The Dragon in the Room: China and the Future of Latin American Industrialization by Kevin P. Gallagher & Roberto Porzecanski

Author:Kevin P. Gallagher & Roberto Porzecanski [Gallagher, Kevin P. & Porzecanski, Roberto]
Language: eng
Format: epub
Tags: International Relations, Trade & Tariffs, Industries, Political Science, Business & Economics, General
ISBN: 9780804771887
Google: i7Dzu91dusYC
Goodreads: 9111221
Publisher: Stanford University Press
Published: 2010-09-24T00:00:00+00:00

Summary and Conclusion

Mexico's fears about China's competition clearly have justification. Indeed, our analysis of international competitiveness shows that over half of Mexico's non-oil exports are under partial or direct threat from their Chinese counterparts. This “threat” comprises all but a handful of Mexico's top twenty exports. What's more, recent changes indicate that Mexico's loss of export competitiveness to China is also reaching its more technologically sophisticated exports. Mexico is losing out in sectors abundant in unskilled labor where value-to-transport costs are cheap. It is holding steady, instead, in assembly sectors such as trucks and autos, where transport costs are more significant and NAFTA's rules of origin serve as local content rules mandating that production stay in North America.

How can this deterioration in Mexico's international competitiveness—particularly in relation to China—be explained? First is the relatively lackluster performance of investment in Mexico over the last two decades. Although the macroeconomic reforms launched in the mid-1980s were aimed at positioning the private sector as the pivotal engine of growth of the Mexican economy, private investment has not stepped up to the plate. In fact, since that earlier period, gross fixed capital formation has never reached more than 22 percent of GDP. This is below the 25 percent benchmark identified by UNCTAD as the minimum investment ratio required to sustain the long-term annual rate of economic expansion of 5 percent that Mexico needs to absorb its increasing labor force.

In contrast, China's gross fixed capital formation as a percent of GDP has been over 40 percent for the same period. Mexico's disappointing investment performance can be partly explained by the fact that the reforms were implemented when the Mexican economy was in deep stagnation, with virtually no access to foreign finance. And later, in the mid-1990s, when foreign funds became available, they tended to almost exclusively benefit large, private conglomerates or the few big enterprises remaining within the public sector (Mattar, Moreno-Brid, and Peres 2003).

But the problem has not only originated in the availability of foreign funds. Domestic credit for investment or productive purposes has also been scarce. Private banks have instead preferred to buy government securities or to lend for consumption or housing.1 This financial constraint for small and medium firms has become even more binding given that, as part of the shift in macroeconomic strategy, development banks were sized down and their capacities to award loans at preferential or subsidized rates was drastically curtailed.

In addition, in Mexico there has been a relation of complementarity among public and private investment and not necessarily of competition. In fact, the decline of public investment brought about an acute deterioration in Mexico's infrastructure—quantity- and quality-wise—that tended to adversely affect the profitability of many private projects and thus to cut down overall investment below its potential.2 In other words, in a country where public investment encouraged (“crowded in”) private investment, the dramatic reduction in public investment has had a multiplying effect. In addition and with some major exceptions—the auto industry and the maquiladoras—foreign direct investment in Mexico, in general, has tended to flow to the service sector and not to manufacturing.

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