Cross-Border
Economic Bulletin - April/May 2002
Are Incomes
in Baja California "Catching Up" to San Diego?
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Since the early 1990s, economists have written extensively about income convergence between geographical regions. Not surprisingly, the idea of "convergence" has several definitions, but perhaps the most salient addresses the question whether incomes in one region are catching up to the level of income in a comparison region. For example, are incomes in Baja California catching up to the level of incomes in San Diego and Imperial Counties? |
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Jim
Gerber
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This particular question is important because it tells us a lot about the effects of US-Mexico integration. For example, a lack of income convergence would imply that a further deepening of the US-Mexico economic relationship might not have any effect in reducing average income differences. If incomes are not converging in the border region, where integration between the US and Mexico is most intense, then many of the pressures on US-Mexico relations—environmental contamination, migration, institutional capacity to enforce rules, trade and investment conflicts, etc.—are unlikely to diminish over time. This would be a worrisome prospect, as it would fly in the face of the assumptions of US and Mexican policymakers about the benefits of economic integration.
This issue of the Cross Border Economic Bulletin examines the issue of income convergence in our local border region. Its main findings are:
• There
is no evidence of income convergence when pesos are converted to dollars
at market exchange rates, but
• Failure to control for purchasing power differences between the
peso and the dollar is misleading;
• Income convergence is very evident when purchasing power differences
between the peso and dollar are taken into account;
• The historical pattern shows no income convergence from 1970-1985
and strong convergence from 1985-1999;
• Two forces behind income convergence include (1) a more rapid increase
in worker productivity in Baja California than in San Diego or Imperial
Counties; and (2) an increase in the share of Baja’s population that
works.
The
local pattern
The US Department of Commerce
estimates annual income at the county-level but no Mexican agency provides
equivalent estimates at the municipio-level. Since Mexico’s national
statistical agency only publishes state-level data, city (municipio) incomes
for Tijuana, Tecate, Mexicali, and other border jurisdictions have to
be estimated. To my knowledge, no one has attempted to do this in a systematic
way. However, using employment data from Mexico’s decennial Censuses
of Population and Housing, it is possible to construct reasonable values
based on (1) total state income, broken down by economic sectors and (2)
the share of municipio employment in total state employment, again broken
down by economic sector.
The result
is a time series of estimates of income for each of the border municipios,
in pesos. Given the purpose of this exercise, US dollars are used to compare
incomes across the border. The estimates are shown in Table 1.
Table
1: Ouput per capita , US$, market exchange rates
Mexicali
Tecate
Tijuana
Imperial
Co.
San
Diego Co.
According to Table 1, Mexican incomes remain approximately the same 17-20
percent of San Diego income in 1999 as they were in 1970. Clearly there
is no catching up, and the situation could even be described as having deteriorated,
given that the absolute difference between San Diego and Tecate, the poorest
region, widens from about $4,700 to $29,000. Even if adjustments for inflation
between 1970 and 1999 are taken into account, the real gap widens in absolute
terms.
Table 1 is
useful for understanding the purchasing power of Mexican income earners
who convert their pesos to dollars and spend them in the US. This is the
sort of information that a US exporter might want to have if they are
trying to sell US-made goods in Mexico. The numbers in Table 1 are absolutely
misleading, however, if they are used to estimate the purchasing power
of Mexican incomes inside Mexico. The reason for the distortion is that
prices are not the same in Mexico and the US, so that 6,800 US dollars
in Mexico buys a larger basket of goods and services than it buys in the
US. In other words, an accurate comparison of living standards requires
a further adjustment to allow for differences in prices between the US
and Mexico.
Table 2 shows the same information as Table 1, but adjusted for purchasing
power differences in the two countries, and price changes over time. The
estimates in Table 2 use information from the International Comparisons
Project at the University of Pennsylvania, which is updated in the Penn
World Table of international comparisons. Estimates given in Table
1 are adjusted to capture the differences in the peso’s purchasing
power inside and outside Mexico.
Table
2: Ouput per capita , 1985 US$, purchasing power parity
Mexicali
Tecate
Tijuana
Imperial
Co.
San Diego
Co.
Once price differences are taken into account, convergence in incomes
is evident. Mexican border incomes in Baja California are about one-third
of San Diego incomes in 1970. They maintain about the same one-third
of San Diego incomes until approximately 1985, but start to close the
gap thereafter.
By 1999, they are about one-half San Diego incomes.
The pattern
along the US-Mexico border
Looking beyond local conditions in the California-Baja California border
region, the pattern of convergence repeats itself along the entire US-Mexico
border. Little or no income convergence takes place from 1970 to 1985,
followed by significant convergence from 1985 to 1999. Statistically,
the rate of convergence is a little over 2 percent per year, at which
rate about half the income gap disappears in approximately 27 years.
It is significant that convergence appears sometime in the mid-1980s (given the gap in years, it is impossible to be certain about the year-to-year pattern or to precisely date the turnaround) since that is the period when Mexico began its economic policy reforms. For example, Mexico joined the General Agreement on Tariffs and Trade (GATT, now subsumed under the WTO) in 1986, and a few years later opened the NAFTA negotiations.
It is also
significant that the speed of convergence is propelled by the much faster
growth that has taken place in Mexican border cities in the states of
Coahuila and Chihuahua, located in the central part of the border region.
Growth rates of income and productivity have been much higher in that
region, and the income gap has closed faster.
Why convergence occurs
Standard economic theory predicts income convergence between developing
regions and high income, industrially developed ones. The reason for the
prediction is that capital is scarce in the former and abundant in the
latter, causing rates of return to be higher in low income areas, and
capital to flow into them. It’s a nice theory, but looking at data
from around the world, it does not hold empirically. In most cases, the
gap between rich areas and poor areas has grown, and has created a large
and growing economics literature devoted to explaining the patterns.
Many economists share the idea that there are "convergence clubs," which are regions or groups of relatively homogeneous countries where differences diminish over time (for example, countries in Western Europe). The forces responsible for the pattern of convergence within groups is still debated, but at least some economists believe that there is a type of "contagion" that works in the economy. Contagion can happen through the integration of markets, investment and trade flows, labor flows, technology sharing, educational institutions that cross boundaries, and any number of other forces that lead to border crossing. It is not difficult, then, to see the US-Mexico border in these terms.
In particular, the data show that productivity has grown much more rapidly in the border region of Mexico. This is precisely what one would expect given the social and economic integration of the border and the resulting opportunities for US, Asian, European, and other investment to bear fruit.
Table 3 shows
labor productivity in constant dollar (1985 dollars) purchasing power
parity terms. From this perspective, the productivity differences between
a worker in Tijuana, and one in the Imperial Valley, is almost insignificant.
Indeed, comparisons along the entire US-Mexico border show that a number
of US counties have lower productivity than a number of Mexican cities,
or municipios.
Table
3: Ouput per worker, 1985 US$, purchasing power parity
Mexicali
Tecate
Tijuana
Imperial
Co.
San Diego
Co.
Conclusion: What we haven’t measured
Income convergence along the border is happening, but it is worth clarifying
what has not been measured in this exercise. In particular, the estimates
in this Bulletin are based on a regional—county or city—equivalent
of gross national product per person. The local estimates vary by state
income, structure of the economy, and the number of people working in
each sector, but it is a crude measure of the total value of output. In
particular, it does not measure distribution, either within the region,
or between the region and the rest of the country. For example, if Mexico
City takes a large share of the output in the form of taxes, and returns
a smaller share of the output in the form of revenues to cities, it is
not reflected in the numbers. In addition, the numbers are an average
value based on a calculation that assumes everyone is given an equal share
of the pie. Inequality in the distribution of income, which is very high
in Mexico by world standards, is also not reflected in the data. And finally,
all the usual "bads" of an economy escape measurement in the
figures on national and regional output, with environmental damage and
crime among the more prominent of these.
In spite of these limitations, it is heartening to see that the region is not forever doomed to its current income asymmetry. In particular, the closing of the productivity gap, as shown in Table 3, is the only long run foundation for reducing the US-Mexico income gap.
A longer version of this Bulletin is available on the author’s website.
The Cross-Border
Economic Bulletin is prepared monthly by Dr.
Jim Gerber, professor of economics at San
Diego State University. It is underwritten by 