From the June 2010 issue of Research Magazine • Subscribe!

Disorder on the Border

If Mexico becomes a failed state -- or, worse, a narco-state -- much blame will be laid at the door of its Northern neighbor.

Remember the giant sucking sound? That was the catchy campaign slogan on which businessman H. Ross Perot ran as an independent in the 1992 presidential election. The sound was supposed to represent American jobs disappearing across the southern border as a result of the extension of the North American Free Trade Agreement between the United States and Canada to include Mexico.

Bill Clinton, who also campaigned on an anti-NAFTA platform to please his union backers, promptly turned around once elected and got the pact ratified. While some jobs did move south, it didn't impact the overall U.S. employment picture. By the end of the decade, we were enjoying full employment with pockets of labor shortages. Even though leading Democratic candidates in the 2008 presidential primaries still threatened to 'renegotiate' NAFTA, it still stands and, by and large, is judged a success.

Economic Prosperity

And nowhere is that more the case than in Mexico. The country that in the 1980s teetered on the brink of bankruptcy has completely turned around. Not all of its success can be attributed to free trade with the United States -- financial deregulation and bank privatization, for instance, began in 1990 -- but access to the giant U.S. market has been instrumental in transforming the country from a struggling oil exporter to an industrial power. Currently, the United States buys over 85 percent of Mexico's exports and 90 percent of its manufactured goods. In 1980, only 55 percent of its exports went to El Norte.

A set of intelligent policies laid the foundations for a benign cycle. Economic growth averaged 5.5 percent in the second half of the 1990s, and slower but steady growth continued over the past decade. A close link to the U.S. economy sheltered Mexican financial markets from the worst of the financial turmoil that ripped through emerging economies in 1997-1998 and again in 2001. The currency held up its value well. In fact, the last peso devaluation dates back 15 years. All this helped government efforts to get fiscal policy under control, reducing international debt from a peak of nearly 70 percent of GDP in the second half of the 1980s to around 17 percent today. The debt-to-exports ratio went down from over 300 percent to close to 50 percent over the same time period.

Reforms continue, and now the government is pushing anti-monopoly measures to promote a more competitive environment.

Democracy followed in the footsteps of economic reforms. For over 80 years prior to 2000, Mexico was ruled by the Institutional Revolutionary Party (PRI), with each president after his six-year term hand-picking a successor from the ranks of loyal PRI functionaries. But over the past decade, there has been genuine political competition and generally free and fair elections.

The Mexico City stockmarket has bloomed in a climate of economic success and financial stability. Since 1995, the Bolsa's IPC index has increased 17-fold. More recently, it regained all the ground lost in 2008 and early 2009 and rose to record territory once more. Over the same time period, the Dow Jones Industrial Average increased less than threefold. An unintended consequence of the run-up in Mexican stock prices has been the fact that local telecom tycoon Carlos Slim has leapfrogged Bill Gates and Warren Buffett to become the world's richest man on this year's Forbes list.

Even more to the point, Mexico's example has been contagious, encouraging Brazil and, to some extent, Argentina, South America's two biggest economies, to implement market reforms.

Failed State

Yet, while Mexico should, by rights, enjoy the fruits of its newly found economic prosperity, many political observers worry that Mexico might spin out of control and even become a failed state along America's 2,000 mile-long southern border. Drug violence that has been spreading at an alarming rate across Mexico's northern states and into the capital, is now spilling over the border into the United States. Back in early 2009, the Pentagon and the CIA created a stir by naming Mexico and Pakistan two failing states that represent a key security concern for Washington. Under political pressure, discussions about a potential disintegration of Mexico's central government have been toned down, but concern, along with violence, has not diminished.

Just as impetus for economic and financial reforms originated in Mexico, so corruption and incompetence in government, both local and central, as well as in Mexico's armed forces and the police, are key reasons for the spreading chaos. But if Mexico becomes a failed state -- or, worse, a narco-state -- much blame will be laid at the door of its northern neighbor.

Policy-Making Paralysis

It stands to reason that when the United States sneezes, Mexico catches pneumonia. Mexican drug gangs originated and went from strength to strength by sating huge demand for drugs from the U.S. market -- just as Mexican factories along the northern border supply manufactured goods to U.S. consumers. But at least the U.S. government has always been serious about combating drug use at home and trafficking abroad. More important, perhaps, is the fact that Mexican drug gangs grew out of and remain heavily involved in another illegal activity -- namely, human trafficking -- which is a business that was created entirely by misguided U.S. government policies.

Estimates of the illegal alien population of the United States range from around 7 million to 20 million, but most authoritative figures put it at 11 million to 13 million. The number of people living in households which are headed by illegals is estimated at 14 million. This represents nearly 5 percent of the population, but a far larger percentage of the workforce. (Illegals tend to come here to work. While they have more children, there are few working-age students and retirees among them.)

This reveals a real need in the U.S. economy for cheaper, flexible, unskilled labor. The need has existed for decades and has been growing. Illegal aliens have been outnumbering legal ones, whose numbers have also grown substantially, since the 1990s. That a functioning government has not been able to address this need and regularize and legalize the inflow of such labor is scandalous.

It is also extremely dangerous. The question is not that the United States has lost control over its border with Mexico, but that there is real economic demand and plentiful supply. The two will always strive to meet, going around official restrictions. Illegal border crossings are conservatively estimated at half a million annually, but the actual number may be considerably higher. Of the undocumented population, more than 80 percent are Mexicans and other Latin Americans, many of whom also enter the United States through its southern border.

Attempts to fix the problem have been made, most recently by the Bush Administration. However, the U.S. government seems to be paralyzed on this and many other subjects. Worse, most immigration proposals -- such as the requirement for illegal residents to come out of the shadows and return home before being admitted legally -- seem stillborn. While enforcement of immigration laws has been stepped up, and border security has improved, no meaningful reform is forthcoming. The resultant situation is tailor-made for organized crime. Mexican gangs will control border crossings -- which will doubtless continue -- while also providing protection to undocumented persons living in the United States and controlling the market for cheap labor. Meanwhile, they will use their ill-gotten gains to suborn government officials.

Arms Control

Meanwhile, paralysis in the U.S. government and deep ideological divisions make the possibility of any gun control remote. Even though chiefs of police and many other highly respected law-enforcement officials would like to restrict the sale of assault weapons, submachine guns and other weaponry designed neither to hunt nor to protect an individual's life and property, such weapons remain easily available. (Thank God the National Rifle Association has not yet decided that the Constitution allows citizens to own so-called tactical, or battlefield nuclear weapons, which could be considered an equivalent of firearms.)

Mexican police and government officials complain that they are easily outgunned by drug cartels getting military weapons from the United States and smuggling them across the border.

In short, bipartisanship in the United States helped Mexico prosper economically, as NAFTA was negotiated by George H.W. Bush and signed into law by Bill Clinton. Now, lack of U.S. government cohesion even in vital areas is destroying America's southern neighbor. Violence has reached from Mexico into the United States and, as security agencies warn, there will be more fallout in coming years.

Alexei Bayer, a native Muscovite, is a New York-based economist.

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