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Mexico: One Country, Two Economies

Oct. 5, 2017 The country’s status as an up-and-coming economic power raises some questions that can be answered by geopolitics.

Deep Dive

|October 5, 2017


Mexico is a bit of a paradox. Its economy is the 15th-largest in the world by nominal gross domestic product ($1.06 trillion) and the 12th-largest by purchasing power parity. At first glance, these rankings seem well-suited for a country with a booming, high-value manufacturing sector and sophisticated business class. And yet, the idea of Mexico being a leader of economic growth and purchasing power contrasts sharply with its extreme poverty and dependence on subsistence farming in some places. The coexistence of these two realities raises the question: What geopolitical factors have contributed to this simultaneous development of two distinct economies in one country?

Two Mexicos

The phrase “Two Mexicos” has been used by academics, political analysts and the like to describe and discuss the economic and social disparities among Mexican states. A dual economy is not unique to Mexico; it’s a concept observed in the economies of many developing countries in which the conditions for development vary by region.

Often, the disparity found within a dual economy is not a temporary phenomenon or transitional phase of economic development but an enduring quality born of geopolitics. Such is the case with Mexico, which has struggled with economic inequality since it was a Spanish colony in the 1520s. After the Mexican revolution and its subsequent reconstruction, Mexican governments more openly acknowledged their country’s discrepancies, enacting policy reforms meant to harmonize the economy’s most important areas: land ownership, social welfare, infrastructure development and industrial development. Sometimes they were successful in this regard, but they never fully reconciled the differences between the Two Mexicos.

The Two Mexicos are not just economically divided but geographically divided. Central and northern states typically boast more dynamic, advanced economies. Infrastructure networks – roads, electricity, telecommunication, etc. – are well developed and incorporate large portions of the population. The workforce in these states is generally higher educated, relies on formal employment, and receives comparatively higher wages. The poor, southern states have limited access to education, are often informally employed, and are paid lower wages, employed as they are generally in low-value manufacturing and subsistence farming.

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A look at formal employment figures and household incomes shows how the economic activities endemic to each region contribute to economic disparity. Informal employment in Mexico is high — in August 2017, 56.9 percent of the workforce held informal jobs. However, the difference in economic activity makes informal employment much more common in the south than it is in the north. Oaxaca has the highest rate of informal employment (81 percent), followed by Chiapas (78.3 percent) and Guerrero (78.2 percent). In northern cities along the U.S. border, the informal labor rate is half that – roughly 34.2 percent in Nuevo Leon, 37 percent in Chihuahua and 37 percent in Coahuila. Results from Inegi’s 2016 National Survey of Household Income and Expenditure show that Nuevo Leon (87,653 pesos, or about $4,800) and Mexico City (70,834 pesos) have the highest quarterly household incomes. In stark contrast, quarterly household income is much lower in Oaxaca (27,704 pesos), Guerrero (26,980 pesos) and Chiapas (23,258 pesos).

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Drastic differences are also observed on the state level. Mexican states along the U.S. border account for nearly a quarter of the country’s GDP. In central Mexico, the State of Mexico and Mexico City account for more than a quarter of the national economy. Meanwhile, southern states such as Oaxaca, Chiapas and Guerrero collectively generate just under 5 percent to the nation’s GDP. While the average Mexican state’s GDP grew 2.5 percent in 2015, six of those states (Queretaro, Baja California, Guanajuato, Baja California Sur, San Luis Potosi and Sinaloa) grew at least double that average. All of these states lie in the country’s north or central regions and have strong industrial and service sectors. Meanwhile, the economies of four states contracted in 2016 – all of them (Tabasco, Guerrero, Chiapas and Campeche) in the south.

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Explaining the Disparities

One of the reasons the Mexican government has never been able to reconcile the differences between Two Mexicos is that no government can reconcile a country’s geographic features. The dynamics and disparities observed in the Mexican economy today stem from geopolitical factors that have molded Mexico’s economic development. On multiple occasions, developing the central and northern states of Mexico, as opposed to the southern states, was essential to fulfill geopolitical imperatives.

Colonial Period

New Spain (colonial Mexico) was established, in large part, to provide the Spanish crown money. The monarchy was competing with France and enhancing its power in Europe, but it had exhausted or spent much of its domestic wealth. New sources of riches and resources were necessary to prop up the monarchy and ensure its survival. New Spain’s value to Madrid was in its expansive gold and silver deposits and its potential for agriculture. In addition to establishing its colonial capital in Mexico City, Spain focused on establishing control over and developing areas with valuable metal deposits and high potential for cash crops. Development included mining and agricultural activity as well as the infrastructure needed to move resources back to Spain. States rich with mining potential included Zacatecas, Sonora, Chihuahua, Coahuila and Durango.

Spain also found value in Mexico’s Gulf Coast for its soil and ports. Cortes’ initial expedition along the Gulf Coast of Mexico started near Tulum, on the Yucatan Peninsula, and continued north to what is now Veracruz. From here he pushed inland toward the Aztec capital, Tenochtitlan. Spain’s reasons to establish a strong port in Veracruz were threefold. First, the crown needed a port reasonably close to the power center (Mexico City) and easily accessible from inland so that mined metals could be shipped back to Spain. The economic model under colonial rule followed the traditional colonial model of closed trade, where the colony dealt almost exclusively with Spain. Second, unlike most of Mexico’s land, the soil and climate near the Veracruz coast was suitable for farming valuable crops such as sugar cane and coffee. Third, the port served to help defend against landing of foreign powers seeking to march inland to Mexico City. Throughout Mexican history, Veracruz has been the landing point for multiple foreign invasions, including Cortes’.

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The initial area of colonization, the region south of Tenochtitlan, was of secondary interest to the crown because it did not boast the level of wealth and natural resources the rest of New Spain did. What resources were present were, by comparison, more difficult to get to port. For these regions, main maritime access was along the Pacific coast, which made sails to Spain long and expensive. The alternative – crossing goods over land – was not much better. In other words, Spain had little incentive to develop these areas. Places like Chiapas and Oaxaca, moreover, were notoriously resistant to Hispanization. These regions were barely under Aztec rule in the 1400s and never fully assimilated into the empire. The Spanish arrival gave these peoples an opportunity to reassert their autonomy. Their resistance made it difficult for the Spanish to establish a strong administrative and institutional presence in the region.

Early Independence

In the early years of independence, early in the 19th century, territorial competition with the United States and a series of domestic rebellions once again forced Mexico to focus its attention on its central and northern regions. Some Mexican states saw the wake of independence from Spain as an opportunity to redefine their relationship with Mexico City. Prior to colonization, Mexico was not a homogenous, unified territory, despite Aztec dominance. After colonization, regional independence movements established new republics and staged rebellions against a strong central government. Zacatecas initiated its brief rebellion in 1835, while Texas established its own republic the following year. Tabasco entered outright rebellion in 1839 and, for the first half of the 1940s, oscillated between being part of Mexico and an independent state. Though unrecognized, a republic called Rio Grande occupied what is now Coahuila, Nuevo Leon, Tamaulipas and a sliver of Texas in 1840. The Yucatan Peninsula declared its own republic for most of the 1840s (1841-1848), and for nearly four decades after independence, areas of Chiapas were being integrated into Mexico rather than Guatemala.

The timing of this upheaval in Mexico was critical – it occurred as the United States expanded westward. Washington’s interests to move west clashed with Mexico’s territorial claims north of the Rio Grande. The U.S. imperative to establish a strong buffer to allow Washington to maintain control over the Mississippi River eventually drove the U.S. to war with Mexico over the disputed territory from 1846 to 1848. Mexico lost the war and, with it, a large swath of its northern territory (what is today Texas, Arizona, California, Nevada, Utah, New Mexico and parts of Colorado).

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International and domestic pressures demanded that Mexico fortify control over its territory. The end of the war with the United States did not provide any security guarantees for Mexico. Instead, it was in the government’s interest to defend and discourage further incursions. This applied to Mexican states along the U.S. border, the country’s core in Mexico City and the Gulf Coast states – all of which had seen U.S. invasions and battles during the war. Efforts to populate, economically develop and physically connect the northern and central states to Mexico City became strategically important. Regions like the Yucatan and Chiapas, meanwhile, were not only remote but were not really a risk for outside invasion. Mexico did not want to lose these territories, of course, but it simply didn’t spend the same kind of resources on them as it did on areas vulnerable to the United States.

Free Trade

After World War II, Mexico pursued import substitution policies as a means of developing industry. This is an inward approach to economic development in which high tariffs are placed on imported items in an effort to encourage consumption of domestically produced goods. Manufactured goods produced on this scheme tend to be less competitive on global markets. These factors combined such that trade did not play a significant role in Mexico’s GDP. According to World Bank figures available during this time, Mexico’s exports as a percent of GDP fluctuated between 6.8 percent and 10.5 percent.

By the early 1980s, various economic pressures prompted the Mexican government to end its import substitution practices and engage more openly in trade. Though this resulted in greater trade and in exports playing a larger role in the Mexican economy, the introduction of NAFTA changed things markedly. In the first year after NAFTA’s implementation, exports as a share of Mexico’s GDP went from 13 percent to 25 percent. This figure reached 38 percent in 2016.

NAFTA encouraged and enabled trade with the United States, and in doing so indirectly reinforced economic activity in northern and central states but not in southern ones. The United States is by far Mexico’s largest trade partner. Last year, it accounted for 81 percent of Mexico’s total exports. These U.S.-bound exports were valued at nearly $317 billion, according to the U.S. Trade Representative. The top export categories were vehicles ($75 billion), electrical machinery ($62 billion), machinery ($51 billion), and optical and medical instruments ($13 billion). In other words, a mere four categories of high-value manufactured goods accounted for about two-thirds of Mexico’s exports to the U.S. in 2016. The vast majority of these goods are transported by land, giving northern states, and to a lesser extent central states, significant logistical and cost advantages over the south.

The presence of Two Mexicos isn’t inherently bad. The coexisting economies mean the country has two avenues for pursuing growth and can take advantage accordingly, depending on which economies will fare better in the present economic conditions. And while the disparity found within a dual economy is often deeply rooted, the challenges it poses are not inherently insurmountable. From a geopolitical perspective, a “big picture” look at things in the long term, Mexico is a very young country. In its short existence as an independent country, Mexico has not experienced a period of prolonged peace and stability such that it could focus entirely on domestic economic development. And yet, despite multiple foreign invasions and separatist movements during the 19th century, and a prolonged domestic revolution and economic crisis in the 20th century, Mexico has still become a robust, industrialized economy. The comparative stability of North America presents Mexico with an opportunity to pursue domestic development in areas where, previously, development was not a geopolitical necessity. Thus, Mexico’s economic emergence needs to be viewed as part of a much longer process.