Break the Habit

Sunday, July 30, 2006
this is an image

Economists have long pointed out that relying on oil as a natural resource can be a long-term disaster for a developing nation. The income from petroleum exports provides cash infusions that can distort a country's economy, mask structural problems, and impede reform. Petrodollars are a lethal narcotic: A formerly impoverished country depends on short-term relief from oil profits at the risk of being reduced to an enfeebled addict.

Easy oil income also promotes dictatorial governments by allowing nationalist thugs to buy expensive weapons with which to threaten neighbors or buy off internal dissent with lavish cash subsidies. Take away oil from Venezuela and Hugo Chávez would be just another failed Fidel Castro. Evo Morales is able to offer the old bankrupt socialism to poverty-stricken Bolivia largely owing to the country's natural gas reserves.

Mexico also suffers from this unhealthy oil-exporting syndrome, in that the government uses profits from its inefficient state-run industry to spread around subsidies in lieu of enacting long overdue wealth-creating measures. But worse still, Mexico suffers a double whammy: receiving between $10 billion and $15 billion annually in remittances from its expatriate population in the United States.

Exporting its own poor turns out to be the cash equivalent of selling on the open market about a half million barrels of $70-a-barrel oil a day. The muscles of Mexico's former residents can prove as deleterious as oil derricks to the country's long-term economic health.

Millions of unemployed Mexicans now depend on money wired from the United States, where low-skill wages are now nine times higher than in Mexico. On the national level, such subsidies, like windfall oil profits, allow in just enough money to hide the government's failure to promote the proper economic conditions—through the protection of property rights, tax reform, transparent investment laws, modern infrastructure, and so on—that would eventually lead to decent housing and well-paying jobs.

It may be counterintuitive to think that checks from hard-working expatriates are pernicious. But for a developing nation, remittances can prove as problematic as the proverbial plight of the lottery winner—sudden, unearned winnings that neither reward thrift nor punish waste. In short, remittances, along with oil and tourism—not agriculture, engineering, education, manufacturing, or finance—prop up an otherwise ailing Mexican economy. This helps explain why half the country's 106 million citizens still live in poverty.

Exporting its own poor turns out to be the cash equivalent for Mexico of selling on the open market about a half million barrels of $70-a-barrel oil a day.

The billions of dollars Mexicans in the United States send back to their country pose another economic and ethical dilemma. Many illegal immigrants in the United States allot nearly half their weekly paychecks to relatives in Mexico. But such deductions come right out of the workers' food, housing, and transportation budgets here. So, to survive, illegal immigrants in the United States must endure cheap, substandard, and often overcrowded housing. They cannot easily buy their own health care or invest in safe and reliable cars.

Because the United States is a caring nation, the state often intervenes to offer illegal immigrants costly entitlements—emergency-room medicine, legal help, and subsidized housing and food—that provide some parity to all its residents.

And when immigrants are paid in cash—that is, off the books—the problem of remittances only worsens: The beneficiary, Mexico, still gets help from workers' pay; the benefactor, the United States, collects no taxes.

Along with the lack of English, illegal status, and insufficient education, remittances explain the poverty of many Mexican immigrants in the United States. In the American Southwest there are now many apartheid communities of Mexican nationals whose standard of living does not meet national norms.

Millions of unemployed Mexicans now depend on money wired from the United States, where low-skill wages are now nine times higher than in Mexico.

Americans are often blamed for such disparities, as we saw in the recent immigration protests. But the tragedy is more complicated than the failure to offer workers sufficient compensation—especially when such communities are often the recipients of millions in federal dollars to improve schools, roads, and police forces that cannot be maintained through customary taxation of local residents.

It might be cruel if remittances somehow came to an end. But it may be even crueler in the long run not to deal with a broken system that facilitates such massive transfers—both for millions here in dire need of retaining all their earnings and for millions more in Mexico in dire need of vast structural reforms.

The content of this article is only available in the print edition.