Is Mexico at risk of falling into the “middle income trap?”
Much has been written about this infamous trap in economics, which refers to the situation in which a middle-income country — which Mexico is becoming — can no longer compete internationally in standardized, labor-intensive goods because of wage increases, but also struggles to compete in higher value-added sectors, because of low productivity.
In short, this means a country is no longer poor, but not yet wealthy, and can get stuck — unable to advance economically. The danger of this is that a middle-income country can then fail to attract additional foreign direct investment into lower-skill industries, due to a relatively high cost of labor, yet lack the skilled labor and productivity to attract investment in other sectors.
Further complicating matters, a common solution to get out of the “trap” is a currency devaluation that, while lowering labor costs, can create many other problems.
The recent strengthening of the peso has put Mexico at risk of this dilemma, which I have written about previously. Mexico needs to evolve beyond relatively low-skill, basic manufacturing and service jobs to those that are of higher skill levels, and/or to increase productivity of existing jobs. This means more output from each worker, which tends to lead to increased wages, higher-skill work, and ultimately improved standards of living for workers.
But is this really happening in Mexico?
Part of what makes the country so fascinating to watch is that a transformation across multiple industrial sectors is taking place at the same time — right before our eyes. There is an industrialization boom taking place in the manufacturing sector, being led by the auto industry but there is also significant investment in aerospace, healthcare and other industries. There is a boom in the food and beverage industry, with exports hitting record highs across many products in that sector.
There is also an infrastructure boom, with investment and improvements pouring into airports, ports, highways, and trains. There is a tourism boom, with tourist spending hitting record highs across the country. These transformations are undeniably creating new and better jobs for many Mexicans, but are they improving productivity?
Mexico is receiving record amounts of foreign direct investment, with the vast majority continuing to be in the manufacturing sector. Perhaps of most interest, many of these investments are going into higher skill manufacturing in new technologies like electric vehicles, solar panel production and medical devices, which are industries that have more advanced technology, require higher skill levels and as a result will pay workers better wages.
The recent US $5 billion investment announcement from Amazon Web Services (AWS) into cloud computing infrastructure is especially promising. This investment, to be made in the center of the country in the state of Querétaro, will serve to boost Mexico’s digital transformation across many industries.
The investment from AWS is a game changer because it is an enabling technology, allowing companies to lower costs and improve productivity in their operations. In this sense, an investment like this can have a much larger, “multiplier” effect, given the impact it can have on many other companies.
Since 2017, AWS says that it has up-skilled over 400,000 Mexicans in digital technologies, and will train an additional 200,000 by 2026. An investment in infrastructure along with the training provided by AWS will allow businesses of all sizes to better leverage vital digital resources like cloud computing.
It is not easy for an emerging economy like Mexico to attract investment in both new technologies like electric vehicles and into enabling technologies like cloud computing.
The fact that Mexico has had significant investment announcements in both of these strategic areas is a very bullish sign for the country’s economy. These types of investments will help by providing higher-wage jobs, raising the standard of living of workers, and ultimately helping the government to have the resources it needs to invest in important areas such as education, health care and infrastructure for its citizens.
Travis Bembenek is the CEO of Mexico News Daily and has been living, working or playing in Mexico for over 27 years.
Great article, super insightful. I do believe thatMexico’s trading relationships and geographic proximity may allow the country to avoid this dilemma.
I’m Canadian and American, I have lived in CDMX for over 6 years. For this otherwise wonderful country to be called anything middle it will have to address providing a living wage to its working population, access to free and better education for its youth and repairs to its infrastructure , especially its roads. Until then , I weep for what most Mexicans put up with.
Mexico is in an enviable position, geographically located, a young population, and lots of foreign investment pouring in! What is lacking is a reliable infrastructure to support the growth. From fresh water to waste water, and water resource management, the country is dead last in spending for this area. One only has to look at what happened in Monterey to the water supply to realize that for a country to be successful, basic infrastructure needs must be a priority.
Dear Travis – If “ Mexico needs to evolve beyond relatively low-skill, basic manufacturing and service jobs to those that are of higher skill levels, and/or to increase productivity of existing jobs,” how much time does she have? ‘Evolve’ implies slow. Does Mexico have a decade or more or is this trap a more immediate risk? Thanks so much for your insightful articles and strategic thinking
Dear Brad – great question. I think that Mexico has some time. There are clearly alot of Nearshoring “tailwinds” of investment flowing in that is helping. I think that if this weren’t happening, there would be a risk of stagnation in the short term. Given the above, I think that this evolution, which is already happening, needs to take place on a large scale in the next 3-5 years. If Mexico can take advantage of this in a big way, I think they will have in effect “stepped over” and avoided this trap….
Hola, Travis. I’ve lived in Mexico for 50 years, which is most of my life. I was involved in education for many years and raised 3 sons who went through the Mexican educational system in private schools. Mexico is a wonderful country with wonderful people who are not being adequately prepared for what is currently happening and what is coming in the future.
First and foremost, there must be security for all residents. There must be rule of law and an end to impunity and corruption. There must be a drastic improvement in the country’s overall infrastructure, water being the most urgent problem that needs to be solved.
However, with all of the above in place and functioning, Mexico will not prosper unless and until its education system is totally revamped and improved, especially public school education beginning in elementary school and going all the way through university level. There is not enough space or time here to expound on this but if Mexico wants to compete, it needs to take a page from S. Korea’s playbook and analyze how S. Korea went from being a poor post-war country to an industrial powerhouse. The basis for their success is their education system, which has consistently turned out extremely well prepared citizens who are able to have good lives and are very productive. Mexico can do the same. It’s a question of the government and the teachers’ unions willingness to do it.
Great comments Carl…I agree with you 100% that education must be further prioritized
Banal : all that is old news, it’s been known for decades that Mexico has been failing to reach its potential, 50% of the workforce is casual (75% casual in the big employment of areas of tourism & construction) no education, no rights with poverty level wages & no training. The opportunity of friend-shoring will pass Mexico by : it takes literally decades to have a skilled, educated workforce and the necessary infrastructure – to say nothing of corruption and crime. Amazon claiming to have trained 400,000 with another 200,000 to come says it all
I have been living in SW Mexico for 15 years, we have employed a local work force for many years, we have experienced just about every experience. There is no way this work force will enter the next phase of productivity, it’s not because of their disinterest , it’s because for those 60 million plus dependence on the pay cheque to pay cheque. This existence suites the elite, nothing is ever going to change. All the Rar Rar is crap.
Not very optimistic as regards improving the education and productivity of workers. AMLO has gutting reforms meant to improve the quality of public education, including in the recruitment of qualified teachers and the use of testing and evaluation. Pure politics meant to gain popular support from teachers and their supporters unions. Private schools will continue to churn out educated elites, but broad based improvements have been stymied.