Tyler Cowen: belief

Transcript context

…I think we don’t fully understand why there are so many places where the long-term interest rate is more responsive to what the central bank in Washington does than what the central bank in their capital city does. That’s an important puzzle that I don’t think the economics profession fully understands at this point. I don’t know that we’ve got a framework that is, in a profound sense, better than the Dornbusch overshooting model for thinking about a range of exchange rate fluctuations. If I think about the economy of Mexico, they have NAFTA, which I’ve always thought was a good idea. They’ve done significant reforms. They have a much, much higher level of professionalism in their government than they did several decades ago. But typically they grow in the range of two to two and half percent. This, to me, is somewhat of a puzzle. What’s your take on why Mexico hasn’t done better? I agree with you that it’s a puzzle. If you had described to me in 1995, 1996, after our bailout, if you had said to me, “This is going to be the quality of Mexican economic management. This is going to be the kind of leadership that Mexico’s going to have. How fast do you think they’ll grow?” I would have expected more convergence with the United States than we’ve had. I agree with you that it’s a puzzle, and it’s not what I would have expected. In terms of understanding it, I would highlight two things. One is, Mexico has still some very serious rule-of-law issues, some very serious security issues associated with the risks of becoming more like Colombia than it wants to be, and I suspect those are larger issues than many outside Mexico appreciate. I think that’s one part of it. The other part of it is a much broader phenomenon. In some ways, I think Mexico’s problem is the same problem as Michigan’s problem. We have this tremendous phenomenon of globalization, and there’s some who are able to seize the opportunity to produce and to build supply chains across many countries, to sell their products into a global economy rather than into a domestic economy. There’s some, who by being part of the global economy, like hundreds of millions of people in China or India, are lifted to an entirely new level than they were before. But there’s a group in between those who are levering the global economy and those who are being pulled along by the global economy, who can’t really turn the global economy into an opportunity, and don’t really want to compete with Chinese labor, who are a bit left behind and frustrated. I think there would be many in Latin America who would be in that group, including Mexico. I think it’s a very profound social and economic problem.…

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