Why aren’t Mexican managers as good as managers in the States?

Mexico City’s Buena Vista Walmart is the first super-market I’ve ever seen paralised by a trolley-jam. It is not more busy than any other large city supermarket, and not understaffed. No: the reason it takes ten minutes to walk from one side of the store to the other every single night is because they have no baskets—only large trolleys. To my sample of Mexican Walmarts, this is unique; most Mexican Walmarts have trolleys and baskets. And so the error must have been made by the managers of that particular outlet. Of course, this is only a small example of inept management in Mexico, but it’s sadly representative—labour productivity in Mexico is about a third of that in the US. If Mexico were as well managed as the US, it would be as rich.

This all raises a few questions: why are managers in Mexico (and the developing world in general) so terrible? why are those in the US so good? and how much of the difference is able to be affected by policy?

Management in Mexico

There are many well managed businesses in Mexico, and they do very well. This suggests there are large returns to good management, and we should expect, over time, well managed businesses to displace poorly managed businesses. To an extent, this has occurred already; Walmart and Appleby’s have slowly usurped street markets and cantinas. But the pace of this transition is slow, and still most of the businesses most Mexicans deal with are run terribly, exacerbating poverty. I attribute this poor management to three causes: Mexico’s caste system, nepotistic/senioric hiring, and its abysmal school and university system.

First, Mexico actually has a caste of idle rich, which surprised me. In Australia, it’s typical that small business owners (and most large business owners) work harder than any of their employees. In Mexico however, it seems the entire point of owning a business is to avoid any painful task.

To characterise, there are some jobs which appear to be below Mexico’s entrepreneurs, and so potentially labour-saving or product-improving changes to businesses are either not realised or not acted on. In the restaurant I worked at for 3 weeks, the owner never looked inside the fridge. Had she, she’d have discovered motzarella, stored on top of raw pork sausages, which were placed directly on top of (not above: on) raw lettuce. This didn’t bother the kitchen workers—generally poor and uneducated—and so nothing changed. I lost 3kg in a day after eating from that kitchen.

So if the business owners don’t want to work, why don’t they just hire a good manager, and incentivise them with a suitably-worded contract? This problem confused me, until hearing an anecdote from a former classmate who now works in a Mexican central government department.

All public-sector job openings in Mexico have a selection process that involves, as the second-last hurdle, completing an exam. Of course, preferential hiring always finds a way: on helping to fill a senior position, my former classmate, who had worked with the preferred candidate, was instructed to write an exam that only the pre-chosen candidate could pass.

We sadly expect corruption like this in the public service of poor countries, but not in private enterprise. However we still see well-run businesses (like Walmart) hiring incompetent managers, and then not firing them. My suspicion is that much of the cause for this is the low level of security, which has begot Mexicans’ low levels of trust for those with whom they’re not acquainted. They hire an incompetent manager not because they know the manager is good, but because they know he’s not a thief.

Of course the first two reasons can be remedied by educating people. Caste can be dissolved when there’s some prospect for dish-pigs to become hotelliers, and hiring a stranger can be easier when you know that their education probably indicates competence. But on almost any metric, Mexico’s education fails. In the OECD league tables, only Brazil and Indonesia do worse. It’s not poverty—in the 90s when Korea was as well off as Mexico (it’s now twice as well off, which is telling), it still did better than the US. Of course, if children aren’t being taught to do difficult things well, universities have to pick up the slack, but in this respect, Mexico still lags: only a handful of universities educate their students to anything near a world standard. So there’s probably little reason to expect a new generation of world-class managers.

Management in the US

On returning from holidays in the US, Australians usually rave on about two things: terrible coffee served by excellent waiters. These two things are really a symptom of the same phenomenon: Americans’ desire for well-priced consistency. This is centuries old: economic historian Nathan Rosenberg points out that the great immigration westward was facilitated by cheap (not fancy) balloon houses; that the conveyor-belts of early factories were more standardised than abroad, lowering down-time when piece of machinery broke; while on the Continent skilled craftsmen made excellent, expensive things, the uneducated of America produced, by the million, less-good, less-expensive things.┬áThere is no way of producing many good, cheap things without deliberate management.

While much has been said about the Taylorism of American management—the reduction of food making to a production-line job requiring little training, for instance—I’ve seen little written about the accompanying phenomenon: the desire of American managers to turn their business into an institution. It may be gimmicky, but it seems to work. In Seattle WA, fishmongers throw fish at each other in front of tourists’ cameras; in Bakersfield CA, the town’s most popular Italian restaurant has hundreds, no thousands of photos of footballers and old newspapers pinned up on the wall; in Austin TX the best tacos are the Korean ones; LA’s favourite fast-food burger joint has an off-menu menu; and all through the country, evening road-trippers pull in at Denny’s diner to be greeted “Good morning, and welcome to Denny’s”.

The fact is that managers of businesses in the US take their role as managers far more seriously than anywhere else I’ve spent any time.

The Role of Public Policy

If I am attributing the differences in productivity between Mexico and the US to private-sector management, then what role policy? We surely can’t force businesses to be better managed. But there are some public policies (or lack of) in Mexico today which, if continued, are likely to perpetuate poverty.

– Mexico has an abysmal education system, particularly in fostering critical thinking and mathematics. It also has a culture of ‘rule-of-thumb’ (as do many relatively uneducated countries), and so getting people to accept new ideas is incredibly difficult relative to the US. Unsurprisingly, the Mexican education system is terribly corrupt, with tenured teaching jobs effectively sold or bequested, and La Maestra, the head of the the Union, being one of the most powerful political players in Mexico. Short of a very costly industrial war, there does not seem to be an easy way out of this equilibrium.

– There is no Productivity Commission in Mexico. There are plenty of great economists, especially in Mexico City and Guanajuato, but neither Federal nor (more powerful) state governments give them toothy roles in government. In Australia, where we have a very well respected Productivity Commission, commissioned reports serve as talking point documents for both sides of parliament. The result ends up being that on both sides of parliament there is nominal acquiescence to themes of productivity, especially over the long-run. Even union bosses aren’t arguing for a return to the bad old days.

– Mexico’s informal economy and poorly-developed banking system go hand in hand. Because so many businesses work solely in cash, they have no financial history able to be verified by banks: a prerequisite for any serious lending.

This leads to incredibly low deposit and loan rates. According to MarketWatch, in 2010 total bank deposits were about 15 per cent of GDP, compared with over 100 per cent of GDP in Australia. There is little surprise that small businesses–even the ones that are more productive–fail to grow if credit market access is off the table.

This is partly the fault of Mexican banks, which, despite being private institutions, are ridiculously poorly managed. Electronic banking is hardly used (for payments, salaries, anything!) and queues at major banks can be several hours long. Forcing businesses to formalise could only work if banks come up to speed, and if bad policies like deposit taxes (!!!) are removed.

While Mexico’s poverty is almost solely a result of poor management (even within the private sector), there are some policies which affect productivity in the long-term. I’d be interested to hear your ideas.

3 Comments

  1. khakieconomist said,

    March 22, 2012 @ 1:56 am

    The Rosenberg citation is

    – Rosenberg, N., `Perspectives on Technology’, p. 38., Cambridge University Press, 1976,

  2. Jonas said,

    March 31, 2012 @ 10:43 pm

    How many years experiencing do you have in the Mexican market? To me, being worked abroad and in Mexico, your so called arguments are the cliche of how Mexico works. The only thing missing from your article was that you managed to see a couple of drunken people sitting outside a bar with enourmous sombreros.

    There are so many flaws here and asupmtions that I do not know where to begin…

    “Mexico’s poverty is the result of poor management”? Have you studied the country’s politics? Do you have insights on the bureaucracy and corruption that affects the Mexican system? Clearly not…

    “low lending due to work only on cash” (sic): the low lending rates thatwe experience in Mexico are due to the fact that banks charge an arm and a leg for credit. As simple as that. While in the US a mortgage is spectacularly low, here a mortgage can run as high as 14%. Same goes for business loans. Banks ask everything as collateral and as a premium, they charge up to 20 points higher than the US (in some cases).

    I can go on here but if you are going to write about how Mexico does business, I suggest you spend more time doing business that reading how it is done.

  3. khakieconomist said,

    April 15, 2012 @ 1:19 am

    Hi Jonas, and thanks for your comment.

    Please enlighten us why, if not for poor management, labour productivity in Mexico is 1/3rd of its northern neighbour? Please tell us how a country can have such low productivity yet not be poor?

    Why do you think banks charge so much for credit, if not due to low rates of deposit and terrible management?

    As I did say, there are excellently run businesses in Mexico. These businesses are slowly displacing less well-run businesses in terms of market share, which we expect. But, sadly, these well-run businesses are outnumbered by businesses run in cliche-like fashion. Do you truly disagree, or is it your (presumably Mexican) nationality which leads you argue? Try not to have feelings in place of ideas.

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