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.