Mexico's Arrested Development

June 19, 2006

Santa Monica

Description

Solving the issue of illegal immigration will take more than fences and green cards on the American side. It will take drastic reform of Mexico's economy and social structures to enable both Mexican entrepreneurs and U.S. investors to build companies and create jobs south of the border.

This examination of Mexico's economy and needed reforms was presented by Milken Institute Senior Fellow Joel Kurtzman and Glenn Yago, Director of Capital Studies, at a special briefing for members of the Milken Institute Associates.

According to both researchers, Mexico has tremendous economic potential that it's not reaching because of a lack of transparency in its markets, corruption and security issues that not only keep out vital foreign investment, but also make it difficult for Mexican entrepreneurs to get the capital they need to build a business and create jobs.

"The Mexican economy is operating at half capacity," said Kurtzman.

Because of this, Mexico forgoes an estimated 2.6 percent of GDP each year due to the poor way in which its institutions function and another 2 percent due to things like corruption, Kurtzman and Yago said. If Mexico reformed its institutions and cleaned up corruption, it could grow at Chinese rates, they added.

Nearby Mexico is losing out to faraway China. Mexico's share of U.S. imports is declining compared to China. As late as 2001, Mexico's share of U.S. imports was close to 12 percent, while China's was only about 8 percent. In 2005, while Mexico's share dropped to under 11 percent, China's had climbed to nearly 16 percent.

By reforming its economy — including its vital energy industry — Mexico can begin to improve its investment climate, thus producing more jobs that will keep its citizens at home. Failure to do anything will cause Mexico's economy to stagnate, sending yet more immigrants north, Kurtzman and Yago said.

For further reading, see "Their People, Our Money," an op-ed by Kurtzman and Yago that appeared in The Wall Street Journal.

This discussion was one of a series of private meetings open to members of the Associates. To join, please contact Mindy Silverstein, director of Milken Institute Associates, at (310) 570-4634, or by e-mail at msilverstein@milkeninstitute.org.