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In Latin America, rich-poor chasm stifles growth
Monday, July 18, 2005

By David Luhnow and John Lyons, The Wall Street Journal



TEHUACAN, Mexico -- Sergio Martinez, a tinsmith who supported his family of seven on the equivalent of a few dollars a day, saved every peso he could to pay for a private-school education for his daughter, Griselda. As one of the few poor students in town to finish high school, Ms. Martinez dreamed of becoming an interior designer. But all she could land was a secretarial job. Now 34 years old and unmarried, she earns just $70 a week and wonders whether her father's sacrifice was in vain.

"It seems like there's a limit to how far up a poor person can go," Ms. Martinez says, echoing a complaint heard throughout Latin America, where the gap between rich and poor is among the steepest in the world and the hardest to span.

While researchers have in recent years described limits to class mobility in the U.S. and decried the growing wage gap among Americans, things are much worse just south of the border. The son of a blue-collar worker in Mexico has only a 10 percent chance of making the jump to a white-collar job, compared with a 30 percent chance in the U.S., according to a 2001 study by the Inter-American Development Bank.

Because of an abundance of natural resources and a large indigenous population, Latin American nations grew up relying on raw materials, cheap manual labor to exploit them and low government taxation. The system concentrated land ownership and wealth in a few hands, deprived governments of money to spend on education and offered little incentive for the elite to invest in human capital or technology. Latin America has also historically relied on monopolies and franchises, leaving few opportunities for entrepreneurs to advance through hard work and innovation. The American dream never became the Latin American dream.

Latin American culture tends to emphasize advancement through personal relationships rather than merit. Corporate executives and tortilla grinders alike hand their jobs down to the next generation in their families. Education gets less emphasis. Only a few years after its founding in the early 1600s, the Massachusetts Bay Colony made primary-school education mandatory. It took Brazil until the mid-1960s. Today, seven out of 10 Latin Americans drop out of high school, almost double the rate of industrialized nations and some Asian countries like South Korea.

The lack of economic and social mobility in Latin America is one reason why the region has developed slowly. In 1980, Mexico's economy was nearly four times the size of South Korea's. Last week, the World Bank's ranking of the world's biggest economies placed South Korea 11th, one place ahead of Mexico.

"By hampering mobility, you are reducing the overall competitiveness of the country, putting you at a serious disadvantage competing in international markets," says Miguel Szekely, an Oxford-trained economist who is Mexico's deputy social-development minister.

Another result is political instability. In polarized societies, the poor often take their grievances to the streets. Some countries such as Bolivia have had revolving-door presidencies in the past few years with successive leaders driven out by street protests.

Moving up the economic escalator in Mexico often means moving north of the border. At the Isaac Ochoterena middle school, just outside Tehuacan, a class of 25 children shout "No way!" in unison when asked if they want the same kinds of jobs as their parents, most of whom are bricklayers or factory workers. What would they rather do? "Live in the U.S.," one student answers, followed by a quick nodding of heads by all but two of the other children.

"There's more opportunity there," says Maria del Rosario, 15. Her six uncles work in a restaurant in Los Angeles and are saving money to buy homes there, she says, while her father, who stayed in town, works odd jobs and makes $60 a week. So many people in the state of Puebla, where Tehuacan is located, are moving to the U.S. that some people in the area call New York "Puebla York," a play on Nueva York, or New York in Spanish. The region is southeast of Mexico City and about 500 miles from the Texas border.

Almost one in five Mexican men between the ages of 26 and 35 was living in the U.S. in 2000, says Gordon Hanson, a Mexico expert at the University of California at San Diego.

Mexico does have some economic success stories to point to. Thanks in part to subsidized food and other assistance for those in extreme poverty, the proportion of people who don't have enough to eat has fallen to about 20 percent today from 62 percent in 1950, according to a study this year by Mr. Szekely. A government program developed in the 1990s, called "Opportunity," gives cash subsidies to poor families who keep their children in school. As a result, enrollment in primary school has increased.

After frequent crises in the 1980s and 1990s, Mexico has enjoyed relative economic stability in recent years, with lower inflation, more trade with the U.S., and growing markets for car loans and mortgages. That has produced hope that Mexico could one day develop a sizable middle class.

For now, a middle-class lifestyle seems a distant dream to most in Tehuacan, a city of a quarter-million people nestled in a desert valley. It is blessed with pure underground waters, which spawned a bottled-water industry in the early 20th century. (Mineral water is often called "Tehuacan" in Mexico's restaurants.) Chicken and pork processors also employ many Tehuacaneros, as do jeans-making factories.

But these industries have done little to boost economic and social mobility. A generation ago, the rich strolled on the north side of Tehuacan's tree-shaded central plaza, while the poor kept to the south. Today, the gulf has widened further. The rich use a small squadron of jets at a private airport in the north to escape on weekend jaunts, while the poor barter chilies and potatoes in an open-air market. In the highway that leads into town, the poor drive along the shoulder to let more-expensive cars zoom past.

Children often inherit their parents' jobs. In the suburb of Coapan, Norma Marquez, 33, grinds wet maize on a stone tablet to make corn tortillas. The job stretches back at least four generations in her family. Her 15-year-old daughter, also named Norma, recently dropped out of the eighth grade because she felt her education was a waste of time. She now helps her mother sell tortillas door-to-door.

In Tehuacan's business district, 26-year-old Marco Antonio Balseca is the commercial director of a soft-drink company run by his father. His family has been in the soft-drink business since his great-grandfather co-founded a bottling company in the mid-1920s. For years when the Balseca family hammered out a new labor contract, it sat down with one of the sons of late union boss Luis Rodriguez, himself a union leader.

The social and economic rank of someone's father in Latin America matters enough that 80 percent of Latin Americans listed "connections" as the single most important ingredient to success in a 2000 poll by Latinobarometro, a Chilean polling firm. More than half -- 55 percent -- said hard work wasn't enough to succeed. By contrast, a 2003 poll by the Pew Research Center for the People and the Press found that only 30 percent of Americans agreed with the statement, "Hard work offers little guarantee of success."

Mexico's government budget relies heavily on sales taxes, which dun the poor proportionately more than the rich, and less on income taxes, which many rich avoid in any event. Mexico also doesn't charge capital-gains taxes or inheritance taxes. Overall, Mexico collects about 12 percent of its economic output in taxes, according to the Ministry of Finance, well below the level in the U.S. and Europe. To accommodate a burgeoning student population, Mexico split the school day in the late 1970s into two sessions. The move reduced the school day to just four hours.

Tehuacan's wealthiest family, the Romero clan, has turned hard work and political power into a multimillion-dollar business. In the mid-1940s, the family of merchants moved to Tehuacan and expanded into the chicken, egg and pork businesses. After patriarch Zeferino Romero struck up a friendship in the late 1950s with union leader Amador Hernandez, who was close to Mexico's ruling party, the Romeros secured subsidized grain and cut-rate credits through government lending agencies, says the union leader's son, Jesus Amador Hernandez. He is now a Tehuacan political operative and union leader, too.

The power of the clan is so legendary that some locals believe the Romeros send up a plane to spray clouds with chemicals to prevent rainfall because a dry climate is better for egg production. On a recent cloudy day, an angry farmer called a local radio station to complain that the plane was back in the sky. "Why doesn't anyone investigate this? My crops are drying up," the caller demanded.

The Romeros turned down several requests for an interview. Jorge Garcia de la Cadena, who is head of the Aviculture Association of Tehuacan and acts as a spokesman for the family's business interests, says the Romeros fear that any media coverage of their businesses could increase the risk of kidnapping by gangs. He says family matriarch Socorro Romero, the 89-year-old sister of the late Zeferino Romero, has funded schools in poor areas and still personally drives to her employees' homes from time to time to give them their pay. "She cares about their welfare. She'll even tell them to stop having so many children," Mr. Garcia says.

Zeferino Romero's son, Gustavo, now runs the family's egg business, El Calvario, Mexico's second-largest. Locals describe the younger Mr. Romero as an avid game hunter and say they have seen him driving around town in a Ferrari. Mr. Garcia says Mr. Romero sold his Ferrari three years ago and hunts rabbits but not big game. Mr. Romero's children attend Tehuacan's most prestigious private school, Colegio Mexico, which is surrounded by high walls and protected by armed guards clad in black uniforms. Inside, children enjoy a low student-to-teacher ratio, high-speed Internet access, and after-school soccer and drama clubs.

"In Mexico, education is very unevenly distributed and perpetuates an uneven system," says the school's director, Esteban Setien. "Here, daddy's boy inherits the father's position at the company, and they know it." In Mexico, students who come from families in the top fifth of the income spectrum on average get eight more years of schooling than students who come from families in the bottom 20 percent, according to the World Bank. The gap hasn't changed significantly in recent years, the bank says.

Most of the Romero children have married other children of the elite. Marriage between the lighter-skinned rich and darker-skinned poor is almost unheard of in Mexico, blocking off one path up the economic ladder. Only in Mexico's soap operas does the poor maid occasionally marry the son of the boss -- and only then if the maid is beautiful and fairly light-skinned.

Jacinto Huerta, 35, has the kind of drive that could boost him into the middle class in another part of the world, but seems insufficient in Tehuacan. He was born in the mountain hamlet of San Bernardino del Lago. Because San Bernardino lacks a high school, he begged his father, who is barely able to read, to send him to live with an aunt 100 miles away when he was 12 years old so he could attend school there. She later ran out of money for school supplies and he had to leave school after the eighth grade. He arrived at age 15 in Tehuacan, the nearest city to his home village, sharing a single room with three brothers.

After taking a job as a clerk at a small stationery store, Mr. Huerta spotted opportunity in an unusual place: a cake recipe pasted on the back of a condensed milk can he found on the street. He made the cake, got hooked on baking, and scrambled to get a job at a local bakery. There he worked six-day, 14-hour shifts for $70 a week, with no training or hope for advancement.

He wanted to open his own store in Tehuacan, but without a bank account, telephone or collateral, he couldn't get a loan. Instead, he saved for a year to buy an $800 industrial cake mixer and an oven so he could quit the bakery job and start a cake business out of the kitchen of his tiny cinderblock home. Some customers come to his home, while others buy from his wife by the slice when she goes door-to-door on weekends.

Three years ago, he was forced to take a second job at one of the Romero companies to get health insurance when his wife was pregnant with twins. The job at a chicken farm pays minimum wage, about $40 a week. After a decade building his business, Mr. Huerta makes an additional $50 a week or so selling cakes. His home, which he has been building for 12 years, still lacks a shower, so the family takes a daily sponge bath by heating up water in a giant pot on the stove.

With his hard work, Mr. Huerta has advanced economically from his upbringing, but hasn't come close to the middle-class life he craves. Mr. Huerta's 64-year-old father, Primitivo, is a subsistence farmer who lives in a small house with a sheet of steel as a roof. Primitivo grows the food he eats on a small plot awarded to his family in the 1930s after Mexico's revolution. His only source of cash, about $250 a month, is pulque, an alcoholic drink he makes from the spiky maguey plant. He peddles the brew in nearby mountain towns in two plastic jugs tied to the back of a mule. The elder Mr. Huerta's savings are in the form of four sheep that he keeps in case he needs extra food or money.

Nowadays, the younger Mr. Huerta has a new ambition: to work at a bakery in the U.S. On his kitchen wall hangs a plastic picture of a New England lake scene, with sailing boats moored in the deep blue lake and mansions along the shores. To begin his journey to that lake would cost him $2,000 to pay for a border smuggler.

Mr. Huerta, who has three children, says he wants to leave for the U.S. to improve his children's educational prospects and give them a shot at a better life "so they don't suffer like I have." Mr. Huerta's eldest child, 11-year-old Jose Luis, goes to a local public school that doesn't have any computers.

Thanks in part to the program that pays parents to keep their kids in school, Mexican children get 3.7 years more schooling than their parents on average. But family background still plays a large role in determining how long they stay in school. The 2001 Inter-American Development study looked at how correlated a child's education level is with his parents, comparing the U.S. and Latin American countries. On a scale of zero to one, with one signifying maximum correlation, Brazil came in at 0.7, Mexico at 0.5 and the U.S. at 0.35, meaning the U.S. had more educational mobility.

The percentage of Mexicans ages 25 to 34 with a college degree is 5 percent, compared with 2 percent for the generation 30 years older, according to the Organization for Economic Cooperation and Development. While that suggests progress, other nations have moved faster. In South Korea, 26 percent of people in the 25-34 age group have college degrees compared with just 8 percent in the older generation.

Unions and on-the-job training have failed to make much impact in helping Tehuacan's poor advance. In May 1980, Panuncio Flores, a chicken worker who had organized a union in one Romero plant and was seeking to spread it to other plants, was found beaten to death. No one was ever charged in the murder. More recently, the city's biggest maker of jeans, Tarrant Apparel Group of Los Angeles, closed up shop after its attempts to stop a union drive attracted the ire of major customers, including Levi Strauss & Co.

In 2002, the Rotary Club in Tehuacan convinced the city's textile factories to let workers use the last hour of work to take classes in basic reading and writing. The factory would pay for 30 minutes of the instruction and the worker would forgo pay for the other 30 minutes. But workers were skeptical that the training would help them get better jobs, so few signed up. Some factory managers declined to offer the instruction in the belief that it wouldn't help workers become more productive. The program folded last year.