Their People, Our Money
May 26, 2006
Publisher: The Wall Street Journal

The Wall Street Journal

The problem with the debate on immigration is that it has so far looked at just one side -- ours. Somehow, for political or other reasons, Mexico has escaped scrutiny. And yet we are suffering for Mexico's myriad of economic sins. Our part in creating the immigration mess is that we built a society filled with opportunities but surrounded it with a porous border. Mexico's part is that it has failed to produce enough growth, despite massive wealth. The solution is to open the borders even wider -- but open up Mexico, too. If Mexicans can come here, let our capital and ingenuity invest there freely. President Fox, tear down that investment-restriction wall!

In order to keep its people from leaving for the U.S., Mexico needs to create a million jobs a year; currently, it creates half that. Similarly, its growth has been nonexistent since 2000, despite a 5.5% jump in the first quarter of the year due to oil prices and increased sales of auto parts to U.S. manufacturers. Put simply, Mexico has too little investment capital to start, expand or turn around businesses. And failing to attract that capital has an impact. Despite its proximity to the U.S. market and the special status of the maquiladora program, Mexico has seen its share of exports to the U.S. fall since 2000.

If Mexico is to make up that half-million job difference, it will require capital investment to expand its business sector and modernize the energy sector, which generates 38% of government tax revenue. Mexicans don't have access to capital because of the way Mexico is run. It has a big, bureaucratic government that is highly corrupt and controls too much of the economy. To conduct business requires bribes or "facilitation" payments in order to get the bureaucracy to move. Without these, papers don't get filed, permits don't get issued and cases don't get heard in court. Even the police take bribes. Americans can land in jail in the U.S. if they make these payments, due to the Foreign Corrupt Practices Act. As a result, Mexico only gets a fraction of the money it needs to grow.

In addition, Mexico is a highly opaque country, with woeful accounting standards and corporate governance. And then there are Mexico's own self-imposed restraints, many of which were aimed specifically at the U.S. Americans cannot invest in real estate within 30 miles of the coastline, cannot invest in the energy sector and are limited in their investments in the telecom and transportation sectors. And yet, with so many Americans reaching retirement age and looking for warmer, less expensive beachfront property, Mexico could become their top choice -- if it ended investment restrictions and bureaucratic complications. Mexico could be enjoying a real-estate-led boom big enough to lure back its best construction workers, many of whom are now working illegally in the U.S. but could be contractors in Mexico. Capital coming into the real-estate sector would stimulate many other sectors of the economy including banking, insurance, textiles, construction and services.

Then there is oil. Nothing better illustrates the country's problems than Pemex, a gigantic, inefficient, state-controlled jumble -- and the No. 1 foreign supplier of oil to the U.S. Because the Mexican constitution prohibits foreign and private investment in the energy sector, Pemex has a 100% monopoly on Mexico's vast reserves of oil and gas, the largest proved in North America.

Pemex, like much of Mexico, is opaque. It has weak internal accounting, budgeting and reporting practices. It has no independent board members and a dubious relationship with its union. These problems -- which don't even take into account corruption with suppliers, distributors, dealers and others in the supply and distribution chain -- have made it difficult for Mexico to derive as much benefit from its vast oil reserves as it should. Counterintuitively, Pemex has made Mexico one of the world's highest cost energy producers, even in its low-wage environment.

Of all oil producing companies, public and private, in any country, Pemex is the most indebted. As a result, whereas other oil companies have been investing to develop new proved oil reserves, Pemex's reserves have been falling with much of the Gulf of Mexico still unexplored. Even without changing its constitution, Mexico's energy sector could be opened up to U.S. investment by using future oil revenues as collateral to finance the modernization of Mexico's oil sector.

The only way for Mexico to reduce the number of workers it sends to the U.S. is to transform itself into a jobs-producing, high-opportunity economy. The way to begin would be to allow unfettered U.S. investment. As that happens, Mexico should reform its bureaucracy -- to make it more efficient and transparent -- and make a real effort to do away with corruption. President Fox took a first, tentative step with his national transparency commissions. The next step is to clean up the nation's police force.

Mexico is a rich country, exporting its troubles north while pretending to fix them. It must do better. By creating an environment conducive to investment and relaxing restrictions, jobs will be created, and immigration will slow. A rapidly developing Mexico would induce would-be immigrants to stop seeking opportunities far from their homes and families, and start seeking them at home.

Messrs. Kurtzman and Yago are, respectively, senior fellow and director of capital studies at the Milken Institute.