Improving Mexico's Economy: Learn Wealth Building

Posted on July 31, 2006 | Type: In the News
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Labor activist Dolores Huerta was criticized for telling students at a Tucson Magnet High School assembly that "Republicans hate Latinos, OK?" Clearly, her small-minded partisan drivel has no place in an educational setting. But that wasn't really the worst of her speech.

Huerta praised Venezuelan President Hugo Chavez for providing programs like free health care for his country's poor and chided the U.S. for not being more like Chavez. Here, we "give tax dollars to the wealthy" instead of using them "for the people." The minimum wage should be $16 to $22 per hour. Immigrants of any legal status are entitled to the same welfare programs as indigent American citizens and the benefits should be increased for all.

If Huerta really wanted to improve the future prospects of young Latinos, she could do better than filling their heads with the economic theories of losers. Immigrants around the world are attempting to flee socialistic countries for the opportunity and wealth in the U.S. Rather than criticizing Americans, advocates for the poor should apply the lessons of wealth building to countries like Mexico.

WHY MEXICO REMAINS POOR

Wealth doesn't come from government handouts. Wealth is created by people, who use personal effort and capital to create value in goods and services produced. These entrepreneurs flourish where government is honest, where property rights are protected and where the rule of law is honored. Low, fair taxes promote wealth building as do regulations that are clear and minimal.

Mexico's agricultural system is a great example of how that country stays poor and produces millions of desperate would-be immigrants. In the 1917 land reform, privately held farms were expropriated and given in small plots to farmers who were members of communally owned collectives.

These ejidos, or communal farms, were unproductive of course, in spite of government subsidies. Worse, the owners were denied property rights. The land could not be sold, rented or used to collateralize debt. As the Peruvian economist Hernando de Soto would point out, the land was a "dead asset," useless for wealth generation.
 
A 1992 constitutional amendment bequeathed property rights to the ejidatorios, but Mexico's famously corrupt bureaucracy has effectively blocked the reform. By 2002, only 1 percent of the land had been privatized. Forty-two percent of Mexico's rural population lives in "extreme poverty," according to government statistics.
 
Pemex, the nationalized oil company, provides another example of how Mexico's statist economic policies are dysfunctional. Mexico is the fifth-largest oil producer in the world. Yet Pemex is going broke, partly because its profits provide one-third of all government revenue, partly because foreign investment is forbidden. Mexico's proven oil reserves are nearly exhausted but Pemex, $85 billion in debt, lacks the capital for further exploration and development. Sure, no foreigners are sharing in the profits - but a huge natural resource advantage has been squandered.

Even Mexico's successful maquiladero plants, where manufactured goods are assembled, face a doubtful future. China seems poised to outbid Mexico for this low-cost, low-skill activity. China is also outhustling Mexico to create a more business friendly environment.

ONLY 25% GRADUATE FROM HIGH SCHOOL

Ideally, Mexican workers could become competitive in higher wage sectors, but Mexico has an educational system in which only 25 percent of the students graduate from high school. The educational system is highly centralized and dominated by a powerful teachers union. (Sound familiar?) As a result, students in public schools receive such an inadequate education that most of them are permanently incapable of rising from poverty.

A government that grasped the principles of free enterprise and capitalism could do much to rescue Mexico from grinding poverty and massive outflows of citizens. As George W. Grayson of the College of William and Mary writes, "If Taiwan or Singapore could lease Mexico for 20 years, gringos would be whining about the colossus of the South.' " He's right. Successful economies aren't built by "compassionate" governments with centralized power and redistributionist policies. Wealth comes from free markets and governments that protect the rights of the people, including their right to own, innovate and build.

The experience of Singapore, Taiwan and other successes shows how wrong the Dolores Huertas of the world are. Hopefully, Mexico's new president, Felipe Calderon, gets the message.

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