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National Data | When Will It End? Mexico`s Economy Falls Further Behind
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July 18, 2007, 05:00 AM
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You`ve heard the argument:

Forget the border fence. Forget self deportation and strict workplace enforcement. They are doomed to fail as long as the economic "push factor" driving illegals to cross the border prevails.

They send us their poor. The poor find work and send money home. The remittances are spent and invested in local businesses, creating jobs and raising income levels. Eventually the income gap between Mexico and its neighbor to the North narrows to the point where emigration is no longer worth the effort.

Economic convergence is the only long-term solution to illegal immigration.

But converge how?  Does Mexico come up to our economic level—or do we go down to theirs?

Many economists do believe the emigration/remittance scenario offers the best hope of lifting Mexico`s standard of living closer to our own.

The only problem: it`s not happening. Record levels of emigration and remittances after 1980 have not arrested a sharp slowdown in the Mexican economy.

From 1960 to 1980 Mexico enjoyed robust economic growth, with real per capita GDP rising 99 percent. [Mexico`s Presidential Election: Background on Economic Issues By Mark Weisbrot And Luis Sandoval PDF Center for Economic And Policy Research, June 2006.]  The U.S. was a comparative laggard: its GDP per capita grew 63 percent over that period.

Mexico`s per capita GDP was a mere 34 percent of America`s in 1980. But the gap was narrowing—and illegal immigration was trivial.

Since 1980 these trends have reversed:

From 1980 to 2000 Mexico`s per capita GDP grew by 16.7 percent, or by less than a third of the 53 percent growth recorded in the U.S. Over the following five years (2000 to 2005) Mexico was up 4 percent, and the U.S. by 7 percent.

As a result Mexican per capita GDP slid to 17.8 percent of the U.S. figure in 2005—$7,453 U.S. dollars versus our $41,891—according to the World Bank.

The GDP gap vastly understates the income disadvantage of the typical border crosser. Forty-seven percent of the Mexican population—48 million people—were poor in 2004, according to Mexican government figures. The official poverty line, defined as the amount needed to cover "basic necessities," is $4.00 per day.

That`s an abysmal $1,460 per year. And remember: this is the poverty threshold –the income received by the richest of Mexico`s poor.

 Can economic growth make a dent when poverty is this deep and pervasive? Absolutely. China`s poverty rate fell from more than 50 percent in 1981 to about 8 percent in 2000, thanks to per capita growth of almost 8.5 percent per year. Similarly, Vietnam cut its poverty rate in half, from about 58 percent to about 29 percent, by growing at almost 6 percent per year between 1993 and 2002.

But Mexican poverty is peculiarly intractable because the country`s income distribution—and the fruits of GDP growth—are overwhelmingly skewed towards the rich. A World Bank study finds that, on average, a 1 percent rise in per capita GDP reduces a nation`s poverty rate by about 2.4 percentage points. In Mexico the expected reduction is about half that. [World Bank, "Mexico`s Competitiveness: Reaching Its Potential," August 10, 2006,  PDF]

Furthermore, by merely crossing the border these folks are eligible for $30,164 of public benefits per household, according to the Heritage Foundation`s Robert Rector. This is an irresistible draw.

The defeated candidate in Mexico`s last, much-disputed, Presidential election, Lopez Obrador, was a big fan of FDR. He wanted to tax the rich to finance public jobs and income transfers for the poor.

Any "Mexican New Deal" would probably lower the nation`s per capita GDP growth. But it may raise incomes of those individuals most likely to cross illegally into the U.S. [Using FDR as Model, Presidential Hopeful Out to Build New Deal for Mexico By Manuel Roig-Franzia Washington Post, June 23, 2006

We should help equalize incentives by reducing the benefits that illegals receive on this side of the border.

Edwin S. Rubenstein (email him) is President of ESR Research Economic Consultants in Indianapolis.