China and Mexico aren't often mentioned together these days. One is seen as an economic dynamo with a highly efficient, if authoritarian, political system; the other as a stagnant, crime-ridden basket case. But the two countries actually took very similar paths over the last three decades, which raises important questions about why the results have been so dramatically different.
Under Chinese leader Deng Xiaoping in the late 1970s and Mexico's PRI party in the 1980s, both countries undertook massive economic reforms designed to better take advantage of the vast U.S. consumer market, economists Timothy J. Kehoe and Kim J. Ruhl point out in a new paper for the U.S. Federal Reserve. By 1995, each seemed to be on the way up: Mexico's manufacturing sector even kept pace with China's legendary industrial productivity. But from 1985 to 2008, Mexico's real GDP per working-age person grew just 10 percent; China's grew by an astonishing 510 percent.
"I've spent a lot of time in Mexico, and people are very conscious of this there," says Kehoe. "They wonder why they're not growing as fast as they'd like and China is growing so quickly."
Why the disparity? Kehoe and Ruhl discuss some popular explanations -- Mexico's dysfunctional financial system, lack of contract enforcement, and rigid labor market -- but none is particularly satisfying given that China suffers from the same ills.
Instead, the real reason that China has been able to grow at such a healthy clip is that it's still poor. In 2009, China's GDP per capita was only $6,700 versus Mexico's $13,200. The authors hypothesize that countries with inefficient financial systems and weak rule of law can grow rapidly while they're much poorer than the market leader -- the United States -- but will eventually plateau when, like Mexico, they reach a certain level of wealth. So before too long, we may see the Middle Kingdom heading south of the border.