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Mexico's Job-Creation Problem

Aug 03, 2007

Publisher: The Wall Street Journal
Why do so many Mexicans leave their families, friends and homes to make the arduous journey to the United States?

It's a central question to the immigration debate and is essential for setting workable policies. But it's also a question that has rarely been asked.

After looking at the numbers, what I discovered is that Mexico has a job-creation problem. During President Vicente Fox's six years in office his goal was to create six million jobs across all sectors of the economy. Mr. Fox fell far short of that goal. Between 2000 and 2006, the period when he was in office, Mexico created only 1.4 million jobs. Though accurate figures are difficult to arrive at, the General Accountability Office estimates that during each year of Mr. Fox's presidency between 400,000 and 700,000 illegal immigrants arrived in the United States from Mexico. The number of illegal immigrants from Mexico was roughly equal to the number of jobs Mr. Fox did not create.

If one were to do a CAT scan of Mexico's economy, one would find a country with the potential to become a job creator's paradise. Mexico has far more oil than fast-growing Dubai (a net labor importer) and almost as much as Qatar, another labor importer. If Mexicans working in the U.S. are any indication, Mexico has a work force that is trained and disciplined. With thousands of miles of coastline, Mexico is a tourist haven. It shares a border with its largest trading partner. But even with these positive attributes, Mexico's job creation engine has stalled.

Research shows that big companiesi? 1/2 especially big Mexican companiesi? 1/2 do not create many jobs. Jobs are created by entrepreneurs who start companies from scratch. To perform their job-creating function, entrepreneurs need access to capital, which is where Mexico falls short. According to the Milken Institute's 2006 Capital Access Index, Mexico ranks a dismal 43rd with regard to capital access out of 122 countries studied. To compare, the U.S., the world's top job-creating developed country, ranks No. 4, and Hong Kong, Asia's most vibrant, entrepreneurial hub, ranks No. 1.

Mexicans with drive, ambition and a willingness to take risks sneak across the border to the U.S.. But they don't just come for jobs. They also come for the capital. When these immigrants arrive they don't just sell their labor, many start small businesses in the food, construction, maintenance and landscaping trades. When those businesses are launched, illegal Mexican immigrants hire other illegal Mexican immigrants. A great deal of Mexico's job creation takes place inside the U.S.

Mexico's financial and economic structures fail at providing entrepreneurs with the capital they need to create jobs. The economy is too concentrated, with nearly half of it controlled by a single familyi? 1/2 that of the billionaire Carlos Slim. A handful of other families own the bulk of Mexico's remaining wealth. Mexico's legal and business structures effectively fence off from competition whole sectors of the economy. In telecommunications, petroleum and much of the real-estate and tourism sectors, real competition is restricted. Without going the route of Venezuela, Mexico could jumpstart its job-creation engine by opening its economy to competition.

Mexico's oil wealth is another job-creator's nightmare. It is controlled by a single government-owned company, Pemex. Even with today's high oil prices, Pemex is the world's most heavily indebted oil company and one of the least efficient producers. Pemexi? 1/2 whose monopoly status is protected by the Mexican constitution'is so bogged down by bureaucracy, conflicting interests, political meddling and sweetheart union deals, that it has failed to find any new oil reserves in years. It is not that new oil reserves don't exist. Last year, Chevron found huge deposits in the U.S.-portion of the Gulf of Mexico. The problem with Pemex is that it isn't really looking for oil. If Mexico's oil industry were opened up to competition, even within the confines of its constitution, not only would more oil be found, more jobs would be created.

Mexico's financial system is to entrepreneurship what sharks are to a swimmer's beach. Banking, which is conservative and risk-averse, dominates Mexico's financial system, accounting for about 55% all financial assets, compared with just 24% of all financial assets in the U.S. In the U.S., the capital markets and a diverse array of funds provide most of the capital. If that weren't enough, Mexico's top three banks control 60% of all banking assets. If entrepreneurs are turned down by the first bank, they really have only two more places to apply. For a country its size, Mexico's stock and bond markets are hugely underdeveloped when measured as a percentage of GDP.

Household credit is also scarce in Mexico and amounts to only about 5% of GDP, versus 65% in the U.S. Without access to credit, Mexico's consumer and retail sectors have not grown sufficiently. These sectors could be vibrant job-creation engines if Mexicans had wider access to credit.

But perhaps most strikingly, Mexico has not yet succeeded in building a robust residential mortgage market. Whereas the U.S. has $8.2 trillion outstanding in residential mortgages, Mexico, with a population a third the size of U.S., has just $47 billion outstanding. Not only that, more than half of Mexico's homes are self-built and substandard. As a result, the Federal Reserve Bank of Dallas estimates Mexico has a housing deficit of five million units. If mortgages were cheap and plentifuli? 1/2 through the increased use of mortgage securitization tools, for examplei? 1/2 the epicenter of demand for Mexico's trade- and craftsmen would not be California, Arizona, Texas and Florida. It would be in Mexico.

Solving the immigration problem will not happen unless Mexico solves its job-creation problem. To do that, Mexico needs to modernize and open up to competition its antiquated, concentrated, economic and financial systems. For decades, Mexico has argued that if it were to do so, America would take over. It's time to dispel that urban myth with a little reality. If Mexico can succeed in providing capital to risk-taking Mexicans, they will create jobs in Mexico, not just in the U.S.

Mr. Kurtzman, executive director of SAVE and senior fellow at the Milken Institute, is co-author of the forthcoming book, i? 1/2 Global Edge: Using the Opacity Index to Manage the Risk of Cross-border Businessi? 1/2 (Harvard Business School Press).