Friday, July 17, 2009

Mexico's Resource Curse: The United States

"¡Pobre Mexico! ¡Tan lejos de Dios y tan cerca de los Estados Unidos!"

– Porfirio Diaz

To a developing country, a long border with a wealthy, industrialized neighbor might seem like a blessing. But we have at least one pairing where this is anything but obvious: Mexico and the United States.

There are other cases where a national asset that seems on its face to be a big advantage turns out to be anything but; the famous example is the resource curse. You would think that a developing country fortunate enough to be sitting on mineral wealth would be able to use that wealth to its advantage – especially if it's oil. Nigeria is the textbook case.

These countries experience a vicious cycle of incredibly corrupt juntas uninterested in developing other industries or indeed doing anything except pocketing the proceeds from mineral extraction being conducted by foreign companies. In these institutionless post-colonial kleptocracies, the only options for the ambitious are to get out, or try to get in on the next coup. It's hard to believe that these governments could keep the figurative lights on for even one minute after the oil and diamonds stopped coming out of the ground. These are failed states with an allowance. They're Somalias waiting to happen.

What started me thinking about this was the recent arguments I've seen from several quarters that Mexico is increasingly showing alarming characteristics of a failed state. Combine this speculation with the interesting observation that the U.S.-Mexican border is easily the longest one in the world between a developing and an industrialized country, and you may begin to wonder if there's a connection. If Mexico had started off with a decent-sized middle class and relatively transparent institutions, they may have joined in the ongoing growth that the Anglophone parts of the continent have enjoyed since the industrial revolution.

Among the generally agreed upon characteristics of failed states are these: economic decline; loss of control of and security in their territory; deterioration of basic services; inability to make and execute decisions, in both domestic and international arenas. I don't think Mexico is there yet. It has elections, the lights shine and the toilets flush, and it's a productive member of the international community. It's even tied for 72 out of 180 in Transparency International's 2008 index – not great, but pretty good for a supposedly failing state. Still, the increasingly brazen coordinated paramilitary attacks on the police are a bad sign. Mexico is, in fact, losing control of and security in large stretches of its territory. Where? The states closest to the U.S. To whom? Drug cartels. Coincidence?

The truth is that Mexico is resource-cursed, and the resource is drug-consuming Americans. To be more accurate, the resource is drugs and the market is the U.S., but the situation is in some ways worse than in Africa's resource-cursed states. Imagine that Nigeria had a long land border with the EU. Now imagine that oil is outlawed as a result of global-warming legislation. The oil would still flow north - but it would become contraband, and the trade would be an entirely criminal activity. Because the drug trade is internationally sanctioned, the Mexican government (unlike Nigeria's) can't openly profit from the trade as it does with legal oil in Nigeria - because even graft and kickbacks are parasitized from activities that are at least legal in and of themselves. So the business becomes the domain of paramilitary drug cartels and some corrupt officials that allow them to flourish. It's worth pointing out that, although it doesn't border the United States, Colombia is the other perilously-close-to-failing state in Latin America, though it's improved in recent years. Still, it's had large tracts of its territory not under its control for years on end – and those tracts were controlled by organizations in the same trade as the paramilitary groups in Mexico. And they had the same end market.

A reasonable objection is that there are income disparities across other borders in the world; surely Mexico and the U.S. aren't the only odd couple, yet there are no paramilitary drug groups forming elsewhere. I suspected there were reasons why this didn't happen elsewhere, so I compiled a list of 279 sets of two-country shared land borders, and ordered it in terms of absolute nominal per capita income difference. Out of 279, here are the top ten:

RankCountry1Country2PCI1PCI2PCI Diff
1AustriaLiechtenstein50,098145,734 95,636
4Saudi ArabiaQatar19,34593,20473,859

Source: IMF World Economic Outlook Database 2009, except Liechtenstein from CIA World Factbook April 2009. Border ranking process did not include exclaves (e.g. Ceuta, Kaliningrad)

It's immediately interesting that the U.S.-Mexico border pops up as 9th out of 279, and is one of the longest on this top-ten list. Three qualifiers in order here. a) There is less incentive to engage in risky activities if basic needs are met. An Austrian might know his neighbors are wealthier, but it's different when your PCI is over US$50,000 as opposed to just over US$10,000. If you're comfortable, you're probably less likely to consider running drugs to Liechtenstein. b) Not all borders are as easy to cross (legally or otherwise) as the one between the U.S. and Mexico. Many countries don't have the same freedom of movement (like Russia), many countries don't have as well-developed a road system as the U.S. or Mexico, and even if a border is about as long as the U.S. Mexican border (as in Finland and Russia), it may be even less hospitable than the often-mild desert between the U.S. and Mexico. c) Many of the extremes of per capita income reported by the IMF would be flattened if a median calculation were used instead of a mean. Few subjects of the UAE come close to the reported per capita incomes listed here.

What's the solution? I don't anticipate Americans' consumption of drugs will stop any time soon, nor will Mexicans' willingness to supply them; after all, markets are markets. The part of the equation we can control is a choice that we've made which forces the profits from the drug trade underground. That is to say, if the United States decriminalizes, suddenly Mexico's unique resource curse can at least benefit Mexicans and their institutions openly. Sounds like a pie-in-the-sky solution, right? Wrong. One country – Portugal, a civilized EU country no less – has already done exactly this, and "judging by every metric, decriminalization in Portugal has been a resounding success."

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