Friday, 10 January 2014

Is Mexico 'the new China'? A closer look at inequality, business and development

By Jodie Thorpe

Two recent discussions on Mexico have got me thinking about inequality, business and development.  The first was part of the BBC Radio 4 series on the ‘MINT’ countries (Mexico, Indonesia, Nigeria and Turkey) - presented by Jim O’Neill, the ex-Goldman Sachs economist who coined the term ‘BRICs’.  The second was a thoughtful article in El Pais which considered Latin America’s future, based on a dialogue between two prominent Latin American thinkers, Mexico’s Enrique Krauze and Mario Vargas Llosa from Peru.

O’Neill’s broadcast, while acknowledging the challenges that Mexico faces, including appalling problems of crime and insecurity, was upbeat.  Mexico was ‘the new China’ and the growing, youthful population and renewed export opportunities created by a decline in China’s competitiveness means Mexico has a great future.  In contrast, Enrique Krauze painted a more dismal picture – of whole regions of Mexico under the power of organised crime, unending political discord and lost opportunities.   

The issue which lies behind Krauze’s observations, and which O’Neill largely glossed over, is inequality.  Mexico is a highly unequal country – by far the most unequal in the OECD, according to that organisation’s own figures.
http://www.theatlantic.com/business/archive/2011/05/income-inequality-around-the-world-is-a-failure-of-capitalism/238837/

There is a growing consensus that rising levels of inequality are a massive problem – not just in Mexico, but globally.  An excellent lecture by Jan Vandemoortele at IDS recently laid out the mounting evidence.  High inequality slows economic growth, creates more instability and leads to low efficiency, compared to more equal countries which have greater chances of sustained growth.  Countries with high inequality have low health outcomes and significant social problems - and these negative impacts hit everyone in unequal countries, not just the poor.  In other words, the rich in unequal countries have worse health outcomes than the rich in more equal countries.

The System is Unfair

While the trend in much of the rich world until roughly 1980 was one of falling inequality, this trend has resoundingly reversed.  This turn around coincides with a period in which the free market and neo-liberalism have dominated, and in which the returns to capital have increasingly exceeded the returns to labour.  While this trend has been with us now for three decades, it has come into sharp focus with the economic crisis.  As the Economist pointed out in its special report on the world economy, the crisis showed us the unfairness of a system in which affluent bankers were bailed out whereas ordinary folk lost their houses and jobs.

I work on business and development, so for me the question is where does inequality fit in our analysis of business and its impacts on development?  If we accept, as the Economist, the IMF, the OECD and others do, that inequality is a brake on growth and significant driver of social problems, then it matters a great deal.  (There is also a massive issue around social justice which I won’t focus on here).

Few people, whether from business or the development community, have really grappled with this question. However, Peter Utting at UNRISD is one of the few who has, publishing a thoughtful paper in 2007.  In it he pointed out that business efforts (as well as efforts aimed at incentivising business interventions) primarily target social and environmental ‘protection’.  It is a technical approach that seeks to improve working conditions, for example, but not to empower workers or improve the overall position of labour.
 
His paper points to two main areas in which inequality could be tackled in the context of business and development:
  • Empowerment: increasing the voice and influence of weaker groups in society and creating accountability and other mechanisms that keep corporate power in check.  
  • Redistribution: This could include progressive shifts in the distribution of income within enterprises and value chains - to favour labour, small producers and other low-income stakeholders; fair and transparent fiscal policies and practices conducive to progressive taxation; and lobbying for redistributive policies (or at least not lobbying for regressive policies that have perverse economic and developmental impacts).
Such steps might feel unpalatable or politically uncomfortable to companies, as well as government and donors that see the private sector as a potential driver of development.  However, not tackling these issues leaves the world locked into a pathway of rising inequality, with all the negative economic impacts and social discord this brings.  It also perpetuates mistrust of business and, in the eyes of many, undermines their legitimacy as potential development actors. 

It is this perception of business and capitalism that both the optimistic O’Neill and pessimistic Krauze identified in Mexico.  Many in this highly unequal country see the current government, as well as the broader economic system, as beholden to the rich and, in particular, those linked to international capital.  As inequality rises across the globe, this is a view not unique to Mexico.

Jodie Thorpe is a Research Fellow with the Globalisation Team at the Institute of Development Studies.  

8 comments :

David Neven said...

Dear Jodie,

I think your are raising very timely and critical points here, thanks for starting this discussion. I'd like to add two related elements to it:

(1) wealth accumulation and ownership of productive assets: apart from how added value is distributed between workers and asset owners, we should explore ways in which they can become asset owners (a shift to new business models perhaps, or financial structures that allow then to link savings to shareholder value, or in some case just getting them formal titles to their land).

(2) lessons learned from other countries in terms of giving political voice to the poor, which has both capacity building and institutional change elements to it (e.g., in Belgium - I highly recommend watching the movie "Daens" on how around 1900 an exploited working class in Belgium's textile industry had to fight a small elite that controlled all the strings (money, politics, connections); it's also a good movie from a cinematogrpahic point of view, by the way, winnig an Oscar in 1994)

Jodie Thorpe said...

Hi David,

Many thanks for your comment - you raise two great points. The first in particular is a gap that needs more analysis within the area of business and development.

You're right that asset ownership can be as basic as formal land rights, an area which has been receiving more attention of late. There are also interesting examples in agriculture of farmer-owned businesses - such as Kuapa Kokoo and Divine Chocolate, or the Kenya Tea Development Agency. Small-scale farmer ownership of these companies, which include processing and manufacturing operations, means a significant difference in the degree to which farmers benefit from the crops they produce. In the case of tea, I believe something like 70% of the value reaches small-scale farmers - much higher than in other tea-producing countries.

It would be interesting to explore this area more - what are other potential models out there, how do they work, and can they be replicated?

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