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June 24, 2012

Boom Times in Mexico Despite the Drug War

Despite the grisly death toll (50,000 dead since 2007) and horrifically public nature of the violence in Mexico’s drug war, business is good in Mexico. The city of Monterrey, situated a mere 40 miles from where 49 decapitated corpses were found on the side of a highway last month, is booming.  The Financial Times reports that Monterrey’s home state of Nuevo León is experiencing its biggest foreign investment surge in history.  It is expected to receive $2 billion in direct foreign investment this year.

Against the backdrop of the remorseless violence between gangs, the police, civilians and the army, Mexico has become an increasingly important logistical center for exporting to the United States and to the rest of Latin America. The big reason Mexico is attracting money is because the country has become more competitive compared to China.  Wage inflation has nearly closed the wage gap separating Mexican and Chinese labor costs, and rising transport costs make it more expensive to base operations in Asia.

And the violence does not seem to be affecting the foreign companies flocking to the land of the eagle and the snake:

But what about the violence? Alejandro Hope, a security expert at the Mexican Institute for Competitiveness in Mexico City and a former high-ranking government intelligence official, argues that foreign companies in Mexico are sometimes physically close to the violence but are also largely immune to it. Although a Mexican subsidiary of PepsiCo was attacked with fire bombs last month, there does not appear to be a trend towards attacking multinationals.

“Organised crime doesn’t know what to do when it comes to multinational companies,” Mr Hope explains. “It has made a business of extorting small and medium-sized Mexican companies but, when it comes to multinationals, the drug lords don’t even know who to call.”

As horrifying and tragic as Mexico’s drug war may be, it’s encouraging to see that it hasn’t deterred businesses from taking advantage of the country’s economic strengths. It is also interesting to note that Mexican opinion remains resolute for law and order and against the cartels. Mexicans want their country back and they are prepared to fight to clean it up.

Americans have special reasons to be thankful that employment is booming in Mexico. A healthy economy south of the border reduces immigration pressure on the north. Mexico is not a basket case, and it is not a bottomless well of destitute migrants seeking work in the US. It is one of the world’s more dynamic economies and as its fertility rate continues to drop and its population continues to stabilize, it will look less and less Central American and more and more North American.

Mexico is likely to be an important and valued partner for the US in the 21st century, and Americans should welcome and support the increasing prosperity there.

Posted in Latin America, Quick Takes
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  • Color me skeptical

    “Mexico is not a basket case, and it is not a bottomless well of destitute migrants seeking work in the US. It is one of the world’s more dynamic economies and as its fertility rate continues to drop and its population continues to stabilize, it will look less and less Central American and more and more North American.”

    Wishful thinking. I’d love for this to be true, but I wouldn’t bet on it. Mexico is, in fact, a basket case.

  • An

    The drug trade by and large has been a good thing for Mexico. Tens of thousands have lost their lives but that is a small price to pay in the grand scheme of things. All the violence and murder is a “bug” that Mexico can live with. Mexico has a labor surplus anyways, that is why so many have ventured to the US for work. The violence is concentrated on Mexican states and the people who are dying are criminals, very poor, Central American migrant workers. A class of people the elites and upper middle-class don’t care much for anyways.

    The last time I checked illegal drugs brought $30-40 billion of hard currency to Mexico. On the low side, the profit margin of drugs is 80%. Let’s assume the lower figure of $30 billion, that means drugs bring a “profit” of $24 billion to Mexico. An 8% profit margin is considered very good for most businesses. Not everyone can be Google or Apple with 30+% margins, but not everyone is a Chinese manufacturer such as Foxconn that eak out a 1.5% profit margin. For Mexico to generate $24 billion in hard currency in an honest way based on an 8% profit margin, whatever means they did would have to generate $300 billion in revenue. Mexico’s GDP is slightly above $1 trillion dollars. Drugs more than oil or tourism is fueling Mexico’s development. Calderon is fighting this drug war but their really is no incentive for Mexicans to stop the flow of drugs.

    Now many might argue that the drug money benefits a small handful of people, but I disagree. The drug money flowing to Mexico is not being wired from….say… Bank of America to some Mexican bank. It’s entirely cash. You can’t transfer $400 billion worth of cash (over the span of a decade) from one country to the other without raising eyebrows and suspicions. The drug lords are not sleeping on mattresses of cash and do not have billions of dollars in a vault some where. The money flowing to Mexico is being laundered through all sorts of businesses. The physical cash is being transferred to legitimate Mexican businesses and that cash is being circulated back to the US economy.

    Mexico has no incentive to end the drug war the way they have no incentive to end illegal immigration. Illegal immigration allows Mexico to deal with the issue of surplus labor, turning a liability into an asset. The poorest and least educated Mexicans work in the US, and send roughly $18-25 billion in remittances back. The US pays for their education, health, and other social needs. A liability is now turned into an asset. This is why the Mexican government created comic books a few years ago to show their citizens how to cross the border safely.

  • http://wwrtc.blogspot.com Art Deco

    You might notice the following:

    1. High crime rates. The homicide rate in Mexico is currently 18 per 100,000. There are municipalities in our own country which had such rates for periods measured in decades during the period running from 1890 to 1930 and from 1960 to 1995, including the town I grew up in (which was not a basket case either). A rate of 18 per 100,000 is high for an Arab country and high for the Far East, but quite unremarkable in Latin America or Africa.

    2. Deficient living standards. Per capita income in Mexico is about one-fifth that of the United States. That is fair-to-middlin in this world and (to the extent that such can be compared over periods of time of that length) characteristic of a standard of living roughly comparable to the one in the America in which my grandparents were coming of age. Of course, there is an intense skew in the Mexican distribution of income, and that changes things. (This last is common in Latin America)

    3. Political corruption and poor decision-making. Which, regrettably, is an endemic human problem. It ought be noted that Mexican political institutions have had no breaches of continuity since 1920, that the last head of state who might have been described as a despot was run out of the country in 1934, and that systemic political repression ceased in 1940. It is a constitutional republic, albeit a crooked one, and the political order is more competitive and democratic than it ever has been.

    Mexico is not a basket case. Haiti is a basket case. Mexico has the sort of chronic social problems you see in Latin America. Social life is, well, problematic (in Mexico and everywhere else).

  • Mick The Reactionary

    @Mead

    “ [Mexico] is one of the world’s more dynamic economies and as its fertility rate continues to drop and its population continues to stabilize, it will look less and less Central American and more and more North American.”

    A bit of humorismo is always good, Senor Profesor.

    How about adding some cartoons?

  • Corlyss

    “not a bottomless well of destitute migrants seeking work in the US.”

    Great news! When will we see evidence of this stunning reversal?

  • http://wwrtc.blogspot.com Art Deco

    The last time I checked illegal drugs brought $30-40 billion of hard currency to Mexico.

    Where did you check?

    This study from the Rand Corporation estimates that Mexican drug traffickers earned (liberally estimated) about $2 bn from exports of Marijuana to the United States.

    http://www.rand.org/pubs/occasional_papers/2010/RAND_OP325.pdf

    (scroll down to pages 33-35 for the money quotes)

    The study only concerned marijuana exports. This study from the Office of National Drug Control Policy estimated that retail expenditure on marijuana amounted to about 37% of retail expenditures on street drugs by American consumers ($35 bn of $95 bn expended).

    http://www.whitehouse.gov/sites/default/files/page/files/wausid_report_final.pdf

    Posit for a moment that Mexico’s export mix mirrors the consumption mix of the American market. That would suggest $5.5 bn in export revenue, or 0.5% of legitimate domestic product.

  • CIM

    Art Deco-

    There are more drugs that pass the border than marijuana.

  • Maid Abusing Socialist

    Sad– What type of creep celebrates a place for safety and cheap labor it offers multi-national corporations while simultaneoudly shrugging off as irrelevant the predations visited upon local businesses by narco-criminals (usually working, of course, hand in hand with local authorities)?

    Red model, blue model– what the [heck] is this– Narco Pol Pots Meet the Washington Consensus model?

  • CIM

    Art Deco-

    Here is a BBC article on it from 2008.

    http://news.bbc.co.uk/2/hi/americas/8588509.stm

    The National Drug Threat Assessment produced by the US Justice Department in 2007 estimated that drug gangs were moving an estimated $40 billion in cash back into Mexico across the border each year.

  • CIM

    Art Deco-

    “The study only concerned marijuana exports. This study from the Office of National Drug Control Policy estimated that retail expenditure on marijuana amounted to about 37% of retail expenditures on street drugs by American consumers ($35 bn of $95 bn expended).”

    Your accounting is off. You cannot use the consumption of the American consumer to mirror Mexico’s export mix. It’s like saying the Apple’s or Walmart’s profit margin in the US is the same profit margin for the Chinese manufacturer.

    http://www.pbs.org/wgbh/pages/frontline/shows/drugs/special/math.html

    Above is an old article from PBS, but it illustrates the math behind the illegal drug trade well. From their numbers an 80% profit margin is realistic when the production cost in Colombia for cocaine is $1500 per kilo but the US street price can be high as $66,000 per kilo. In the article a former US DEA agent says smugglers can lose 90% of their drugs and still earn a profit.

    “The average drug trafficking organization, meaning from Medellin to the streets of New York, could afford to lose 90% of its profit and still be profitable,” says Robert Stutman, a former DEA Agent. “Now think of the analogy. GM builds a million Chevrolets a year. Doesn’t sell 900,000 of them and still comes out profitable. That is a hell of a business, man. That is the dope business.”

    “What keeps the drug industry going is its huge profit margins. Producing drugs is a very cheap process. Like any commodities business the closer you are to the source the cheaper the product. Processed cocaine is available in Colombia for $1500 dollars per kilo and sold on the streets of America for as much as $66,000 a kilo (retail).”

  • http://wwrtc.blogspot.com Art Deco

    If you have a problem with the Rand Corporation’s methodology, just what is it?

    I am making an extrapolation to get a rough idea of the dimensions of the problem. About a quarter of Mexico’s enumerated exports are bound for the United States. A guess derived from both extrapolations would arrive at a figure of $22 bn in total exports, or about 2% of Mexico’s legitimate economy.

  • Jose Angel Flores

    Mexico buys nearly 10% of all american exports and is the US’s second largest partner. Mexico exports more manufactured goods than Brazil and Argentina together, a third of all manufactured goods exported from latin america come from Mexico, the second largest economy in latin america, and the 11th in the world. Mexico’s drug problem is also the US’s, Central America’s and Colombia’s and Venezuela’s, you name it. But Mexico is fighting them hard. We don’t depend on US Dollars derived from drugs, in fact we have laws governing deposits of US dollars in our banks, Mexican citizens cannot deposit more than one thousand five hundred dollar’s a month and needs a special permit to deposit up to four thousand. Deposits in cash are also taxed heavily. Drug’s money has never impacted our economy as a nation, it may impact small towns, but not our economy as a whole, that is a huge myth with no fundamentals. Currently, Mexico is beginning to grow thanks to reforms and free-trade agreements signed with Chile, Europe, Costa Rica, Colombia, Peru, US and Canada and other nations.

  • http://facingzionwards.blogspot.com/ Luke Lea

    ” Wage inflation has nearly closed the wage gap separating Mexican and Chinese labor costs”

    Would you like to back that up with some hard data?

  • http://thepencilofnature.net Lorenz Gude

    I find it implausible that Mexican gangsters will remain too disorganized or ignorant to extort money from multinational companies operating there. I’ve spent time on the border and I also find it difficult to be optimistic about the situation. What I do see is a difficult relationship between two countries of different levels of wealth- a relationship further distorted by drugs. I actually like Mexicans and know them to be hardworking family oriented people. Mexicans will work hard – as hard as I sometimes had to work on the farm growing up. I don’t like their criminals. Read Victor Davis Hanson for an insight into how Mexican criminals make life in the California’s central valley untenable. So I am all for Mexican prosperity. But America still has a drug problem and that will keep the Mexican gangsters in business indefinitely. We clearly have failed to stop drugs on the supply side. A 90% Interdiction rate is what drives the price up so that whatever gets through turns a big profit. What if we attacked the demand side and made drugs available at cost in clinics.? Well, lots of bad things would still happen, but I would sure like to watch the drug lords squirm.

  • thibaud

    Another red herring from VM. The big challenge for the US re. Mexican immigration has nothing to do with whether Mexico can fairly be called a “basket case.” Neither does it have anything to do with the drug wars, or with decisions taken in the Distrito Federal.

    Over the last 30 years, Mexican immigration to the US has been just as strong in years when Mexico’s overall economy was booming as it has been when Mexico’s economy was in recession.

    The driver of emigration to the US by poor and unskilled campesinos from Mexico was never the health of the Mexican industrial economy _OVERALL_, but the chronic corruption and economic malaise of the Mexican agricultural sector in particular.

    There has been no meaningful reform of this sector in decades, and in many ways, the carveouts that US agribusiness extracted from NAFTA in 1996 have actually made the Mexican rural malaise even worse: the US is, unbelievably, dumping billions of dollars in subsidized corn into Mexico each year.

    This is one among many reasons that small-scale farmers and the Mexican rural proletariat have and will continue to seek to enter the US in the hundreds of thousands each year – unless and until such time as our elites summon the will to secure the border, verify and deport.

  • DrMaturin

    I travel to Guadalajara periodically, most recently last month, and speak Spanish and I can attest to the accuracy of this post. That city is doing quite well. There is a lot of new foreign investment, employing many locals. There are several new and quite busy luxury hotels. The restaurants and cafes do a brisk business and the streets are full of recent model cars.

    When I ask people about the drug war and how it affects their lives they shrug and tell me that they have learned to live with it. It’s just something in the background to most people.

  • Mick The Reactionary

    @Luke Lea says:

    “” Wage inflation has nearly closed the wage gap separating Mexican and Chinese labor costs”

    Would you like to back that up with some hard data?”

    Data, what data? Why should we care about your stinking data?

    Dr Mead is a PoliSci Professor, he does not need no data to prove his point.
    Prove by assertion is just as good.

  • Mick The Reactionary

    @Lorenz Gude

    “What if we attacked the demand side and made drugs available at cost in clinics.? Well, lots of bad things would still happen, but I would sure like to watch the drug lords squirm.”

    How would you like your middle school kid in a nice suburban school district to have an easy access to cocaine?

  • thibaud

    @ 17 – Mick: VM doesn’t do data. But the Boston Consulting Group does – here’s their take, from last summer:

    http://www.bcg.com/media/PressReleaseDetails.aspx?id=tcm:12-75973

    It’s silly to talk about “boom times” in Mexico. What we’re seeing is increasing convergence of wages around the world, as US wages fall and Chinese and other East Asians’ wages rise. This doesn’t do much for Mexico.

    Latin America’s in the middle and will benefit somewhat, but there will always be severe pressure on Mexico as more and more low-cost latin nations improve their productivity and expand trade with the US.

    btw, per BCG, Chinese wages are at about $3/hr now and are expected to reach $6 an hour on average in another few years. US workers per BCG are currently 3.4x as productive as Chinese workers, which means that, for US producers to preserve the benefits of cheaper logistics, we can expect US manufacturing wages on average to hit a hard ceiling of around $20 per hour.

    No wonder the Reshoring initiative in Chicago calculates that we’ve added no less than TEN THOUSAND – yep, believe it – 10,000 new manufacturing jobs in the last two years alone! Booyah!