Superior Mayan engineering

I met a Mayan engineer on the plane last December. He was headed to Detroit to learn something about some mechanical engineering thing that I didn't understand. He handed me his business card, very politely, and made fun of me and all other Americans for predicting an apocalypse later that week. He told me that the Mexican economy was doing great, especially in the south of the country, and that I should come to visit him in Mexico City.

Now, if I were Tom Friedman, that conversation would be enough to make me believe in the power of the Mexican economic miracle. But I'm not Tom Friedman, so instead I decided to check the numbers. Here is Mexico's GDP per capita (PPP):

As you can see, the income of the average Mexican, after stagnating in the early 2000s, took off in 2003 and has grown by over 64% since that time (more, since that data is from 2011). That is a 6.4% annual rate of growth! (Update: Oops, I noticed that this wasn't inflation-adjusted. The actual numbers are more modest; here's the inflation-adjusted series from 1995 through 2010, and here's Mexico's real growth rate since 1999. The actual growth is more modest than the non-inflation-adjusted number, but still solid.)

OK, so the "average" Mexican is quite a bit richer than two decades ago. But is that the median, or the mean? Aren't all those gains being pocketed by the rich? Well, as it turns out, no. In 1998, Mexico's Gini coefficient was 53.1; in 2008, it was 51.7. Now that's a small change, but the fact that it's negative means that Mexico's poor and middle class have shared equally in that rapid growth. Of course, the number is still too high, and that tiny change is not a trend. But Mexico's rising tide is lifting all boats.

It's not hard to see what's driving the growth: Mexico's exports have exploded since NAFTA and more than doubled since 2003. Most of those exports go to the U.S., but Mexico is diversifying its markets to places like India. Nor are those exports things like fruit and oil and minerals; Mexico is a booming manufacturer of cars, electronics, aircraft, and appliances. In fact, Mexico exports more manufactured products than the rest of Latin America combined. Mexico - not China - is now the world's leading exporter of flat-screen TVs and fridge-freezers. Those are high-tech products, and those factory jobs are good jobs. Mexican engineering is powering the world...or this corner of it, anyway.

So what's the point of this post? "Yay Mexico"? Well sure, but actually it's a lot deeper than that. It's about two competing narratives of how countries become rich and happy.

For a long time, Mexico and other Latin American countries - and countries elsewhere in the Global South, like India - couldn't pull off the trick of getting rich. They tried import-substituting industrial policy...didn't work. They tried free trade and deregulation...didn't work. Some experimented with forms of quasi-socialism...didn't work. The lands of Europe and America and Japan, the former imperial powers, were rich and powerful and industrialized; the lands of the South were agrarian, resource-based, poor, and hideously unequal, and nothing seemed likely to change that.

I'm not sure, but I have to imagine that this repeated failure made a certain narrative of national development very seductive in Latin America. That narrative goes like this: Rich countries get rich by stealing their wealth. Imperial powers got rich because they seized the wealth of the lands they colonized. And they stay rich by continuing to exploit the resource wealth of the poor countries in the global South. Even within rich countries, the rich people get and maintain their wealth by forcibly extracting labor and land from the poor people. In other words, there is a lump of wealth in the world, and it goes to the people who have the power.

We've all heard that narrative at some point.

Now, I don't want to get too down on people who believe that narrative, because that really was the way the world worked for many thousands of years. Almost all economy was farming, logging, mining, fishing, etc. The only capital was land, and land was fixed. Grab the land, and you grab the wealth. A zero-sum game where kings ruled and slaves starved.

And in plenty of countries today, something similar is still true. In countries suffering from the "resource curse", most of the income comes from oil drilling, or mining, or farming, or logging - in other words, from land. The people who own the land get fabulously rich, and the poor people languish in poverty, with little to do but open little shops and stalls in the slums, or work the mega-farms of the land barons. The rich people buy the government, and use it to stifle any attempt at a change in the status quo. Meanwhile, the government doesn't invest in things like education and health, because its tax revenues come from land instead of human capital.

So the zero-sum narrative is not obviously wrong and dumb. But it's not the only narrative. And it is not the narrative of industrialization. And we know this because of...South Korea.

South Korea has never had its own empire. It was desperately poor, a tributary of China and Russia, then a colony of Japan. It has no natural resources to speak of. And yet, beginning in the late 20th century, South Korea began to get rich very rapidly. And it continued getting rich. And now it is rich. With those riches came not a rise but a fall in inequality, and of course huge improvements in health. The rising tide lifted all Korean boats. Nor has that country been blighted by pollution. In fact, South Korea is just an awesome place to live.

How did South Korea pull off that trick?

Well, no one knows exactly what worked and what didn't; all we see is the overall result. But in general, South Korea followed a blueprint outlined by America, Germany, and Japan. That blueprint is called, for lack of a better term, "manufacturing-export capitalism". We don't really know what countries can do to get rich, but the really successful ones all seem to do something that looks like "manufacturing-export capitalism". And it's basically what Mexico is doing right now.

What is "manufacturing-export capitalism"? Basically, it involves policies designed to get a country to export as much manufacturing output as possible. That means, first and foremost, capitalism, since private companies are good at exporting manufactured goods and state-owned companies are not. But it usually involves a huge raft of government policies to get the country into a position to do lots of manufacturing exporting. Those include education (because you need a literate workforce), public health (because you need a healthy workforce), infrastructure investment, urbanization (because you need the workers close to each other and to consumers), property rights (especially for farmers to sell their land and move to the cities), and rule of law. It also means giving the working class the feeling that they have a stake in the economy and society, that society cares about them and not just the rich people. That's really important, since strikes and labor strife can make a country a very unattractive hub for manufacturing.

"Manufacturing-export capitalism" also involves trade. Lots of trade. Not necessarily "free" trade, though. It's not clear why, but things like a cheap currency and various types of "financial repression" seem to really help. Export incentives, FDI incentives, and other types of industrial policy also seem useful, though probably less crucial than the cheap currency. "Free trade" agreements with rich countries (e.g. NAFTA) are essential for securing markets for a developing country's manufacturing exports.

Why does "manufacturing-export capitalism" work so well? No one really knows, but it looks like the model that works. Actually, economists do have a sort of theory of why it works - namely, Paul Krugman's "New Economic Geography". But it's a pretty simplified version of the real thing.

But in that theory, there's a catch - not all countries can industrialize at once. There's only a certain amount of manufacturing exports that the rich countries can absorb. So countries have to wait and develop one by one, which is unfortunate, and which is frustrating. Actually you can almost see this happening in East Asia - first Japan got rich, then Korea and Taiwan, now China, tomorrow maybe Vietnam. Yes, it's crappy to languish in the queue while the fast movers finish their economic miracles...but the good news is, the more rich countries there are, the more can industrialize at the same time.

So who gets to hop on the development train first? Education, health, urbanization, functioning government, and "inclusive institutions" definitely seem to all play a role, but proximity to a rich country seems to really help. Which is almost certainly why Mexico is the first of the Latin American countries to take off into full industrialization mode - if that is what is truly happening there.

Of course, "manufacturing-export capitalism" has eventual costs. When growth slows and the economy shifts toward services, the institutions that encouraged manufacturing exports are no longer relevant and often become parasitic and stifling (this is evident in Japan, for example). But by then, a country is rich.

So Mexico can win at the game of national development. It can do what South Korea did. And it may already be doing it.

Of course that leaves the question: Should Mexico get rich? The answer is "Of course yes!" Even if you don't think big houses and shiny cars are the true measure of human welfare, you should remember that rich countries have much better health than poor countries. They have much better natural environments than poor countries (though about half of that improvement comes from exporting polluting activities to poorer countries lower down the development chain). They have much less starvation and insecurity than poor countries. And they are happier.

(This doesn't mean I think that the Right has it right in Latin American countries. I know little about the situation, but anecdotes suggest that conservative forces are typically much more interested in preserving the corrupt, land-based economy in which they live like kings, than in kicking off real broad-based industrial development. Anecdotes also suggest that center-Left leaders, like those currently in power in Brazil, often seem to be the most open to modernization and development.)

(This also doesn't mean I think everything is great in Mexico. Far from it! Mexico has a bloody gang war, high inequality, an education system that needs lots of work, and still a lot of poverty. But I do think Mexico is on the right track in terms of economics.)

In any case, back to the master narrative: Real national wealth does not come from theft. It comes from reorganizing society into a more productive form. As South Korea did. As Japan did before that. As Mexico is hopefully doing right now. The nations of the Global South were late to the industrialization party, but I think they are finally here.

Don't believe false narratives. If you think the apocalypse is coming, chances are you're just going to get laughed at by a Mayan engineer on a plane.

(See? I gave it a schmaltzy Tom Friedman ending after all!)