MEXICO: A Strategic Partner for North American
Global Competitiveness
J. Enrique Espinosa
Founding Partner
SAI Consultores, S.C.
November 7, 2013
AGENDA
I.
NAFTA’s competitive challenge
II.
Mexico, comparative advantage, today:
III.
IV.
•
Labor supply
•
Logistics
•
Openess to capital flows
•
Macroeconomic convergence
Structural reforms:
•
Education
•
Telecommunications
•
Energy
Concluding remarks
2
I. NAFTA’s competitive challenge
3
I. NAFTA’s competitive challenge
NAFTA and the BRICS as exporters of manufactures
In 2012, these two blocks represented about a fifth of the world’s exports of manufactured goods,
roughly the same share as in 2000.
However, mostly due to the rise of China, their relative weight has changed dramatically.
“Other” NAFTA and BRICS, 2012
Source: World Development Report, 2013; The World Bank
4
I. NAFTA’s competitive challenge
Choosing parnters to enhace your competitive strengths
NAFTA has induced an deeper integration
of its partners’ manufacturing industries:
the US content of Mexican and Canadian
exports is remarkably high.
This fact signals susbtantial efficiency in
production capacity allocation within
NAFTA.
By contrast, US content in China’s exports
remains minuscule, and may well decline
in future, given that country’s industrial
policy model.
It is hard to anticipate that the TPP,
currently being negotiated, will ever
induce NAFTA-like integration among its
members.
Source: C. E. Wilson (2011), Working together: Economic ties between the United States and Mexico, Woodrow Wilson International Center for Scholars.
5
II. Mexico’s comparative advantage, today
6
II.1. Labor Supply
Wage comparisons
No doubt, a critical factor in assessing North American global competitiveness is the cost of
labor.
In this regard, Mexico clearly stands
out as a strategic NAFTA partner.
When compared to labor cost in the
US:
China´s labor cost advantange has
been steadly eroding, and can be
expected to maintiain this trend in the
coming years;
By contrast, Mexico’s labor costs not
only have been stable and can be
expected to remain this way, but have
acummulated a substantial differential
vis a vis China.
Source: Alix Partners (Costs and Complexity): Will China Remain the Low-Cost Country of Choice?
7
II.1. Labor Supply
Demographic structure in North America
The
demographic
profiles
and their
projected evolution
clearly suggest that,
the proportion of
Mexicans in North
American jobs will be
growing steadily.
Where those jobs
will
be
located,
however, remains an
open question:
United
States
Canada
Production
could
increasingly migrate
to Mexico; or
As
many
fear,
migration of workers
towards the US and
Canada may grow;
or
Mexico
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Dependency Ratio*
NAFTA
2012
100+
Mexico
United States
Canada
NAFTA
95-99
90-94
85-89
80-84
Elders
10.06
19.76
23.17
17.66
75 - 79
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
70 - 74
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
25 - 29
2030
65 - 69
Mexico
United States
Canada
NAFTA
60 - 64
55 - 59
50 - 54
45 - 49
Elders
17.45
32.10
41.40
28.85
40 - 44
35 - 39
* Ratio of population older than
64 over total work force (1564 years old)
e/ Estimate
30 - 34
20 - 24
15 - 19
10 - 14
Source: US Census Bureau,
International Data
Base.
5-9
0-4
20
10
0
10
20
Millons
Both.
8
II.1. Labor Supply
Labor mobility (Immigration)
Defying conventional wisdom, a recent article in the New York Times argued that, for Migrants,
Mexico is a new Land of Opportunity. The latest data available support this view.
TOTAL: 301,795
foreigners on
work visas in
2011.
Sources: NYT (Sep. 21, 2013), based on data from Mexico National Census, Pew Research Center and Mexico Interior Ministry.
9
II.2. Logistics
Origin and destination of cargo flows
Even a cursory inspection of the railroad network in North America reveals that the demographic
and economic center of gravity of the region rests of the US Midwest and East Coast. This is the
heartland where most of the cargo flows originate and are received.
NORTH AMERICA: Railroad network
The cost involved in getting goods to
and from this economic heartland are
critical and, especially regarding
international trade, the main drivers
of this cost are:
Transportation costs, mostly by ship in
overseas flows, and by rail, which in
turn depend on;
The price of oil, as this is the essential
input for fuel used by these means of
transportation;
Import duties charged on goods,
according to their origin.
Source: Taken from Samuels J.M. (2008): The Freight Railroad Renaissance.
Shipping lead times, especially under
just-in-time criteria;
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II.2. Logistics
Rising differentials as the price of oil increases
Transportation cost from China to the East Coast of the US are more than 2.5 times the cost for
deliveries from Mexico.
In addition, merchandise imported from China must pay MFN duties whereas goods from Mexico
enter duty-free under NAFTA rules.
Source: SAI, based on information from Rubin, J. (2008): Will Soaring Transport Costs Reverse Globalization?.
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II.3. Macroeconomic Convergence
Consistency of macroeconomic policies in
North America has been an important byproduct of NAFTA that reduces risk, and thus
reinforces the region’s competitiveness.
Today, the three NAFTA economies show
substantial convergence on key indicators:
inflation, interest rates and foreign exchange
stability.
Source: SAI, based on data taken from INEGI and Banco de México.
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II.4. Openess to Capital Flows
A. Investors vote “with their feet”…
Absence of controls to capital flows is an additional competitive advantage recognized both by
international investors and business concerns. This is particularly apparent in BRICS and in Latin
America.
Source: Adapted from The Economist, (October 12, 2013)
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II. Structural reforms underway
14
I. Structural Reforms: EDUCATION
Measuring Labor Skills
PISA tests* provide a broad, but internationally comparable indirect yardstick to measure specific
skills acquired through education.
These tests focus on three
major areas:
Reading skills
Mathematical skills; and
Science skills,
Grades in these areas tend
to be highly correlated, so
any of them can be used to
explore effects on labor
productivity.
Years of schooling is
another variable linked to
productivity.
Source: SAI, based on data taken from JOBS: The World Development Report 2013, The World Bank.
* PISA stands for Programme for International Student Assessment, is a worldwide study conducted by the OECD.
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III.1. Structural Reforms: EDUCATION
The average number of schooling years is positively related to labor productivitity, but the
relationship is relatively weak: the quantity of education matters, but not that much.
The quality of education, as measured by the PISA tests, appears to be a much more significant
factor in raising productivity. Therefore, efforts to improve this quality (especially in emerging
economies) are clearly justified.
With this in mind, early these year a comprehensive reform to Mexico’s education laws was
approved by Congress, and by a majority of state legislatures.
Correlation Coefficient:
0.4349
Correlation Coefficient:
0.7006
R2 Coefficient (Linear):
0.1891
R2 Coefficient (Linear):
0.4909
Source: SAI, based on data taken from JOBS: The World Development Report 2013, The World Bank.
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III.1. Structural Reforms: EDUCATION
Notwithstanding strong opposition from teachers’ unions, two key changes introduced:
Mandatory, national evaluation of both teachers and students, at all pre-college levels, federally
administered;
Centralization of all labor relations with teachers, to be administered by the federal government.
Statistically, the long-term payoff of improving the quality of education is quite significant: a 1%
increase in PISA grades appears to improve value-added per worker between 6% (Mathematics)
and 7% (Reading), while raising the average years of schooling appears to have a much smaller
benefit.
Logarithmic Estimation
Results:
Intercept
Estimated
Coefficient
Coefficient:
Std. Error:
t-Statistic:
Coefficient:
Std. Error:
t-Statistic*:
Years of
Schooling
-8.882
4.051
-2.193
2.847
0.881
3.230
Regressors:
PISA Grades:
Reading
Science
-26.794
-24.032
4.013
3.935
-6.677
-6.107
6.738
6.139
0.872
0.856
7.725
7.148
Multiple:
0.185
0.565
Adjusted:
0.167
0.555
* Significant at a confidence level of at least 1% .
R-Squared
0.528
0.518
Mathematics
-22.879
3.656
-6.258
5.889
0.795
7.400
0.544
0.534
Source: SAI estmation, based on data taken from JOBS: The World Development Report 2013, The World Bank.
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III.3. Structural Reforms: TELECOMMUNICATIONS
Mexico’s telecoms are dominanted by a
single private monopoly, which controls
over 2/3 of most telecom markets,
where services are overpriced and
investment is scarce.
Corrective regulatory measures have
been
judicially
challenged
and
effectively blocked by “temporary”
injunctions stay in place for years.
However, under extensive
already approved this year:
reforms
“Temporary” injunctions will no longer
apply
A new, constitutionally charted
regulatory agency has been created,
with expanded powers to, among other
things:
• Establish assymetrical
dominant operator;
regulation
to
the
• Licenses now open 100% to foreigners in nonbroadcasting sevices;
• Separation between infrastruture providers and
sellers of retail telecom services
Source: OECD
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III.2. Structural Reforms: ENERGY
Comparative costs of natural gas
A key competitive advantage for the US as a manufacturing hub rests in its dramatically expanded
availability of economically-priced energy resources, especially natural gas, of which the US is
rapidly growing as a net exporter.
Located nextdoor to Texas,
Mexico shares many of the
geological features of the
most energy rich region of
the US, and has a strong
potential to replicate its
success story.
However, today Mexico has
one of the most restrictive
regimes for the development
and exploitation of the
country’s energy resources:
such activities can only be
done by PEMEX, a state
monopoly.
Source: International Monetary Fund.
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I. Structural Reforms: ENERGY
The removal of these constitutionally-established restrictions, a highly sensitive issue as many consider
these a pillar of national sovereignty, is currently been debated in the Mexican Congress, with a betterthan-even prospect of being approved.
In the short to medium term,
this reform would open
construction and operation of
natural gas pipelines by private
firms, both foreign and
national.
US gas pipeline network
In
turn,
this
should
dramatically
improve the
availability
of
low-priced
natural gas imported into
Mexico from the US.
Later on, the new pipeline can
distribute gas extracted from
Mexican fields, developed and
exploited by private firms
under profit and risk sharing
arrangements.
Source: Energy Information Administration, Office of Oil & Gas, Natural Gas Division, Gas Transportation System.
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III.2. Structural Reforms: ENERGY
In the longer term, these arangements should open to private concerns the development of deepwater oilfields in Mexico’s exclusive economic zone, thereby reinforcing North American
competitive advantage in energy.
Experts anticipate that, if the proposed reform is approved, private investment in Mexico’s oil and
gas sector may equal over 3% of the country’s GDP over the next 6 years, and may surpass public
investment as early as 2019.
Source: Up to 2017, PEMEX data were taken from PEMEX's Business Plan 2013-2017. Private flows, and PEMEX data for later years are estimates by Marcos & Asociados (Mexico City).
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IV. Concluding remarks
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IV. Concluding remarks
1. No single NAFTA partner can single-handedly sustain the region’s competitive edge, but
they all have an excellent chance of doing so by preserving and expanding the benefits
created by their path-breaking free trade agreement reached 20 years ago.
2. Largely as a result of NAFTA, Mexico already offers a substantial contribution to North
America´s global competitiveness given its abundant and labor force, its logistic
advantage vis a vis Asia in the region’s supply chain, and its openess to international
capital flows.
3. This contribution is especially significant in manufacturing, but can also become quite
important in other major sectors of the region’s economy, such as energy and
telecommunications.
4. Last, but never least, competitiveness is something acheived by firms, rather than by
countries. This is why events like this conference are so important: they bring together
business executives and advisors who can translate potential opportunities into
concrete business undertakings.
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