The Future of China? Look at Mexico

In Zeno's famous paradox, a racer continually halves the distance between his original place and the finish line, but never theoretically reaches the end. The same story applies to developing countries undergoing modern industrial revolutions. In the beginning they advance at blistering speeds, gaining on the developed world with eye-popping growth numbers. As they get closer, however, the going gets tougher. Workers demand more wages and services, other countries take its place as a destination for cheap work, and the country loses the competitive edge that comes with being the world's cheapest alternative for off-shored services and imported goods. The risk for countries like Mexico and China, therefore, is that they get stuck in "middle-tier" status, having made the first big leap but still toiling in the middle of the race.

Economists Timothy Kehoe of the University of Minnesota and Kim Ruhl of New York University ask whether China's future is Mexico in a new paper. Here's the abstract below, and here's the paper:

Following its opening to trade and foreign investment in the mid-1980s, Mexico's economic growth has been modest at best, particularly in comparison with that of China. Comparing these countries and reviewing the literature, we conclude that the relation between openness and growth is not a simple one. Using standard trade theory, we find that Mexico has gained from trade, and by some measures, more so than China. We sketch out a theory in which developing countries can grow faster than the United States by reforming. As a country becomes richer, this sort of catch-up becomes more difficult. Absent continuing reforms, Chinese growth is likely to slow down sharply, perhaps leaving China at a level less than Mexico's real GDP per working-age person.

Read the full story at WSJ. As with most studies we run here on the Business site, keep in mind that passing along and teeing up a paper does not mean that we're endorsing its conclusion -- only that we find it interesting.

This article available online at:

http://www.theatlantic.com/business/archive/2010/12/the-future-of-china-look-at-mexico/68689/