Part 1 is here.
Part 2 is based on a stunning report from Bank of America: nominal dollar wages in Mexico are now lower than in China. (Hat tip: Beyond Brics. But note that we here at TPTM called it first!)
This is a great thing for China, obviously, and it has benefits for Mexico. It means that “nearshoring” will continue, as Mexico gains competitiveness against China. In fact, Mexico became competitive back in 2008, right after the big depreciation in the peso. The below chart shows Alix Partners’ decomposition of the landed costs (i.e., wholesale cost for U.S. sales) for five representative goods. In 2005, China was cheaper than Mexico; by 2008, that was no longer true.
But is it a good thing for Mexico? I am less certain. A boom based on nearshoring and continuing low wages ($2.50 an hour from BofA; $4.53 from the BLS) is a good thing for investors and the resulting employment boom is a good thing for Mexicans, but it does not presage much future growth. (In addition, the gains from the good news are already priced into the markets; ship-sailed if you’re looking for easy returns.)
Mexico is a solid middle-income democracy with a serious (but not existential) organized crime problem. It has made amazing strides in eliminating unnecessary volatility. The country works. But looking over the recent hype it’s attracting (see here and here and here.) I feel a little like Chris Rock. “You’re supposed to have a democracy! You’re supposed to have a middle class! You’re supposed to have factories! What do you want, a cookie?”
In other words, Mexico is performing just as you would expect a stable middle-income country with substantial long-term problems to perform. The expectations of super-returns and blather about Aztec Pumas (or whatever) is just hoping for a cookie.
P.S. Noah Smith expects rising demand for Mexican manufactures to raise wages. (You should all read his blog! It is a very good blog.) His error is simple: the demand for Mexican manufactures is extremely elastic, because Mexico is not the only country in the world.
P.P.S. No, I have not started to follow Twitter feeds. I hate that thing even more than Facebook.