In the 1980s, a new genre of interactive children’s books “where you are the hero” became popular. A book on Canada’s housing crisis might well be titled “a story where you are the villain.” It is rare that the right and the left collude to produce analogous – bad – results. Yet that is in part the story of Canada’s housing crisis. The villains come in many shapes: selfish homeowners, progressive urban planners, community activists, populist mayors and average citizens asking for a nice home and neighbourhood.

At the root of the crisis, in the simplest terms, is a dearth of housing, private and public. The gap between demand and what is being built has widened and will, in all likelihood, continue to widen. Each year, the Canada Mortgage and Housing Corporation updates its estimates of new housing units required if the gap, now a veritable canyon, is to be closed.¹ Citing a recent OECD study, the Economist suggests that Canada’s housing gap is currently the most acute among industrialized nations.²

Growing demand, with immigration largely to blame, is exacerbating the shortfall. But why does supply not follow? Leaving aside publicly funded housing, which accounts for only a fraction of supply and responds to different imperatives,³ why are developers not rushing to put new housing on the market? After all, for any other good, be it smartphones or breakfast cereals, supply rapidly adjusts to rising demand and prices. Why not housing? And why, seemingly, even less so in Canada than elsewhere?

Canada’s sticky housing market is no accident, I argue, but the outcome of a combination of public underfunding; ill-conceived, though well-intentioned, urban planning policies; land restrictions; and, of course, NIMBYs.

Why housing is different

The construction of a housing block next door rarely leaves residents indifferent. Housing cannot be separated from its environment, which is why urban planning and zoning ordinances exist. But that is only half the story. Canada is a democracy in which people are free to express their opinions and understandably feel they have a right to be consulted on matters that risk altering their environment. We also live in an enviably rich nation where, social inequalities notwithstanding, the aspiration to reasonably pleasant surroundings is seen as normal, as is our corresponding right to choose and to defend those surroundings.

The inclination to protest, encapsulated in the marvellous acronym NIMBY (Not In My Back Yard), is a favourite bogeyman of progressive urbanists, seen as not only the chief obstacle to new housing but also the gatekeeper of socially and ethnically segregated neighbourhoods.⁴ However, NIMBYs are only one villain in our housing story.

Housing is also different because of its relation to land, by definition limited. Every location is unique. There are no substitutes for locations within, say, 30 minutes of downtown Toronto. The fact that houses are available at half the price in Sudbury is of little solace to a young couple where both partners work downtown. Restrictions (zoning bylaws, ordinances …) that limit land available for housing or the number of units that can be built per lot will, predicably, raise unit prices. The more the location is coveted (i.e., closer to downtown), the greater will be the upward effect on prices. Like NIMBYs, as we shall see, there are always “good” reasons for limiting residential land.

But let us not forget the understandable desire to shape cities entertained by urban planners and architects, heirs to a noble utopian tradition. Urban planning, as a profession, is traditionally wary of markets, with a natural inclination to view the profit motive with suspicion. In the ideal, well-planned city, housing should be a right, not a commodity.

Virtuous (and not so virtuous) NIMBYs

I can think of no better demonstration of virtuous motivations (certainly in the eyes of the protagonists) than the Toronto Annex story.⁵ The Annex is a highly coveted neighbourhood near downtown Toronto with magnificent Edwardian and Victorian houses, home to Margaret Atwood and other luminaries, among them Galen Weston, Jr., CEO of Loblaws, and Cleophee Eaton, heir to the Eaton’s fortune. In 2016, the city announced the planned construction of an eight-storey condo development to replace an existing two-storey commercial building. The building exceeded prescribed density and height limits but was consistent with Toronto’s stated objective of greater density to augment housing supply.

Nevertheless, the project was opposed by the neighbourhood’s eminent citizens. To get a feeling for their arguments, let me quote excerpts from open letters to local City Councillor Joe Cressy, starting fittingly with Margaret Atwood: “I join my neighbours in their concerns about setbacks that violate bylaws, and about privacy issues, and about the precedent such large violations of bylaws would set, not only for the neighbourhood but for the city.” She also expressed concern about the impact that the development would have on “six privately owned trees located on three neighbouring properties.”

Atwood’s husband, Graeme Gibson, was more blunt, suggesting that the project “hovers close to a brutal and arrogant assault on a community that has been here since the 19th Century.” Not to be outdone by his illustrious neighbours, Galen Weston wrote, “Designed as is, (the development) will change the neighbourhood in such a negative capacity and will devalue all of the assets we currently love about living here; it will no longer be the ideal place for our young family to grow up.” Cleophee Eaton and her husband emailed a long list of objections, among them balconies that would allow newcomers to view the backyards of surrounding homes.

The project was eventually built, but the consultations, often acrimonious, lasted six years. Here we come to a central dilemma in the housing debate. Surely residents have the right to express their misgivings. Many of the concerns voiced by Atwood and her neighbours were entirely valid. Their opposition improved the final project (the trees were taken care of). Seen thus, the consultations played a useful role. Yet such NIMBY opposition, whether in the end effective or not, constitutes a cost in time and resources for developers, some of whom will deem it too high. The braking effect of NIMBYs on new construction is impossible to measure, but that does not make it any less real.

Similar issues have played out in Montreal, where I live, though its housing shortage is far less acute than Toronto’s or Vancouver’s. In June 2023, in an attempt to resolve the conflict between the right of citizens to be consulted and the need to accelerate construction, Quebec passed Bill 16, which allows municipalities to exempt specified higher-density projects from local referendums, to be replaced by a written consultation process.⁶ The law has been vigorously attacked by prominent members of Montreal’s urban planning community, including several respected colleagues. The title of a letter to Le Devoir, signed by 12 personalities including a former municipal affairs minister, nicely sums up their mood: La participation citoyenne en urbanisme placée sur la voie de garage (“Citizen participation in urban planning hits a dead end”).

In any case, whether the right to be consulted is embedded in law or not, populations will react. We live in a democracy. Activists will make themselves heard. Staying on the left side of the political spectrum, opposition to a housing project of some 1,000 units (60 per cent condos, 20 per cent social, 20 per cent other rental) in the Montreal working-class neighbourhood of Hochelaga-Maisonneuve is typical of the stance of many community groups. As the organizer of the local association argued in a letter to Le Devoir earlier this year,⁷ even with 20 per cent social housing, the new housing is beyond the means of the local population, would raise housing prices, and would bring in a well-off population, changing the neighbourhood’s social fabric – in a word, gentrification, a favourite bogeyman of community activists.

The perception, valid or not, that private housing will raise prices and bring in gentrifiers remains a powerful driver of NIMBYs on the community left. To this we may add a general aversion to towers, often shared with the well-to-do (recall Margaret Atwood and friends). The City of Montreal’s avowedly progressive administration is currently engaged in a tug of war with developers over a planned residential development near the Old Port. The developer is proposing several 20-storey towers, which the city wants scaled down in the name of “human-scale” development. Montreal boroughs controlled by Mayor Valérie Plante’s Projet Montréal party have as a rule been loath to approve projects above six storeys, understandably fearful of alienating their electoral base.

Let me move to more classical NIMBYs, ostensibly on the right of the political spectrum, where I can be brief. NIMBYs here are generally associated with the suburbs. Among the more notorious recent examples in Greater Montreal are the suburban borough of Pierrefonds-Roxboro and the municipality of Pointe-Claire.⁸ In Pierrefonds-Roxboro, citizens successfully blocked a six-storey residential building, triggering a referendum. In Pointe-Claire, the mayor, elected on an antidensification platform, openly opposed two planned 25-storey residential buildings and a 20-storey tower for seniors to be built near a future light rail station. They remain blocked. This, to quote the mayor, is the popular will: her constituents prefer a suburban lifestyle (why else would they live here?), which they have every right to defend.

Protecting land, zoning, preservation and livable spaces

Land remains the primary constraint on new and/or denser housing. Here we are paying the price for almost a century of low-density zoning focused on the car and single-family home (with garden and garage if you please). The NIMBY suburbanites in the Montreal suburbs are simply defending that legacy, our original sin.

It’s difficult to undo the past. But that is what Ontario and British Columbia are trying to do. Ontario’s Bill 23 and B.C.’s Bill 43 explicitly target zoning.⁹ In both cases, municipalities are encouraged, via various carrot-and-stick measures, to “upzone” in the jargon of urban planners – that is, to allow more dwellings per lot (adding accessory units to existing dwellings, greater heights …) and reduce or eliminate parking-space requirements. I do not know whether either province is considering going as far as some jurisdictions, such as New Zealand, in expressly prohibiting municipalities from applying single-home zoning. However, upzoning, while a necessary step, does not guarantee that new housing will be built.

Both the Ontario and B.C. bills also attempt to address a stickier problem associated with zoning. Allowing greater densities is only half the challenge. Most zoning ordinances stipulate accompanying conditions, which can vary from municipality to municipality: sanitary requirements, social inclusion obligations, financing urban services. In both provinces, municipalities are asked to simplify their regulatory framework, which is easier said than done. Queen’s Park, it seems, is considering imposing fines on Ontario municipalities that do not approve building permits within a given time frame, which again raises practical enforcement issues.

But let us return to the land. We can increasingly expect preservationist and environmentalist arguments to prevail in opposition to development. The recent case of the small university city of Rimouski in eastern Quebec, faced with a severe housing shortage (rental vacancy rate below 2 per cent at last count), is fairly typical.¹⁰ The city is proposing a new development that would allow for the construction of some 800 housing units – consistent, the mayor contends, with sustainable climate-friendly development. Yet the project is being strongly opposed by local citizens as it would encroach on a local forest. Consultations are foreseen. Only the future will tell whether the 800 dwellings will see the light of day.

The most evident case of environmental concerns limiting residential land is southern Ontario’s Greenbelt, essentially surrounding Toronto.¹¹ I can think of no better example of the nonsubstitutable nature of land. Land thus withdrawn from residential development cannot be replaced with land elsewhere in Ontario with comparable access to downtown Toronto. Freeing parts of the Greenbelt for residential construction was (I use the past tense on purpose) a stated objective of Ontario’s Bill 23. We know what happened.¹² Doug Ford’s government, caught red-handed in a dubious affair of collusion between developers and politicians, totally botched the chance of opening even a small sector of the Greenbelt for residential development. The predictable outcome: the Greenbelt has become untouchable, off limits for any future government.

The Greenbelt is analogous to building a moat around Toronto. Prices in geographically constrained places (Manhattan, San Francisco, Vancouver), whether islands or peninsulas, are exceptionally high for a reason. The Economist recently ran an article on the cost, in terms of housing and income forgone, of London’s green belt.¹³ Suffice it to say that the cost is high, not only inflating housing prices in the core but also spurring leapfrog development beyond the green belt, initially intended to block urban sprawl. There is no reason why the same reasoning should not apply to Toronto. But in England as in Ontario, the green belt has become untouchable, a sacred environmental totem.

Make development pay its true cost: A good idea derailed

Housing prices are abnormally high in Toronto and Vancouver for another reason: a regulatory feature motivated by both fiscal and social considerations. Toronto was long vaunted as a model by urban planners, the first city in North America with a form of metropolitan government. This arrangement, imposed by the province, goes a long way toward explaining Toronto’s absence of extreme U.S.-style spatial segregation. But this is not the only aspect of urban governance where Queen’s Park innovated. In 1989, Ontario brought in the Development Charges Act, which allowed local governments to levy charges on developers to cover the costs of public services generated by new residential developments (roads, sewage, transit …). Many other Canadian cities also introduced development charges.¹⁴

The arguments for development charges are a priori impeccable. What could be more progressive than making developers pay the social costs of development? Make development pay for itself, so to speak, in turn facilitating construction and undercutting NIMBY opposition based on the public costs of new projects. Development charges would also provide a welcome source of revenue for local governments, lessening pressures on property taxes. Provincial governments liked development charges too, as these charges allowed them to offload services onto local authorities.

The true impact was different, a classic case of the law of unintended consequences. Simply, development charges opened a fiscal trap door, difficult to close once opened. Calculating the true cost of public infrastructure generated by residential developments is not an exact science but leaves ample room for discretion. For municipalities, the temptation to keep adding on services funded via development charges is difficult to resist. This is exactly what happened. Taking Toronto as our example, at the time of writing, the development charge for a two-bedroom apartment was $80,218 per door, encompassing charges for policing, firefighting, childcare and libraries.

The impact on housing was threefold. First, as with all fees levied on developers, the cost was passed on, in part or in whole, to consumers – renters or owners. Second, since this was an upfront charge, often also entailing drawn-out, charge-by-charge negotiations with local government, only developers with sufficiently deep pockets and patience entered the field. The predicable result was an oligopolistic housing market dominated by large developers, for which Toronto became deservedly famous. Finally, since charges were levied per unit irrespective of income generated, this created an incentive for developers to build more expensive (often highrise) units, which in part explains Toronto’s so-called missing middle – that is, two- to three-storey houses similar to Montreal’s plexes.

Here also, Ontario is attempting to roll back the past, but development charges cannot simply be undone. Bill 23 explicitly enjoins municipalities to reduce development charges, a provision predictably denounced by Ontario mayors. The province’s cities, nourished over the years on development charges, have little fiscal leeway to make significant reductions and are confronted with two equally unpalatable options: cut services or raise property taxes. I doubt that, in the end, development charges will be significantly reduced. The damage has been done.

The development charge story can be summed up by an old aphorism dear to economists: there is no free lunch. Making “others” pay for public services (here, billing developers) is a blissful illusion; in this case, it means transferring the cost to future residents. Public services – public goods in the jargon of economists – that are best provided collectively should be financed collectively. Taxes exist because the benefits of public goods (health, education and public order among the most obvious) extend beyond direct beneficiaries. Charges make sense for infrastructures whose benefits are largely limited to residents of new housing developments, such as an adjoining playground or park. But applying fees to true public goods confuses private and public responsibilities.

Inclusionary zoning: Another good idea with bad results

Confusing private and public spheres is also at the heart of so-called inclusionary zoning, popular with progressive urban planners. Here Montreal is the showcase example. In 2019, the Plante administration enacted its flagship bylaw for a diverse metropolis,¹⁵ popularly known as bylaw 20/20/20 because of the requirement for developers (for projects of five dwellings or more) to include social, affordable and family units in these proportions. The social category is largely dependent on public (provincial/federal) funding. The affordable category refers to units to be rented well below the market rate (ideally, 20 per cent less). I shall spare the reader the problems of ensuring that affordable units remain so and that the households so favoured are truly deserving. The family category refers to units with at least two bedrooms. For social units, developers can also choose to make a financial contribution in lieu of space. Finally – why keep it simple? – various permutations are possible in negotiating with the city.

Several observers at the time, including this author, criticized the bylaw, noting various possible unintended consequences. First, the cost to developers of inclusionary obligations would be passed on, at least in part, to renters of noninclusionary units. Second, the inclusionary obligations risked discouraging developers, especially smaller ones, from entering the market, producing an added upward impact on prices. Perhaps most importantly, the bylaw largely ignored the cost to developers of time for predictably lengthy negotiations.

Unfortunately for the city, the critics have been proven largely right. Since the adoption of the bylaw, no housing project has been built consistent with the 20/20/20 formula. Developers have preferred to pay the in-lieu fee, de facto sidestepping the bylaw, which says a lot about the costs of time. However, this does not tell us what impact the bylaw might have had, if any, on the decision to build (new housing forgone). No proven methodology exists for measuring such impacts. Unlike medical laboratory experiments where control populations (no medication) can be used to isolate impacts, we cannot run Montreal twice, once with and once without the bylaw.

However, Montreal’s Blue Bonnets Racetrack saga provides us with a quasi-natural experiment. The Montreal Hippodrome (Blue Bonnets), on land owned by the province, ceased to operate in 2009, leaving vacant a vast 45-hectare terrain, 20 minutes from downtown by Metro. The province ceded the terrain to the city in 2017 with the understanding that it be developed for residential use. Last year, the city called for tenders to develop the site. The terms of reference set out various obligations, not least the 20/20/20 bylaw. No developer came forward, to the city’s great embarrassment.¹⁶ The site stands empty still, waiting to be developed. It is of course impossible to rigorously attribute the city’s failure to the new bylaw. What is unarguable is that the city’s terms of reference, however well-intentioned, were economically unsound.

The city administration cannot, without losing face, openly admit that its bylaw went too far. However, it is doing so by the back door. Since the Blue Bonnets fiasco, the city has set up a working group with industry actors and has named “facilitators” in each borough with the explicit mandate to work with developers to fast-track projects.

The lesson to be drawn is the same as for Toronto’s development charges. One should not ask the private sector (or private individuals) to take on public responsibilities. Including social (subsidized) units in privately built developments is an entirely worthwhile social objective, not least to promote social diversity. But the cost should be borne collectively, by all taxpayers, not by developers (always an illusion) and, ultimately, some residents only. One reason the confusion persists (let me now sympathize with Montreal’s unlucky bylaw) is that governments, both provincial and federal, have cruelly underfunded social housing in recent years. The unintended side-effect has been an underperforming private sector, saddled with costs it should not be asked to bear.

All actors need to change: Senior governments, municipalities, you and I

Will Canada overcome its housing crisis? Perhaps, but only in part. I put aside current economic conditions – high interest rates, inflation and associated building costs. These have hurt housing construction, but they should pass. Immigration – permanent, temporary and illegal – will continue to be a major driver of housing demand, but that demand can be met if housing supply follows, which is not an insurmountable task. The principal reason for Canada’s housing gap, I have argued, is its exceptionally “sticky” (unresponsive) housing supply, for both publicly and privately financed construction.

For Canada’s housing market to become truly responsive, three conditions need to be met:

  • substantially increased public funding for social housing, not only to meet the needs of the most needy but also to eliminate the incentive to transfer the cost to private actors;
  • streamlined municipal regulatory practices, with speed of approval a primary objective, plus substantially expanded upzoned land;
  • acceptance by individuals and activist groups of limitations on the right to be consulted.

The first condition, primarily the responsibility of senior governments, is the easiest, and the one about which we can be the most optimistic. The second, as a municipal responsibility, is more difficult, although both Ottawa and the provinces have in part linked it to the first condition. The third, the reader will have guessed, is the most difficult of all, and I leave it to the reader to assess.

Notes

1 See Canada Mortgage and Housing Corporation, Housing Shortages in Canada: Updating How Much Housing We Need by 2030 (September 13, 2023).

2 The Spat with India Only Adds to Justin Trudeau’s Woes, The Economist, September 27, 2023.

3 Subsidized housing rarely accounts for more that 5 per cent of the total local housing stock and 15 per cent of rentals. The percentage of tenants in subsidized housing was 7.8 per cent in Montreal, 13.3 per cent in Toronto, and 11.1 per cent in Vancouver (CMAs, 2022 census).

4 A good example of the genre is: Richard Florida, The New Urban Crisis (New York: Basic Books, 2017).

5 I have unabashedly stolen this story from a master’s student paper in political science at Western University: Patrick Carlton, Final Report in Addressing NIMBYism, Student Case Studies, Winter 2020. For the original quotes from Atwood and others, see Betsy Powell, Margaret Atwood joins fellow Annex residents to fight condo project (thestar.com), August 28, 2017.

6 Link for Quebec’s Bill 16: Projet de loi numéro 16 – Sanctionné (2023, chapitre 12) (gouv.qc.ca)

7 Marine G. Armengaud, Combien de projets de condos de plus avant une vraie catastrophe ? | Le Devoir, February 2, 2023.

8 Densification Opponents All Over The Island (westislandtoday.com), West Island News, July 20, 2022.

9 For Ontario: More Homes Built Faster Act (Bill 23), Bill 23, More Homes Built Faster Act, 2022 – Legislative Assembly of Ontario (ola.org); for B.C: Housing Supply Act (Bill 43), Bill 43 – 2022: Housing Supply Act (gov.bc.ca)

10 Sébastien Tanguay, Rimouski, là où la crise du logement se heurte à la crise climatique | Le Devoir, September 22, 2023.

11 For maps of the Greenbelt, see https://www.greenbelt.ca/maps

12 For an example of the media coverage of Ford’s blunder, see Ford Apologizes for ‘Wrong’ Greenbelt Decision, Vows to Reverse Land Swap, CBC News, September 21, 2023.

13 Britain’s Greenbelt is Choking the Economy.

14 The exception here is Quebec, which until recently did not allow its municipalities to levy development charges, a major reason why housing costs have been historically lower in Quebec. See also my article Why is Housing Cheaper in Quebec than in Ontario?, Policy Options, August 7, 2023.

15 Diverse metropolis: An overview of the by-law | Ville de Montréal (montreal.ca), May 30, 2023.

16 Thomas MacDonald, Montreal struggles to get developers behind plan for affordable housing at Blue Bonnets site | CBC News, July 2, 2023.

Image: Teotihuacán, near Mexico City, Mexico. Via Mike Peel, Wikimedia Commons

Tan lejos de Dios, tan cerca de los Estados Unidos
(So far from God, so close to the United States)
— attributed to Porfirio Díaz, president and
subsequent dictator of Mexico from 1876 to 1910

The number of Mexican asylum seekers entering Canada continues to grow: some 8,000 in 2022, double the number in 2019 prior to the COVID pause. To asylum seekers add 35,000 temporary workers and almost half a million “tourist” entries. The four unhappy Central American republics to Mexico’s south (Guatemala, Honduras, El Salvador, Nicaragua) are even poorer and less wellgoverned than Mexico. Entries from these countries are also growing: many brave souls crossing Mexico, often on foot, hoping finally to reach Canada.

In this essay I make the simple but disheartening argument that the social well-being gap between Canada and most Latin American nations will not close in the foreseeable future. Explaining why the gap exists and why it persists is my focus. Latin America remains, with rare exceptions, a prisoner of its past. I take Mexico as my prime exhibit. Mexico’s President, Andrés Manuel López Obrador (AMLO for short), is a classic authoritarian populist, nominally left-wing, not very different from others who have sprung up throughout Latin America’s history.

Mexico, institutions and development economics

Before going further, I make two biases explicit. My first bias is my deep affection for Latin America. In a former life, I fell in love with what once was the glory of Buenos Aires, and I have since remained an irreducible appassionato of the tango. I also have an emotional attachment to Mexico, the centrepiece of this essay. I spent a sabbatical year and from 1990 to 2010 was a visiting professor at the Universidad Autónoma de Puebla. I have inherited a Mexican family. My eldest daughter married a Mexican, who at the time was a civil servant for the State of Puebla and is now a proud Montrealer. My grandchildren are at home in Mexico and Canada. Mexico’s rise in violence and backslide to authoritarianism saddens me greatly.¹ Puebla, Mexico’s fourth largest city and my second home for 20 years, was at the time a comparatively safe and pleasant place, an urban jewel with no equivalent in Canada, Quebec City possibly excepted.

Mexico is a good place to start understanding Latin America. It is Hispanic America’s largest nation (my observations apply to Spanish-speaking America and thus exclude Brazil) and arguably its cultural centre. Mexico City is Latin America’s largest Hispanic metropolis. Mexican telenovelas dominate the continent. Mexico’s symbiotic but also problematic meshing of two cultures, Mesoamerican and Hispanic, mirrors the other Hispanic countries except for the three more Europeanized outliers at South America’s southern tip, Argentina, Uruguay and Chile (the first two of which have almost no indigenous populations, indeed less then Canada). Its schizophrenic relationship with the United States is likewise representative.² Mexico was the crown jewel of the Spanish Empire. In 1521, Hernán Cortés landed in Veracruz with a small band of adventurers and crushed the Aztec Empire, one of the most extraordinary events in human history. Those conquistadors, driven by the lure of sudden riches (Aztec and later Inca gold), laid the foundations of a new civilization.

I use the word civilization consciously. In his landmark 1996 book The Clash of Civilizations, Samuel Huntington identifies Latin America as a separate civilization,³ rightly so in my opinion. This brings me to my second bias: my background is in economics. Without going into a long discourse on debates in development economics, a growing consensus, which I share, has emerged emphasizing the role of institutions – what anthropologists call culture. “Institutions” encompass the values, beliefs and norms of a people. The economic rise of East Asian societies (Chinese, Korean) is no accident, argues David Landes, whose The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor (1999) is an important book in this tradition. These societies are imbued with Confucian values. By the same token, Latin America’s development gap with the rest of the Western world is no accident; it is the outcome of a distinct institutional legacy.

One hundred years of solitude⁴

Angus Maddison (1926–2010) was a British economist who made historical time series his life’s work. Maddison’s databank, now managed by the University of Groningen, is continually updated. It is the de rigueur reference for historical economists seeking data by country and geographic/cultural region. Figure 1 shows the evolution of Latin American per capita GDP on the basis of purchasing power parity (PPP) over a century, relative to PPP per capita GDP of the Western offshoots and of Western Europe.⁵

The data leave little doubt. Latin American per capita GDP remains at the same percentage of Western offshoots as a century ago and has regressed compared to Western Europe (once half, now down to a third). GDP per capita has systematically hovered around 30 per cent and even less of the North American average. Latin America has, in short, stubbornly remained outside the (developed) Western world, at least as measured in economic terms.

Figure 2 provides analogous series (compared here to the United States) for seven nations, including Canada.⁶ Unsurprisingly, El Salvador finds itself at the bottom (15.5 per cent of U.S. GDP per capita), barely different from a century ago. In this, it is entirely representative of the other three (unhappy) Central American republics mentioned earlier. Recent developments in the region do not presage an improvement. El Salvador is currently governed by Nayib Bukele, a quirky populist who espoused the adoption of cryptocurrencies as the national currency and has de facto suspended basic civil rights in his war on the country’s notorious criminal gangs, giving almost unlimited powers to the military to arrest and detain. In Nicaragua, Daniel Ortega, a former revolutionary who has morphed into a classic autocrat (rigged elections, nepotism, controlled press), remains in power and shows little inclination to relinquish it.⁷

The surprising story in figure 2 is Argentina, which remains an enigma to development economists. Developed nations are not supposed to slide back, which is exactly what Argentina has done over the last century (sorry for the cynicism). A century ago Argentina was as rich as Canada, and Buenos Aires was a greater cultural centre than Montreal. When my father ran a travel agency in Paris in the 1920s, “as rich as an Argentine” was an oft-heard axiom. Argentinians considered themselves even more overbearing than Americans: “Paris is nice, pero Buenos Aires!” Buenos Aires at the time was in the same league as London, New York and Paris.

Argentina’s GDP per capita is now about a third that of the United States and appears stuck there. Argentina’s downfall is a story of politics gone awry, trapped in an ideological mindset difficult for outsiders (myself included) to fully comprehend.⁸ Peronism, a mix of left-wing romanticism, messianism, protofascism and nationalism born in the 1940s, continues to dominate Argentina’s politics. Portraits of Evita Perón, the national Madonna, continue to adorn the streets of Buenos Aires.

Peronist governments, including the current one, have been singularly inept at ensuring macroeconomic stability. At last count, inflation is running at over 90 per cent, the highest of any Latin American country bar Venezuela.⁹ The national currency is all but worthless. Predictably, Argentina’s credit rating puts it in the junk bond class (CCC), matched only by El Salvador.¹⁰ Argentina’s military dictatorship (1976–83) was particularly repressive even by Latin American standards. A favourite military sport was throwing opponents of the regime out of airplanes. The portraits of hundreds of olvidados continue to adorn the main squares of Buenos Aires. It required defeat in the Falklands to end the domestic “dirty war.” The wounds of those dark years have yet to heal.

AMLO would have made a good Peronist with his penchant for throwing public funds at dubious ventures. His two pet projects are an $8 billon oil refinery in his home state of Tabasco and a $15 billion tourist train in neighbouring Yucatan.¹¹ Mexico’s credit rating currently stands at BBB (Canada’s is AAA, and the United States, despite its political woes, has a credit rating of AA+). When I first arrived in Mexico in 1990, one Canadian dollar bought four Mexican pesos; now it buys 14 pesos – not the sign of a well-managed economy. The Mexican economy has shown little sign of improvement under AMLO’s reign. Since the 1960s, per capita GDP in Mexico has hovered around 30 per cent of that in the United States.

All is not black. Chile fell from its quasi-developed status at the beginning of the 20th century, but it has since reversed with constant slow improvement since the 1980s. Since the end of the Pinochet dictatorship in 1990, Chile has generally enjoyed competent governments from both sides of the political spectrum. Chile is the only Latin American nation with an “A” credit rating, the sign of sound macroeconomic management. In September 2022 a national plebiscite on a proposed utopian (my choice of adjective) constitution took place. After a long “popular” consultative process led by Gabriel Boric, Chile’s idealistic young President and a former student activist, the constitution was rejected by 62 per cent of the electorate. My reading of this result is that Chile has a vibrant democracy and rejects extremes.

However, Chile remains trapped in what development economists call the “resource curse”: the observation that natural resource abundance (notably in minerals and fossil fuels) often leads to bad government. Those first conquistadors looking for gold set the stage for Latin America’s resource curse. Among the negative impacts of a resource curse are underinvestment in education and disincentive to innovate.¹² China is replacing the United States as Latin America’s major trading partner. China is interested in resources, not making Latin America into a technological competitor. Commodity exports (notably copper) are likely to remain Chile’s primary exports. Chile will have truly arrived the day that technologically sophisticated manufacturing and services account for a significant percentage of its exports.

Faulty states: Taxes, trust and public services

Macroeconomic mismanagement is not the only factor in Latin America’s persistently poor economic performance. In Mexico City or Buenos Aires, Latin America should have given birth to a world-class financial centre on the model of London, Hong Kong or New York. Miami is today its de facto financial capital. The wealthy do not keep their money at home (at least not in the national currency); investments are foregone. However, the costs of poorly regulated financial systems are primarily borne by small businesses via high interest rates.

Macroeconomic mismanagement is the tip of the iceberg. The ultimate measure of a functioning state is the ability to collect taxes. One cannot redistribute income or fund social programs, such as primary and secondary education, without taxes. Figure 3 shows taxes collected as a share of GDP for Canada, Mexico and two other Latin American countries. All three Latin American nations collect significantly less than Canada; Mexico is the worst offender. Some 40 per cent of Mexico’s workforce is estimated to be working outside the formal economy: street vendors, backroom workshops, etc. The informal economy is sometimes romanticized as evidence of an indomitable entrepreneurial spirit, which is not wrong, but informality equals taxes foregone. Informality is, of course, not limited to the poor. Mexico’s powerful drug cartels operate, by definition, outside the state, representing billions in foregone public revenues.

The relationship between willingness to pay taxes and trust needs little explanation. Tax avoidance is rational in kleptomaniac, repressive states. Why pay taxes if most of the money goes into the mayor’s (or governor’s, or police chief’s) pockets? Corruption remains a fact of daily life in Mexico, notably at the state and local level. Property taxes are among the most difficult to administer. Comparing what homeowners in Puebla paid in property taxes, I calculated that they paid one fifth what I paid in Montreal, even after factoring in cost of living differences. Property taxes require functional land markets and recognized ownership titles. Valuing land for tax purposes requires (a) up-to-date cadasters, (b) trustworthy assessment of property values and (c) perceived fair tax collection. This is a tall order. In much of Latin America, titles remain problematic because of competing claims and the indígena legacy of communal land ownership. Unsecured land,cannot be used as collateral for business startups, thereby hampering the development of mortgage markets.

The economic cost (lower productivity, lower wages …) of poor public services is best illustrated by looking at individual firms. Street lighting, paved roads and an honest justice system are examples of “public goods,” which the private sector will not provide and which are necessary for a functioning state. Figure 4 shows the results of a 2002 survey of workers and firms (300 firms in all) in the apparel and food processing industries in three cities.¹³

Firms in the two Latin American cities were significantly more affected by deficient public services than comparable firms in Montreal. Unsurprisingly, firms in San Salvador faced the worst conditions (recall El Salvador’s low position in figure 2). Some 80 per cent responded that they faced arbitrary local administrations; 70 per cent underscored inadequate neighbourhood police protection, often entailing bribes. Receiving any public services also required bribes. The predicable outcome was reliance on private security services, which accounted for more thasn 5 per cent on average of the firm’s wage bill in Puebla and San Salvador. The threat of theft meant that delivery trucks often needed to be staffed by two drivers at an additional cost.

Time lost and delay in deliveries were important economic costs. Other costs were absence of good street lighting and adequate police surveillance. Women interviewed in Puebla were loath to work in early morning hours or after nightfall.

La Malinche, mestizaje and presidencialismo

The seeds of Mexico’s faulty state were planted 500 years ago. I consider myself well informed in matters of history and geography, yet I was not prepared for what I discovered. With apologies for oversimplifying a complex subject, Mexico is not a Western offshoot like Canada. My cultural roots are in Western Europe and North America. In Paris, New York or Montreal, cities in which I have lived, basic cultural parameters – relation to time and power for example – are not fundamentally different. They are different in Mexico.

To understand, we need to start with Mexico’s founding myth. The city of Puebla lies below one of Mexico’s most famous volcanoes, popularly called La Malinche, named after the indigenous (Nahua) woman, born circa 1500, who became Cortés’s translator, adviser and mistress. She gave birth to a son by Cortés, the first Mestizo, laying the foundation of the Mexican nation. La Malinche remains a controversial figure in Mexican history; depending on one’s perspective, she was a tragically abused native woman raped by a brutal conquistador or a conniving whore who collaborated with the invader. In either view, Mexicans are the children of the illicit relationship between the invader and his willing (or unwilling) victim.

Mexicans view the “discovery” of America in different terms than most Canadians and Americans. Their national history does not begin with the arrival of Europeans. The conquered Aztec nation, unlike the less sedentary nations farther north, was a great civilization in its own right. Teotihuacan’s majestic pyramids are visible evidence of the civilizations that preceded the Spanish, of which every Mexican is justly proud – how someone English or French might view Rome’s Colosseum. Rare is the Mexican who does not have indígena blood. With whom does one identify: the conqueror or the conquered? The unresolved answer is at the root of the deepest political divisions, in Mexico and much of Latin America. El pueblo are pitted against hispanized urban elites. The present crisis in Peru (see Maxwell Cameron’s accompanying article) is an example.

La Conquista is viewed as a very different kind of historical event from the landing of the first French and English settlers in North America, although also not necessarily a happy one for indigenous peoples. La Conquista was – there is no kinder way to put it – an openly bloodthirsty and vengeful affair, one empire out to subjugate another, repeated a few years later in Peru with Francisco Pizarro’s subjugation of the Inca Empire. The year and nature of the conqueror also matter. Granada fell to Catholic armies in 1492, marking the final delivery – la Reconquista – of Spain from the Moors (Muslims). The conquistadors and the church that accompanied them to the New World saw themselves as continuing the same war. The first thing the invaders did in many cases was build a church on top of the local pyramid. Cholula, not far from Puebla, is a typical example, its Aztec pyramid surmounted by a chapel – an archeological site well worth visiting. The message was clear: my church has vanquished yours.

The objective of this crusader church and warrior class was, demonstrably, not to build a better society, without even considering notions of justice and democracy. A possible analogy is the slaveowning south in the United States, also built from the outset on institutionalized inequality. The encomienda system that allowed Spaniards to confiscate land and extract tribute from indígena populations, originally based on the practice of exacting tribute from Muslims and Jews during the Reconquista, was not far from slavery. However, the White population of the southern United States saw itself (and itself alone, of course) as heir to a legacy of elected, responsible government. This was missing in New Spain, which brings me to my next point.

One cannot inherit a nonexistent legacy. Whatever its other achievements, Spain had no democratic legacy, however limited, to bequeath to its colonies. The Aztec legacy was no less authoritarian, and no less bloody. A friend of mine, citing the blood-soaked effigies of Jesus in Puebla’s baroque churches and the ritual blood sacrifices of the Aztecs, once remarked that the Aztecs and 16th-century Spaniards were made for each other. Now let me jump to the present with some amateur social psychology. During my Puebla sojourn, few differences struck me more than the perception and use of power, not least in my university. Relationships, especially where money and jobs were at play, were personalized to a degree I had hitherto not known. The rector had discretionary powers and funds, which a Canadian rector can only dream of. The rector directly appointed faculty and bestowed research and travel funds. The length of time spent in the rector’s antechamber waiting for an audience (time is an instrument of power) was a good indicator of one’s position in the hierarchy.

The personalization of power – facilitated by the adoption in most Latin American republics of the U.S. presidential system – runs through all levels of Mexican polity: municipal and state governments, labour unions … The concept of an independent civil service remains alien to much of Latin America. I witnessed the spoils system at the municipal and state level: the complete turnover of technical and professional personnel with each new governor or mayor. Each incoming administration literally starts from scratch: new personnel, new computers and, of course, new contacts and subcontracts to be handed out. Connections, not competence, determine allocation of jobs. This is not a recipe for efficient government – even without mentioning the incentive to outright theft.

But let me resume my history lesson, skipping a few centuries. Following a bloody civil war (1910–20), the defining event was the advent of the Partido Revolucionario Institucional. Known as the PRI (the party had other names during its earlier years in power, but remains remembered under this label), it ruled Mexico until 2000 and is often dubbed la dictadora perfecta (the perfect dictatorship). I witnessed the last decade of PRI rule. While not a totalitarian state on the Soviet model, Mexico was nonetheless a dictatorship built on a well-oiled system of patronage and control. The press was not so much censored as bought. It was indeed a perfect dictatorship, providing order, stability and peaceful transitions of power (and spoils) from one presidential term to the next. Each president regally anointed his successor, his (rigged) election a foregone conclusion. The anointing of a successor was popularly called el dedazo (the pointing finger). Presidents were elected for fixed six-year terms (sexenios) and could only serve one term.

Perhaps the most poisoned legacy PRI bequeathed Mexico was a public education system where corrupt teachers’ unions allocated jobs; qualifications were a secondary consideration. The extreme case, still not abolished during my stay, was hereditary appointment where teachers saw it as their right to pass on their teaching slot to their offspring with no regard to qualifications. Unions have systematically fought off attempts to introduce entrance requirements or evaluations. The results can be seen in low rankings of student performance in the OECD Program for International Student Assessment (PISA).¹⁴ Among 79 countries, the most recent PISA results rank Mexico 53rd for student proficiency in mathematics, 55th in science and 52nd in reading. No Mexican university ranks in the top 200 on the latest Shanghai international ranking of universities (Canada counts eight). Nor for that matter does a university in any other Hispanic American country.¹⁵

Back to the future

AMLO is a product of the PRI. It appears he wants to return to it, as do many Mexicans. AMLO is a child of le Mexique profond who speaks no English and, I am told, does not like to travel and has little interest in the outside world. At heart a conservative with the obligatory dose of leftist nationalist rhetoric, he sees himself as spokesman for the forgotten masses, the eternal victims of venal elites and their discredited political parties. AMLO’s election in 2018 owes much to Mexico’s bungled (in my view) transition to democracy. Vicente Fox (2000–06), the first freely elected president, missed his chance to reform Mexico. All presidents since have disappointed. AMLO’s predecessor, Enrique Peña Nieto, left office under a cloud of corruption. AMLO made fighting corruption the centrepiece of his crusade to save Mexico. That message visibly resonates with el pueblo he purports to represent.¹⁶ He has displayed modesty (at least for material comforts), for example eschewing the presidential palace in favour of a simple apartment downtown. Here, finally, is a man of the people.

Yet, behind this modest crusader lies a conventional autocrat who yearns for a return to presidencialismo. He is openly nostalgic for the years when Pemex, the state oil corporation and crown jewel of the PRI, was a prime source of money, patronage and votes. It had a monopoly on oil exploration, refining and retailing. His attempt to restore that monopoly by appointing loyalists to the Energy Regulatory Board is currently the object of a formal dispute with the United States and Canada under the U.S.–Mexico–Canada Agreement.¹⁷ He has appointed loyalists to other key institutions as well, not least the central bank. He has shown little taste for reforming the education system. He has been no more successful than his predecessors in reducing violence and is even less inclined to take on the drug cartels.¹⁸ Journalists who criticize the cartels do so at risk of their lives. Mexico has the world record for number of journalists killed.¹⁹ None of this bodes well for the Mexican economy.

AMLO is in the process of further weakening Mexico’s young democratic institutions.²⁰ He signed a law earlier this year reducing the budget and mandate of the National Electoral Institute (Instituto Nacional Electoral, or INE). If it comes into effect, future elections will be less fair.²¹ He has increased the power of the military.²² AMLO’s attack on democratic institutions should have surprised no one. He never hid his autocratic proclivities, long holding a grudge against INE and falsely asserting that the 2006 election was stolen, Trump avant la lettre. I was in Puebla when AMLO stubbornly refused to recognize the election results, despite no evidence of fraud.²³ His role in undermining the confidence of Mexicans in their institutions, in 2006 and subsequently, distresses me greatly.

Whether AMLO’s party (the Movimiento Regeneración Nacional or Morena), founded in 2013, will survive him after his obligatory departure in 2024 remains an open question. The party’s likely candidate and current frontrunner for the 2024 presidential election is Claudia Sheinbaum, mayor of Mexico City. Let me end on a positive note. Perhaps Mexico will finally get a president who has the will and political acumen to reform Mexico’s institutions. Wouldn’t it be nice if the next president is a woman, and Jewish to boot?

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