With all eyes on Mexico, or more accurately, Mexico’s newly elected president, Dr. Claudia Sheinbaum, there are a lot of angles I’m tempted to take with this piece. I could write about how, for the first time in 200 years, she will be the first female president of Mexico. Or I could express an opinion on the fears that she and her party’s concentration of power are a threat to Mexico’s democracy. But there are already many pieces celebrating her gender, woefully dissecting the many challenges she faces and scrutinizing her history to speculate on how her presidential choices might affect her constituents and her international neighbors.
Instead, I’d like to take the opportunity to apply Institute theories to something else on many Mexicans’ minds: how can President-elect Claudia Sheinbaum help struggling Mexicans?
Mexico’s perplexing struggles
During the past 10 years, Mexico’s economy grew at an average rate of 2.1%. Mexico is considered the world’s 12th largest economy, second largest in Latin America, and the leading exporter in that region. According to the World Bank, Mexico is an upper middle-income country. These facts all seem to illustrate a country that is doing relatively well, at least economically, and by correlation, if a country is doing well economically, its citizens must be too…right?
Not exactly. Although Mexico’s poverty rate has declined, there are still over 46 million Mexicans living in poverty and over 9 million living in extreme poverty, which means they don’t have enough income for basic necessities like food. In addition to poverty, Mexicans are plagued with social issues. Under President Andres Manuel Lopez Obrador, commonly referred to as AMLO, human rights violations and violent crime continued to grow. With President-elect Claudia Sheinbaum from the same party and a mentee of AMLO, there is little hope that her policies will change the trajectory.
But this doesn’t make sense. If Mexico is considered an upper middle-income country with a steady economic growth rate, then why are so many Mexicans still living in poverty, and why is crime thriving? Isn’t it true, by economic theory, that crimes should decrease as economies improve and opportunities grow?
Truthfully, there are many political, social, and economic factors to consider when trying to understand Mexico’s situation. But I’m going to focus on a very relevant economic one revealed in The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty, chapter 7: “Mexico’s Efficiency Problem.”
To summarize the main point of the chapter, although Mexico is not poor, consistently ranks as a country with the most hardworking people, and has advanced industrial and manufacturing sectors, the country’s struggle is its focus on efficiency innovations. Efficiency innovations are important for making organizations more efficient with their operations, providing tax payments to local economies, and releasing cash flow to investors. But efficiency innovations don’t create local jobs. In fact, they usually decrease jobs and/or keep wages low. These innovations don’t create large enough markets that can pull in necessary infrastructures and institutions necessary for the long-term development of a society.
For the past 35 years, about a quarter of Mexico’s GDP has come from the manufacturing, mining, oil, and gas industries. Outsourcing is an example of an efficiency innovation, and companies in countries such as the US often turn to Mexico’s manufacturing sector for outsourcing opportunities. The issue is that efficiency innovations generate profits by increasing prices and decreasing manufacturing costs, which means that the profits generated are seen in the US but not in Mexico. Furthermore, when lower wages emerge in other regions or political relationships become strained, outsourcing opportunities are easily moved to other countries, meaning any jobs created are temporary and precarious at best. When it comes to mining, oil, and gas, these industries tend to be resource-extraction industries, and resource extraction is another example of an efficiency innovation. Relying too heavily on these innovations might promote short-term fragile investments, but not long-term development benefiting Mexicans.
A shift in focus that leads to a solution
Mexico is expected to benefit from nearshoring opportunities due to the US-Mexico-Canada Agreement and recent disputes between the US and China. But what if, instead of continuing the trend of focusing on efficiency innovations fueled by these nearshoring opportunities, President-elect Claudia Sheinbaum focused her efforts on allocating the billions in private investment she plans to attract toward another type of innovation? Market-creating innovations.
Market-creating innovations (MCIs) transform complicated and expensive products into simple and affordable products, making them accessible to a whole new segment of society that previously didn’t have access: nonconsumers. In doing so, MCIs create entirely new markets, local jobs, and profits, and inspire a culture of innovation. In contrast with efficiency innovations, MCIs foster inclusive economies and create enormous wealth for communities, the country, and its people in the process. MCIs are a long-term, sustainable solution to development struggles. MCIs create prosperity.
Mexico has had successful MCIs: Clínicas del Azúcar, Grupo Bimbo, and Opticas Ver de Verdad. These Mexican companies targeted struggle; they targeted nonconsumption, and you can read about their success in The Prosperity Paradox because this piece is already too long. But that is to say, Mexico is not unfamiliar with market-creating innovations; they are just too familiar with efficiency innovations. The new Mexican president just needs to shift the focus.
President-elect Claudia Sheinbaum has said she plans to complete and continue strategic infrastructure projects. If she grounds these infrastructure projects in a Job to Be Done and targets nonconsumption and daily Mexican struggles, then these projects can be the perfect opportunities to foster market-creating innovations. Focusing on MCIs will only help her lead Mexico into a prosperous new era.
