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with its best labor crowded onto a coastal plain, and with a burdensome debt legacy

from fifty years of Communist rule. Ten years ago, if you took the names off these

two countries andjust gave someone their profiles, he surely would have bet on Mexico.

And yet China has replaced Mexico as the second-largest exporter of goods into the

United States. And there is a general sense, even among Mexicans, that even though

China is thousands of miles away from America, it is growing closer to America

economically, while Mexico, right on America's border, is becoming thousands of miles

away.

I am by no means writing Mexico off. Mexico, in the fullness of time, may turn out

to be the slow-but-sure tortoise to China's hare. China still has a huge political

transition to get through, which could derail it at any moment. Moreover, Mexico has

many entrepreneurs who are as Chinese as the most entrepreneurial Chinese. Mexico

would not have exported $138 billion worth of goods to the United States in 2003 if

that were not the case. And you have many rural Chinese who are no more advanced or

productive than rural Mexicans. But on balance, when you add it all up, the fact is

that China has become the hare and Mexico has not, even though Mexico seemed to start

with so many more natural advantages when the world went flat. Why?

This is a question Mexicans themselves are asking. When you go to Mexico City these

days, Mexicans will tell you that they are hearing that

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"giant sucking sound" in stereo. "We are caught between India and China," Jorge

Castaneda, Mexico's former foreign minister, told me in 2004. "It is very difficult

for us to compete with the Chinese, except with high-value-added industries. Where

we should be competing, the services area, we are hit by the Indians with their back

offices and call centers."

No doubt China is benefiting to some degree from the fact that it still has an

authoritarian system that can steamroll vested interests and archaic practices.

Beijing's leadership can order many reforms from the top down, whether it is a new

road or accession to the World Trade Organization. But China today also has better

intangibles-an ability to summon and focus local energies on reform retail. China

may be an authoritarian state, but it nevertheless has strong state institutions and

a bureaucracy that manages to promote a lot of people on merit to key decision-making

positions, and it has a certain public-spiritedness. The Mandarin tradition of

promoting bureaucrats who see their role as promoting and protecting the interests

of the state is still alive and well in China. "China has a tradition of meritocracy-a

tradition that is also carried on in Korea and Japan," said Francis Fukuyama, author

of the classic The End of History and the Last Man. "All of them also have a basic

sense of'stateness' where [public servants] are expected to look to the long-term

interests of the state" and are rewarded by the system for doing so.

Mexico, by contrast, moved during the 1990s from a basically one-party authoritarian

state to a multiparty democracy. So just when Mexico needs to summon all its will

and energy for reform retail on the micro level, it has to go through the much slower,

albeit more legitimate, democratic process of constituency building. In other words,

any Mexican president who wants to make changes has to aggregate so many more interest

groups-like herding cats-to implement a reform than his autocratic predecessors, who

could have done it by fiat. A lot of these interest groups, whether unions or oligarchs,

have powerful vested interests in the status quo and the power to strangle reforms.

And Mexico's state system, like that of so many of its Latin American neighbors, has

a long history of simply being an instrument of patronage for the ruling party or

local interests, not the national interest.

Another of these intangible things is how much your culture prizes

education. India and China both have a long tradition of parents telling their

children that the greatest thing they can be in life is an engineer or a doctor. But

building the schools to make that happen in Mexico simply has not been done. India

and China each have more than fifty thousand students studying in the United States

today. They come from about twelve time zones away. Mexico, which is smaller but right

next door, has only about ten thousand. Mexico is also right next door to the world's

biggest economy, which speaks English. But Mexico has not launched any crash program

in English education or invested in scholarships to send large numbers of Mexican

students to the United States to study. There is a "disconnect," said President

Zedillo, among Mexico's political establishment, the challenges of globalization,

and the degree to which anyone is educating and harnessing the Mexican public to this

task. You would have to look a long time for a graduate science or math program at

an American university that is dominated by Mexican students the way most are

dominated by Chinese and Indian students.

The government of President Vicente Fox had set out five areas for reform retail to

make the Mexican economy more productive and flexible: labor market reform to make

it easier to hire and fire workers, judicial reform to make Mexico's courts less

corrupt and capricious, electoral and constitutional reform to rationalize politics,

tax collection reform to increase the country's dismal tax harvest, and energy reform

to open the energy and electricity markets to foreign investors so that Mexico, a

major oil producer, gets out of the crazy bind of importing some natural gas and

gasoline from America. But almost all of these initiatives got stalled in the Mexican

parliament.

It would be easy to conclude from just looking at Mexico and China that democracy

may be a hindrance to reform retail. I think it is premature to conclude that. I think

the real issue is leadership. There are democracies that are blessed with leaders

who are able to make the sale and get their people focused on reform retail-Margaret

Thatcher in England comes to mind-and there are democracies that drift for a long

time without biting the bullet-modern Germany, for example. There are autocracies

that really get focused-modern China-and there are others that just drift aimlessly,

unwilling really to summon their people

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because the leaders are so illegitimate they are afraid of inflicting any

pain-Zimbabwe.

Mexico and Latin America generally have "fantastic potential," says President Zedillo.

"Latin America was ahead of everyone thirty years ago, but for twenty-five years we

have been basically stagnant and the others are moving closer and well ahead. Our

political systems are not capable of processing and adopting and executing those

[reform retail] ideas. We are still discussing prehistory. Things that are taken for

granted everywhere we are still discussing as if we are living in the 1960s. To this

day you cannot speak openly about a market economy in Latin America." China is moving

every month, added Zedillo, "and we are taking years and years to decide on elementary

reforms whose needs should be strikingly urgent for any human being. We are not

competitive because we don't have infrastructure; you need people to pay taxes. How

many new highways have been built connecting Mexico with the U.S. since NAFTA?

[Virtually none.] Many people who would benefit from government expenditure don't

pay taxes. The only way for government to serve is get people to pay higher taxes,

[but] then the populism comes up and kills it."

A Mexican newspaper recently ran a story abouthow theConverse shoe company was making

tennis shoes in China using Mexican glue. "The whole article was about why are we

giving them our glue," said Zedillo, "when the right attitude would be how much more

glue can we sell them? We still need to break some mental barriers."

It is not that Mexico has failed to modernize its export industries. It is losing

ground to China primarily because China has changed even faster and more broadly,

particularly in educating knowledge workers. As business consultant Daniel H. Rosen

pointed out in an essay in The International Economy journal (Spring 2003), Mexico

and China both saw their share of global exports grow in many of the same areas during

the booming 1990s-from auto parts to electronics to toys and sporting goods-but

China's share was growing faster. This was not just because of what China was doing

right but because of what Mexico was doing wrong, which was not steadily honing its

competitiveness with micro-reforms. What Mexico succeeded in doing was creating

islands of competitiveness, like Monterrey, where it got things right and could take

335

advantage of proximity to the United States, but the Mexican government never had

a strategy for melting those islands into the rest of the country. This helps explain

why from 1996 to 2002, Mexico's ranking in the Global Competitiveness Report actually

fell while China's rose. And this was not just about cheap wages, said Rosen. It was

about China's advantages in education, privatization, infrastructure, quality

control, mid-level management, and the introduction of new technology.

"So China is eating Mexico's lunch," concluded Rosen, "but more due to the Mexican

inability to capitalize on successes and induce broader reform than to China's lower

wage workers per se." In other words, it's reform retail, stupid. According to the

Doing Business in 200S report, it takes an average of fifty-eight days to start a

business in Mexico, compared with eight in Singapore and nine in Turkey. It takes

seventy-four days to register a property in Mexico, but only twelve in the United

States. Mexico's corporate income tax rate of 34 percent is twice as high as China's.

The McKinsey Quarterly report "Beyond Cheap Labor" noted that since 2000, as China

joined the WTO and started to take advantage of the flattening of the world, Mexico

lost 270,000 assembly jobs, and hundreds of factories closed. But the main advice

the report had for Mexico and other middle-income countries feeling squeezed by China

was this: "Rather than fixating on jobs lost to China, these countries should remember

a fact of economic life: no place can remain the world's low-cost producer

forever-even China will lose that title one day. Instead of trying to defend low-wage

assembly jobs, Mexico and other middle-income countries should focus on creating jobs

that add higher value. Only if more productive companies with higher-value-added

activities replace less productive ones can middle income economies continue down

the development path."

In short, the only way for Mexico to thrive is with a strategy of reform retail that

will enable it to beat China to the top, not the bottom, because China is not focused

on beating Mexico as much as it is on beating America. But winning that kind of race

to the top takes intangible focus and will.

You cannot maintain rising standards of living in a flattening world

when you are up against competitors who are getting not only their fundamentals right

but also their intangibles. China does not just want to get rich. It wants to get

powerful. China doesn't just want to learn how to make GM cars. It wants to be GM

and put GM out of business. Anyone who doubts that should spend time with young

Chinese.

Said Luis Rubio, president of Mexico's Center of Research for Development, "The more

self-confidence you have, the more it diminishes your mythologies and complexes. One

of the great things about Mexico in the early 1990s was that Mexicans saw that they

could do it, they could make it." A lot of that self-confidence, though, has been

lost in Mexico in recent years, because the government stopped reforming. "A lack

of self-confidence leads a country to keep chewing on the past," added Rubio. "A lack

of self-confidence [in Mexico] means that everyone in the country thinks the U.S.

is going to take Mexico to the cleaners." That is why NAFTA was so important for

Mexico's self-confidence. "What NAFTA accomplished was to get Mexicans to think

forward and outward instead of inward and backward. [But] NAFTA was seen [by its

architects] as an end more than a beginning. It was seen as the conclusion of a process

of political and economic reforms." Unfortunately, he added, "Mexico did not have

a strategy for going forward."

Will Rogers said it a long time ago: "Even if you're on the right track, you'll get

run over if you just sit there." The flatter the world gets, the faster that will

happen. Mexico got itself on the right track with reform wholesale, but then, for

a lot of tangible and intangible reasons, it just sat there and reform retail stalled.

The more Mexico just sits there, the more it is going to get run over. And it won't

be alone.

Companies and the Flat World

::::: TEN

How Companies Cope

Out of clutter, find simplicity. From discord, find harmony. In the middle of

difficulty, lies opportunity. -Albert Einstein

As I conducted interviews for this book, I kept hearing the same phrase from different

business executives. It was strange; they all used it, as if they had all been talking

to each other. The phrase was, "Just in the last couple of years. . ." Time and again,

entrepreneurs and innovators from all different types of businesses, large and small,

told me that "just in the last couple of years" they had been able to do things they

had never dreamed possible before, or that they were being forced to do things they

had never dreamed necessary before.

I am convinced that these entrepreneurs and CEOs were responding to the triple

convergence. Each was figuring out a strategy for his or her company to thrive or