hampered by poor education and a system of state monopolies that dominate domestic production, especially of oil.

In 1938 Mexico nationalized its oil industry with great fanfare. Since then, the national oil company—Pemex—has been a model of inefficiency and cronyism. The problems with a state monopoly are easily visible with Pemex: there is little incentive to innovate, economize, or improve their processes. As Adam Smith predicted over 200 years ago, administrators of a monopoly tend to “repose themselves upon their benefices” and avoid rocking the boat. So productivity and income lag behind.

But this may change soon. Mexico recently announced that foreign companies can develop Mexican oilfields; that competitors can come into the largely monopolized telephone industry; that greater competition in financial services may be forthcoming. Opening up the Mexican economy should increase productivity and incomes, with significant impacts on immigration.

Growth in Mexico will be good for them and good for the US. With over 100 million consumers, their fortunes will have a big impact.

Douglas R. Tengdin, CFA

Chief Investment Officer

Leave a Reply

Your email address will not be published. Required fields are marked *