Slim Pickings

The biggest loser from early August’s global market gyrations may well be Carlos Slim, chairman of Mexico’s Telmex. Bloomberg estimated on Aug. 5 that he was down $8 billion in four days following the Mexican stock market’s decline over concerns about the U.S. economy. But before you shed too many tears for Mr. Slim, remember that $8 billion was less than half the distance between him and the No. 2 on Forbes‘s global rich list, Bill Gates. That, along with the fact that Mexico still has millions of people living in absolute poverty, suggests the country has some serious issues with its governance. The good news is the situation is getting better — even if it has a long, long way to go.

This March, Forbes calculated that the 71-year-old Slim had a net worth of $74 billion, beating out Gates by $18 billion. To put that in perspective, $18 billion is enough to extend wireless broadband to 98 percent of Americans or equal to the entire wealth of Facebook’s Mark Zuckerberg. What makes Slim’s wealth all the more amazing is that he is living in a country that still contains some of the very poorest people on the planet.

Worldwide, absolute poverty is defined as living on $1.25 a day or less. It is a level of income that suggests 60-plus percent of expenditures are going to food — although the diet it can purchase is almost certainly too limited to provide adequate nutrition. That $1.25 figure is in "purchasing power parity" — a dollar goes further in a poor country than it does in a rich one, and the poverty calculation takes account for that. At market exchange rates — the ones you pay at the bank — the absolute poverty cutoff in Mexico is closer to 79 cents a day. More than 3.5 million people in Mexico lived on less than that in 2008, according to the World Bank. So the money Slim lost in the first few days of August is equivalent to more than seven times the yearly income of all 3.5 million people in Mexico living in absolute poverty.

The gap between Slim and the poorest Mexican is almost certainly larger than the richest-poorest gap in any other country worldwide. Say Slim is only managing to make an annual return of 2 percent off his wealth. He’s still collecting $360 million a year more in income than his nearest competitor in the wealth rankings. The poorest Mexican is maybe 50 cents a day from the very bottom in the world, while the richest is more than a million dollars a day ahead of Bill Gates.

Of course, living in absolute poverty in Mexico has advantages over being as poor in other parts of the world. For example, according to research by MIT economists Abhijit Banerjee and Esther Duflo, 95 percent of the poorest in Mexico have access to electricity, compared with around 1 percent of those living on similar incomes in Tanzania. On the other hand, the great majority of Tanzania’s very poor own land, compared with a small minority in Mexico who do. And regardless of the better provision of some public services, life remains very tough for the poorest Mexicans. Banerjee and Duflo report that in rural areas, nearly one out of every 14 Mexican children dies before his or her first birthday — a rate as bad as the Ivory Coast’s.

And the richest-poorest wealth gap is a sign of a larger problem. Even by Latin American standards, Mexico is an unequal country — the bottom fifth of the country earns about 4 percent of the income while the top tenth controls 41 percent, according to the World Bank. That a country could see such disparities suggests a failure of governance — in particular, a failure to control monopoly profits at the top and to create opportunities at the bottom.

Take Slim. He was part of a consortium that purchased Telmex from the government in 1990, paying off the purchase cost over the next few years using company revenues. Telmex retained a legal monopoly status in much of the sector for the next six years and remained a de facto monopoly in many segments even after that. Not least, the company made considerable sums thanks to its control of telephone traffic from the United States. In 1997, it charged two to three times its costs to complete calls from the United States, alone accounting for $250 million to $330 million in Telmex profits in 2000. There’s a long global tradition of the über-rich making their money off underregulated or government-supported monopolies — think John Banks’s East India Company, John D. Rockefeller’s Standard Oil, or J.P. Morgan’s Northern Securities railroad company. Slim is only the latest tycoon to benefit. But the recent history of Telmex suggests regulators didn’t do their job, nonetheless.

Meanwhile, at the other end of Mexico’s income distribution, the country’s poorest regions went backward in the 1990s as the price of coffee fell. Already by 1993, the income of the poorest region, Oaxaca, was less than one-sixth that of the Federal District that includes Mexico City — reflecting considerably worse education, health, and infrastructure alongside the poor quality of local institutions.

The good news is that governance at both ends of the income scale appears to be improving. In 1997, the Mexican government officially opened international telephone traffic to competition. And after the United States brought a WTO case against Mexico in 2002 on the grounds that it was breaking its treaty obligations to further open up the sector, prices dropped. Fixed-line tariffs fell by 67 percent between 1991 and 2009 — suggesting a reduction in monopoly pricing, at least.

And to tackle the poverty issue, Mexico has rolled out some innovative and highly effective social-transfer payments to some of the poorest people in the country. For example, the Oportunidades program provides cash transfers to poor families and adds extra pesos for those parents who take their kids to health clinics and keep their kids in school. Families get $16 per month for keeping a girl in primary school and $65 for keeping her in high school, for example. By 2006, about 5 million families were benefiting from Oportunidades, up from around 2.5 million families in 2000 — that’s more than 50 percent of the poorest tenth of Mexico’s households. 

The point, of course, is not to just give away money. The program is credited with about a fifth of the decline in inequality in the country between the mid-1990s and the middle of the last decade. Mothers enrolled in the program give birth to kids who are 127 grams higher in birth weight, and according to randomized controlled trial results, boys ages 12 to 17 in families enrolled in the program are 9 to 12 percentage points more likely to be enrolled in school than their unenrolled contemporaries, while girls are 13 to 14 percentage points more likely to be enrolled. Kids of families in the program are more likely to stay in school, be healthy, not smoke or drink, and have fewer sexual partners.

But Mexico still has a ways to go. As late as 2007, the World Bank was reporting that Telmex’s net profit margins were more than twice that of its closest rival thanks to limited competition.  And the income gap between the richest and poorest states in Mexico is still larger than the income gap between the richest Mexican states and the poorest states of the United States. But if Mexican governance is getting a little better, there is perhaps some hope that the distance between Slim and Mexico’s least fortunate will get a little smaller.