Guest Commentary by Karl Reiner: The Economics of Mexican Immigration

Karl Reiner is a friend of this site and an active voice for a fact-based approach to the issue of immigration from Mexico, recently gave the following speech to the American Association of University Women in Green Valley. His remarks are reproduced here by permission. BlogForArizona published an exclusive essay by Karl in April of this year on the topic of immigration policy. I am glad to present his latest remarks to BlogForArizona readers in full. It takes a little time, but you will be well-rewarded.

Karl Reiner managed international trade and economic policy analysis at the U.S. Department of Commerce in Washington, DC. He served as an acting deputy assistant secretary during the first Bush and Clinton administrations. A Vietnam veteran, he is a graduate of the Ohio State University and holds a MS degree from the Garvin School of International Management. After retiring from government service in 1994, he did consulting and authored a novel, Sgt. Bellnapp’s Secret, published in 2001.

October 17, 2006

By Karl Reiner

Good afternoon ladies and gentlemen. It is a pleasure to be here with you today to discuss some of the economic factors behind the contentious immigration issue which is also   known as the illegal migrant problem. The matter is not as clear cut as many commentators would like to paint it because the situation involves a variety of U.S. and Mexican interests.  I believe we can all agree on the fact that the U.S. government is responsible for border security, immigration policy, foreign relations, and national defense. These have always been Federal responsibilities. Of course, if you live in a border state like Arizona, the consequences of Federal inattention can very quickly turn into a local concern.

Since the U.S. and Mexico share a long common border, you would assume that Mexico would be high up on the list of countries we want to succeed because of the economic and defense ramifications affecting the United States. Mexico, however, seems to have fallen through a crack in our priorities and given the current state of affairs, we ought to be asking ourselves how long is it going to be allowed to continue? 

In its last session, Congress was unable to agree on an immigration bill. The most expensive legislative body in the world is too politically fractured to be able sort through the mass of conflicting interests and proposed solutions. It was unable to reach an agreement taking into account security, Mexico’s economic development needs and the mobility of workers. 

With the U.S. economy running at nearly full employment, provisions will have to be made for the orderly movement of labor. If workers are going to fill jobs, improvements have to be made in the existing temporary visa programs because the regulations have gotten out of sync with market conditions. Although it is a political hot potato, we will also have to decide what to do with the 12 million undocumented aliens already working in the U.S.

The legislation that finally gets enacted will have an impact on Arizona, the rest of the nation and Mexico. We should hope Congress thinks through the consequences of its actions and takes them into account before it acts.  Hopefully, the complexities can be sorted out in a way that makes things better and not worse for the U.S. and Mexico.

Unfortunately in times of crisis, Congress does make a mistake every so often. Back in 1930, as the Great Depression was getting underway, Congress passed the Hawley-Smoot tariff bill that raised American tariffs to record heights in an attempt to protect existing jobs and allow the growing number of unemployed to find work producing the goods that had been previously imported.  It had just the opposite effect. As other countries retaliated by raising their own tariffs, U.S. exports plunged and unemployment climbed. Hawley-Smoot made the Depression worse.   

The shrillness in the debates over immigration policy is a result of our failure to pay attention to Mexico’s economic problems. Having a prosperous and stable Mexico on our southern border has never been an important component of our security policy.  We are now, in a very haphazard fashion, beginning to deal with the consequence of neglecting Mexico for so long.  The economic side of the question continues to be ignored as many politicians focus attention on border security. Securing the border will be costly: more border patrol agents, fences and surveillance devices, all with a hefty price tag running in the billions. The will be one clear benefit, the creation of a lot of new government contracts.  Although we have the technology and manpower to do the job, the money will not be well spent because implementing better security by itself may create as many problems as it solves.  Enhanced security has to be coupled with a program to help Mexico get its economic house in order if we are going to be successful.

We have a situation involving two of the three largest economies on the North American Continent. The American economy ranks No. 1 in the world. It is linked to Canada (No.8) and Mexico (No.10) by the much-maligned North American Free Trade Agreement (NAFTA).  Because the U.S. and Canada have similar economies, there have been relatively few problems in the relationship with our northern neighbor. Trade is flowing smoothly. Immigration is not a major concern because those residents of the U.S. and Canada working outside their home countries are relatively few in number and their presence has been accepted as beneficial to both nations.

The same can not be said for relations with our southern neighbor. When NAFTA went into effect in 1994, there was a great deal of worry about a massive loss of U.S. jobs to Mexico. It never materialized; instead U.S. employment has grown by 20 million since the time of the treaty’s inception.

One of the underlying promises made by Mexican leaders was that Mexico’s prosperity would increase if it joined NAFTA. And it has, although very unevenly, and that has created a high degree of disenchantment. Mexico’s relatively inefficient small farmers have been especially hard hit because they cannot produce crops at prices competitive with imports. Mexico’s sluggish economy is not helping matters because those workers leaving the farming sector, along with the new entrants into the labor market, are having difficulty finding jobs.

Mexican governments have had an unstated policy of looking at the migration of workers to the U.S. as a type of social safety valve. Under present circumstances, the policy will not be changed because it provides an economic benefit to Mexico and they have no good alternatives.  The Mexicans working in the U.S. send home an estimated $17 to $20 billion a year, supporting a substantial part of the population in many regions.  These remittances pump a vital source of revenue into the country.  Working in the United States has become an accepted way to gain skills, save money and provide for one’s family. Many workers have filled the same seasonal jobs for years, arriving in the spring and departing with the onset of winter.  Others don’t see much hope for improving life in Mexico and decide to stay.  Since 1990, about 25% of all U.S. immigrants have come from Mexico.   

The economic ties between the U.S. and Mexico are substantial and they must be factored into any program affecting border relations.  The U.S. buys around 90% of Mexico’s exports. These shipments to the U.S account for approximately one-fourth of Mexico’s $600 billion annual economic output.   In 2005, combined U.S. - Mexican trade totaled $290 billion, more than $23 billion higher than in 2004.  Through June 2006, both our exports and imports are running ahead of last year’s levels.  It is likely that the upward trend will continue and trade will set another record this year.

Mexico is also an essential component of Arizona’s economy.  The state does $15 to $18 billion a year in export business with Mexico. Mexican visitors spend about $300 million in Pima County annually.

The economic relationship is vital to both countries. As such, Mexico has to be considered for what it actually is: a major U.S. trading partner, a border security concern and a rapidly developing county with a number of large problems.  Mexico’s problems are many and serious. The economy suffers from the effects of past mismanagement and the resulting setbacks have hampered the economy in reaching its full potential.

The most vexing problem facing Mexico today is the long-term economic growth failure of the last 25 years.  This tragedy has been caused by a number of economic and social factors. I am going to mention some of the most glaring ones so you can better appreciate the magnitude of the problem.

Mexico’s inconsistent regulatory environment and the poor state of its infrastructure impede job-creating investment and limit the potential for small firms to grow. It must make changes in order to attract more domestic and foreign investment.  Mexico has also had a problem in holding on to jobs. As many as 800,000 jobs may have been lost to China in recent years.

Everyone has heard stories about Mexico’s legendry corruption problem. It has a negative impact on the country because corruption and public safety problems incapacitate a sizable part of Mexican society. The cost to the nation has been estimated at approximately $60 billion per year. It is a drag on development and is an insidious overhead cost Mexico cannot afford.

The failure to grow the economy has resulted in continual widespread poverty. A substantial portion of Mexico’s population, estimated as high as 45 million, has an income of less than $1,000 per year.  Would the situation be different today if management had been better during the previous years?  The answer is yes. If Mexico’s economy had continued to grow at pre-1980 levels, it would now have a per-capita income around the level of Spain’s.

We can also define the effects of Mexico’s growth problem by doing a comparison with South Korea.  In 1970, average incomes in South Korea were about half of those in Mexico.  By 2004, Korean incomes were more than twice Mexico’s. Between 1970 and 2004, average Mexican incomes rose 57%. The comparable gain over the same time period in Korea was 574 %. This clearly illustrates the dire consequences of suffering from a slow growth syndrome.

In recent years, the Mexican economy has grown about 4 % annually. This is far below the 7 % that many economists feel is needed to sustain growth and begin to chip away at poverty levels.  Mexico has been unable to boost itself into the same league as China, which is growing at 8-10 % a year or India, which is growing in 6-8 % range.

What is causing the vexing slow growth problem? Economies tend to advance through the adaptation of better technologies and business methods. As production and efficiency improve, prices go down and incomes go up.

In Mexico, this process is weak. The country is slow to embrace better technology and change outmoded business practices. Mexico has a number of large, modern firms positioned in a semi-protected market. These firms are able to use the government to limit competition and thereby reduce the pressure on them to improve efficiency or lower prices.

Let’s consider an example. Pemex, the state owned oil monopoly had sales of $69 billion and over 137,000 employees in 2004.  For the same period, Exxon-Mobil produced $291 billion in revenue and had 86,000 employees.  In other words, Exxon produced over four times the revenue with a workforce about 65% the size of the one fielded by Pemex.   

Mexico does have a large informal business sector consisting of thousands of small firms, ranging from vendors to manufacturers. They aren’t really legal because they haven’t registered with the government. Most don’t pay taxes or comply with other regulations.

According to estimates, about a third of Mexico’s work force is employed in this informal sector. Many of these firms are forced to remain small and inefficient because they can’t get bank loans. Others don’t want to grow larger because they will become entangled in a web of government regulations and will be forced to pay taxes.

While there are many entrepreneurs in Mexican society, the system frustrates and holds them back. The environment prevents them from expanding their enterprises and making a larger contribution to the economy.  In Mexico, companies with fewer than 10 employees account for about two-fifths of all employment. In the U.S., these same sized firms account for one-ninth of total jobs.

Why does this horrendous inefficiency exist? Some observers think it is due to cultural values that resist change and encourage economic cronyism. They point to the successful Asian societies that have accepted change and have fostered economic growth as the models that need to be followed.  Others are skeptical of the cultural explanation and believe reducing trade protectionism and government intervention requires a certain amount of time. A nation’s attitudes and institutions change slowly and results can’t be delivered faster than change takes place.

Regardless of the cause, a country eventually has to face reality and make a decision to start the process moving. Economic liberalization produces good results when implemented gradually and properly in terms of pace and sequence as in Europe, or more recently as in China and India.  The record is fairly clear. Over time, the reduction in trade barriers and the stability of economic policy in countries has produced an environment conducive to rising living standards and the expansion of world trade.

However, the sudden and brutal emergence of market forces can dispossess people economically and culturally.  We have seen some of these effects in Russia as it slowly moves away from the old Soviet model.

Revving up an economy is not an easy job. Economic reformers are not particularly loved and they struggle to reduce heavy-handed state intervention in the economy while at the same time trying to soften the impact of a cold -hearted free market system. It is a difficult balancing act and it is easy to make mistakes.  There can be negative economic and social consequences if the process gets out of hand. The resulting high levels of inequality can lead to political and social instability.   

With its large amount of intellectual and management resources, the U.S. could provide Mexico with the assistance it needs to improve its economic performance. Why we have not considered this option in the context of the migrant issue is a good question for our political decision-makers to answer.   Of the $8 billion we spend on foreign aid annually, only about $30 million goes to Mexico at the present time. We need to change that policy and ensure Mexico becomes an economic success. Having a stable and secure Mexico on our southern border would reduce illegal immigration, improve security and be good for business.

Time may be running out because the situation in Mexico is becoming dicey. President–elect Felipe Calderon and his National Action Party (PAN) won the recent election by a mere fraction of a percent.  The loser, Manuel Lopez Obrador, the leader of the Party of the Democratic Revolution (PRD) has claimed the election was rigged and has vowed to keep the political pot boiling as he leads the opposition.

With the industrializing north of Mexico now pitted against the southern part of the country that is lagging behind, the government may slide into a political deadlock at the very time more emphasis should be placed on economic reform. The economic forecasts are mostly gloomy.  There is a good probability that Mexico’s economy will improve only marginally; there is also a good chance it may stumble into a decline.

Throughout U.S. history, the impact of immigrants has often been a hotly debated topic.  In good economic times, immigrants have been mostly welcomed. During other periods, the door has been virtually closed. What many people see as most alarming today is the lack of control on the border.  The government doesn’t have the ability to control the door.  This has led to a rekindling of the debate over the impact of immigrants on society. There are studies showing it can take immigrants as long as 10-12 years to become self-sufficient and begin to make contributions.  On the other hand, other studies show it takes much less time. These diverse findings probably reflect the fact that the go-getters and those with higher levels of education move ahead at a faster pace.

There is a study showing Arizona taxpayers pay $1.3 billion a year for the education, health care and jailing of illegal immigrants. Critics consider the estimate to be inflated because it does not include the taxes the illegals pay and the money they pump into the economy as they spend their wages on food, shelter and clothing.

Depending on your point of view, you can easily find data to back up any position on this issue that you wish to take. However, it may not be wise to take a short-term view of immigrant costs and contributions because the second and later generations have always become a productive asset.

John Washington emigrated from England to Virginia in the mid-1600s and died there in 1677. It wasn’t until his great- grandson, George, became an accomplished surveyor, farmer, general and president that people got interested in learning about John’s life.

Samuel Lincoln, an apprentice weaver, sailed from England in 1637 bound for   Massachusetts. Over the succeeding years, his descendents didn’t leave much of an impact on society as they migrated west.  When Abraham Lincoln came on the scene, the popular view of the Lincoln family changed forever.  While many immigrants can viewed as economically marginal today, no one can predict what contributions their children will make. These people could turn out to be the great-grandparents of a person destined to have his or her likeness engraved on U.S. currency at sometime in the future.

As a consequence of the migrants flooding into Arizona, there is a growing concern over the survival of English as our national language. These fears may be misplaced.  China’s economy is expected to continue to grow and at some point during the next 25 years, it will reach the same size as ours. There are about 200 million Chinese studying English today. Less than 50,000 Americans are studying Mandarin. The people who are worried about English remaining the national language of the United States don’t realize it has already become the language of international business. In many countries, all major signs are printed in the native language and English. During the past decades, English has become the second language of the bilingual working world. English may not be doing well in Arizona, but it seems to be more than holding its own in other countries.

While Mexico sputtered along for the past 25 years, the top policy-makers in the U.S. government remained undisturbed despite the fact that Mexico was steadily falling behind the economic power curve.  Unfortunately, Mexico wasn’t the only matter poorly handled or ignored in the recent past. In the early 1970s, the government announced it wanted to reduce our dependence on foreign sources of oil.  The same position was restated again in 2006 as gasoline prices jumped through the roof. In reality, nothing much has changed since the 1970s. Our imports of foreign oil have actually increased. The global demand for oil is increasing, supplies are growing tighter and we can’t decide what to do about it. The alternative technologies that could have been developed since the 1970s aren’t available today because the problem wasn’t taken seriously.

After investing a considerable amount of money and effort in helping drive the Soviets out of Afghanistan in the 1980s, we let the country slide out of our sight after the Soviets departed. Now, we are involved in Afghanistan again.  Neither the Clinton nor the Bush Administrations made terrorism much of a priority because the attacks were taking place outside the U.S.  Unfortunately, it took the sad events of 9/11 to drastically shake things up. The commission investigating the matter issued a report that was less than flattering to the government’s operations and noted the opportunities that were missed.

The initial relief response to Hurricane Katrina was quite slow. It appears that this nation has lost the logistical ability to deliver basic supplies of food, water and medicine in response to natural disasters.

In the aftermath of World War II, a bipartisan group of political leaders supported the program that helped rebuild Europe and Japan. In today’s polarized political environment even the consideration of doing something similar for Mexico appears to be out of the question. We are defaulting on the bipartisan foreign economic policy espousing the benefits of free enterprise, open markets and the rule of law. Seeing to it that our allies and neighbors become economically viable is something we no longer consider important enough to do. And, unfortunately, one of the results of the policy shift is the problem now facing Arizona.