Mexico's Sick Economy

Relying on oil and illegal workers' wages leads to long-term disaster.

May 15, 2006
by Victor Davis Hanson
Tribune Media Services

Economists have long pointed out that relying on oil as a natural resource can be a long-term disaster for a developing nation. The income from exporting petroleum provides cash infusions that can distort a country's economy and mask structural problems while impeding reform. Petrodollars act like a lethal narcotic: A formerly impoverished country depends on short-term relief from oil profits at the risk of being reduced to an enfeebled addict.

Easy oil income also often promotes dictatorial government by allowing nationalist thugs to buy pricey weapons to threaten neighbors or to buy off internal dissent with lavish cash subsidies. Take away oil from Venezuela and Hugo Chavez would be just another failed Castro. Evo Morales is able to offer the old bankrupt socialism to poverty-stricken Bolivia largely due to the country's natural gas reserves.

Mexico also suffers from this unhealthy oil-exporting syndrome, as the government uses profits from its inefficient state-run industry to spread around subsidies in lieu of enacting long overdue wealth-creating measures. But worse still, Mexico suffers a double whammy by also receiving between $10 billion and $15 billion annually in remittances from its expatriate population in the United States.

Exporting its own poor turns out to be about the cash equivalent each day of selling on the open market about half a million barrels of $70 a barrel oil. The muscles of Mexico's former residents can prove just as deleterious as oil derricks to the long-term health of the country's economy.

Millions of unemployed Mexicans are now dependent upon money wired from the United States, where low-skill wages are now nine times higher than in Mexico. On the national level, such subsidies, like oil windfall profits, allow just enough money to hide the government's failure to promote the proper economic conditions — through the protection of property rights, tax reform, transparent investment laws, modern infrastructure, etc. — that would eventually lead to decent housing and well-paying jobs.

It may be counterintuitive to think that checks from hard-working expatriates are pernicious. But for a developing nation, remittances can prove as problematic as the proverbial plight of the lottery winner — sudden winnings that were not earned. In short, remittances, along with oil and tourism — not agriculture, engineering, education, manufacturing or finance — prop up an otherwise ailing Mexican economy. This helps explain why half of the country's 106 million citizens still live in poverty.

The billions of dollars Mexicans in the U.S. send back to their country pose another economic and ethical dilemma. Many illegal aliens in the U.S. allot nearly half their weekly paychecks to relatives in Mexico. But such deductions come right out of the workers' food, housing and transportation budgets here. So to survive, illegal aliens in the U.S. must endure cheap, substandard and often overcrowded housing. They cannot easily purchase their own health care or invest in safe and reliable cars.

Because the United States is a caring nation, the state often intervenes to offer illegal aliens costly entitlements — emergency-room medicine, legal help and subsidized housing and food — that provide some sort of parity to all its residents.

And when aliens are often paid in cash — that is off the books — the problem of remittances only worsens: The beneficiary Mexico still gets help from workers' pay, while the benefactor United States does not collect taxes.

Along with the lack of English, illegal status and insufficient education, remittances explain the poverty of many Mexican aliens in the U.S. In the American Southwest, it is now possible to see apartheid communities of Mexican nationals whose standard of living does not meet national norms.

Americans are often blamed for such disparities, as we saw in the recent immigration protests. But the tragedy is more complicated than the failure to offer workers sufficient compensation — especially when such communities are often the recipients of millions in federal dollars to improve schools, roads and police forces that cannot be maintained through customary taxation of local residents.

It might be cruel should remittances somehow come to an end. But it may be even crueler in the long run not to deal with a broken system that facilities such massive transfers — both for millions here in dire need of retaining all their earnings, and millions more in Mexico in more dire need of vast structural reform.

©2006 Tribune Media Services

We must continue to put pressure on both governments - otherwise, they will do nothing to solve this problem.