The Optimist

Slim Pickings

Mexico is the most staggeringly unequal society on the planet -- but it doesn't have to stay that way.

The biggest loser from early August's global market gyrations may well be Carlos Slim, chairman of Mexico's Telmex. Bloomberg estimated on Aug. 5 that he was down $8 billion in four days following the Mexican stock market's decline over concerns about the U.S. economy. But before you shed too many tears for Mr. Slim, remember that $8 billion was less than half the distance between him and the No. 2 on Forbes's global rich list, Bill Gates. That, along with the fact that Mexico still has millions of people living in absolute poverty, suggests the country has some serious issues with its governance. The good news is the situation is getting better -- even if it has a long, long way to go.

This March, Forbes calculated that the 71-year-old Slim had a net worth of $74 billion, beating out Gates by $18 billion. To put that in perspective, $18 billion is enough to extend wireless broadband to 98 percent of Americans or equal to the entire wealth of Facebook's Mark Zuckerberg. What makes Slim's wealth all the more amazing is that he is living in a country that still contains some of the very poorest people on the planet.

Worldwide, absolute poverty is defined as living on $1.25 a day or less. It is a level of income that suggests 60-plus percent of expenditures are going to food -- although the diet it can purchase is almost certainly too limited to provide adequate nutrition. That $1.25 figure is in "purchasing power parity" -- a dollar goes further in a poor country than it does in a rich one, and the poverty calculation takes account for that. At market exchange rates -- the ones you pay at the bank -- the absolute poverty cutoff in Mexico is closer to 79 cents a day. More than 3.5 million people in Mexico lived on less than that in 2008, according to the World Bank. So the money Slim lost in the first few days of August is equivalent to more than seven times the yearly income of all 3.5 million people in Mexico living in absolute poverty.

The gap between Slim and the poorest Mexican is almost certainly larger than the richest-poorest gap in any other country worldwide. Say Slim is only managing to make an annual return of 2 percent off his wealth. He's still collecting $360 million a year more in income than his nearest competitor in the wealth rankings. The poorest Mexican is maybe 50 cents a day from the very bottom in the world, while the richest is more than a million dollars a day ahead of Bill Gates.

Of course, living in absolute poverty in Mexico has advantages over being as poor in other parts of the world. For example, according to research by MIT economists Abhijit Banerjee and Esther Duflo, 95 percent of the poorest in Mexico have access to electricity, compared with around 1 percent of those living on similar incomes in Tanzania. On the other hand, the great majority of Tanzania's very poor own land, compared with a small minority in Mexico who do. And regardless of the better provision of some public services, life remains very tough for the poorest Mexicans. Banerjee and Duflo report that in rural areas, nearly one out of every 14 Mexican children dies before his or her first birthday -- a rate as bad as the Ivory Coast's.

And the richest-poorest wealth gap is a sign of a larger problem. Even by Latin American standards, Mexico is an unequal country -- the bottom fifth of the country earns about 4 percent of the income while the top tenth controls 41 percent, according to the World Bank. That a country could see such disparities suggests a failure of governance -- in particular, a failure to control monopoly profits at the top and to create opportunities at the bottom.

Take Slim. He was part of a consortium that purchased Telmex from the government in 1990, paying off the purchase cost over the next few years using company revenues. Telmex retained a legal monopoly status in much of the sector for the next six years and remained a de facto monopoly in many segments even after that. Not least, the company made considerable sums thanks to its control of telephone traffic from the United States. In 1997, it charged two to three times its costs to complete calls from the United States, alone accounting for $250 million to $330 million in Telmex profits in 2000. There's a long global tradition of the über-rich making their money off underregulated or government-supported monopolies -- think John Banks's East India Company, John D. Rockefeller's Standard Oil, or J.P. Morgan's Northern Securities railroad company. Slim is only the latest tycoon to benefit. But the recent history of Telmex suggests regulators didn't do their job, nonetheless.

Meanwhile, at the other end of Mexico's income distribution, the country's poorest regions went backward in the 1990s as the price of coffee fell. Already by 1993, the income of the poorest region, Oaxaca, was less than one-sixth that of the Federal District that includes Mexico City -- reflecting considerably worse education, health, and infrastructure alongside the poor quality of local institutions.

The good news is that governance at both ends of the income scale appears to be improving. In 1997, the Mexican government officially opened international telephone traffic to competition. And after the United States brought a WTO case against Mexico in 2002 on the grounds that it was breaking its treaty obligations to further open up the sector, prices dropped. Fixed-line tariffs fell by 67 percent between 1991 and 2009 -- suggesting a reduction in monopoly pricing, at least.

And to tackle the poverty issue, Mexico has rolled out some innovative and highly effective social-transfer payments to some of the poorest people in the country. For example, the Oportunidades program provides cash transfers to poor families and adds extra pesos for those parents who take their kids to health clinics and keep their kids in school. Families get $16 per month for keeping a girl in primary school and $65 for keeping her in high school, for example. By 2006, about 5 million families were benefiting from Oportunidades, up from around 2.5 million families in 2000 -- that's more than 50 percent of the poorest tenth of Mexico's households. 

The point, of course, is not to just give away money. The program is credited with about a fifth of the decline in inequality in the country between the mid-1990s and the middle of the last decade. Mothers enrolled in the program give birth to kids who are 127 grams higher in birth weight, and according to randomized controlled trial results, boys ages 12 to 17 in families enrolled in the program are 9 to 12 percentage points more likely to be enrolled in school than their unenrolled contemporaries, while girls are 13 to 14 percentage points more likely to be enrolled. Kids of families in the program are more likely to stay in school, be healthy, not smoke or drink, and have fewer sexual partners.

But Mexico still has a ways to go. As late as 2007, the World Bank was reporting that Telmex's net profit margins were more than twice that of its closest rival thanks to limited competition.  And the income gap between the richest and poorest states in Mexico is still larger than the income gap between the richest Mexican states and the poorest states of the United States. But if Mexican governance is getting a little better, there is perhaps some hope that the distance between Slim and Mexico's least fortunate will get a little smaller.


The Optimist

Three Cheers for Decline

Look on the bright side, America: Downgrading your global ambitions could make you a healthier and happier nation.

As the U.S. bond rating falls and the stock market plunges, the American Century looks to be well and truly over. While this has provoked no small amount of hand-wringing, Americans may soon come to enjoy no longer bearing the responsibility for running the world's indispensable nation.

The signs of decline are everywhere. Illegal immigrants are heading back home in search of a better life. China already leads the world in green technology and is about to become the world's biggest economy in terms of purchasing power. Two U.S.-led wars are dragging toward an end charitably described as: mission not completely failed. The United States was able to avoid default only by stopping pretty much all other government business for several weeks. And it's not only U.S. political and economic preeminence that is deteriorating, but its cultural hegemony: India's Bollywood and Nigeria's Nollywood are each producing more films a year than Hollywood (to say nothing of their superior artistic quality).

Of course, the United States still possesses greater military strength than any other country in the world. But what good has being the world's policeman done for Americans? Wielding that might meant the United States saw more combat deaths overseas last year than any other country, according to data from Uppsala University. Beyond the blood is the treasure: U.S. military spending increased 81 percent between 2001 and 2010 and now accounts for 43 percent of the global total -- six times its nearest rival, China. The U.S. military burden is equivalent to 4.8 percent of GDP, the largest economic burden of any OECD country.

It is no coincidence that the man who coined the term "imperial overstretch," Yale University historian Paul Kennedy, is British. Britain was the last country to get knocked off the top spot, after all -- and the United States could learn a lot from its experience.

Britain spent much of the 1950s pretending it was still a global power, which resulted in one of the country's grimmest decades -- food was still rationed until 1954. This exercise in delusion culminated in Britain's attempt to occupy the Suez Canal in 1957, an effort that was scuttled by the world's new ascendant power, the United States.

But it was only a year after the Suez crisis signaled the end of Britain's global reach that British Prime Minister Harold Macmillan declared his compatriots "never had it so good." He was right: Average incomes, health indicators, and levels of education were all far better than in the glory days when Britannia ruled the seas. Then, after Britain gave up on empire -- decolonizing across Africa and Asia in the early 1960s -- they got the Beatles, the Mini, and free love.

Britain may still go on about "punching above its weight" in international affairs, and it has kept some of the trappings of great-power status, such as a seat on the U.N. Security Council and a small flotilla of nuclear submarines, but its burdens are significantly less momentous. Freed from the distractions of colonial oversight and global leadership, it could retire its planet-spanning chain of military bases, shrink the Royal Navy, and devalue the pound without fears that the world would come to an end. And the country learned to collaborate without feeling equal status was a slight to its dignity -- joining the European Union, for example, and signing the Kyoto Protocol.

Could the United States go down the same track toward contented (well, most of the time), pretty-good-power status? The British experience suggests that the first step is to accept you have a problem. The simple fact that Britain couldn't afford to keep its empire together after World War II helped forge that acceptance -- and it might resonate in the United States at the moment.

Perhaps Washington could take a baby step or two toward scaling back its global commitments by returning the defense budget to its Reagan-era average, a move that would save about $250 billion a year. Surely what was good enough for a world riven by the Cold War, when the Warsaw Pact had 249 combat divisions and we lived in constant threat of global thermonuclear Armageddon, is also good enough for the United States today -- at a time when al Qaeda apparently has fewer than 100 fighters left in Afghanistan. And it really would be a baby step: Even with a $250 billion cut, the United States would still outspend China about four times over.

Defense cuts would allow the United States to tend to a few other priorities, which just might take Americans' minds off the fact that their country is no longer No. 1. Perhaps the United States could focus on constructing a high-speed rail line or two, or maybe even finish the job on extending health care. After all, of the large economies that enjoyed a AAA rating from Standard & Poor's last week, the United States ranked at the bottom of the list in terms of life expectancy, and it was the only country without universal health care. Perhaps America could also spend a little more on basic education; the United States was at the tail end of the AAA club when it came to believing basic scientific truths like evolution, and it scored lowest out of all those countries on international tests of students' math skills.

The end of Britain's imperial ambitions allowed the country to abandon national service and just relax a little. Similarly, with less need to flag the martial spirit through adrenaline-pumping threat alerts and wars on terror, the United States could find a moment to reform its criminal justice system; another international indicator where the United States remains in the lead, after all, is in percentage of its population behind bars. And once America accepts it doesn't need to work every waking hour to keep up with the Soviets, Japanese, or Chinese, perhaps it could take time for a vacation. At the moment, there is no statutory minimum for paid leave in the United States. Even Singapore provides seven days, and the rest of the AAA club gives employees minimums ranging from 18 to 30 days.

As to foreign relations, the United States couldn't -- and wouldn't -- follow Britain's example and join the European Union, but here too, there could be scope for baby steps. What about signing up for the International Criminal Court or taking a less obstructive line during climate negotiations? In fact, a decline from hyperpower status will doubtless help prolong the upward trend in international opinion of the United States. It's even possible that the U.S. government could get more done in the world by playing nice than barging around on its own.

Whatever happens to the United States in the global economic rankings, it will remain a great country. Accepting -- even embracing -- decline will serve as a reminder that American exceptionalism is built on a set of values, not stock indices. If the S&P downgrade helps the United States foster a shift toward prioritizing the good life over great-power status, perhaps it will be seen as a blessing in disguise. What's more, the United States starts out its decline with many advantages over 1950s Britain. Not least, in large parts of the country, it is already possible to find a good restaurant -- something that took the Brits 30-plus years of not-so-bad power status to achieve.

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