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When comparing economic policies, border counties are a good place to look

I’ve written before about the limits of state to state comparisons in judging economic policy. While useful overall, picking this or that state to compare to some other can often obscure as much as it reveals. Take Minnesota and Wisconsin, two states which have frequently been compared in recent years. Sure, there are similarities. But also there are also differences unrelated to current or recent economic policy which impact economic outcomes.

But there are ways to tackle this. In their book Why Nations Fail, economist Daron Acemoglu and political scientist James A. Robinson begin by looking at the city of Nogales. This is cut in half by a fence, the US on one side, Mexico on the other. As Acemoglu and Robinson note,

If you stand by [the fence] and look north, you’ll see Nogales, Arizona, located in Santa Cruz County. The income of the average household there is about $30,000 a year. Most teenagers are in school, and the majority of the adults are high school graduates. Despite all the arguments people make about how deficient the U.S. health care system is, the population is relatively healthy, with high life expectancy by global standards. Many of the residents are above age sixty-five and have access to Medicare. It’s just one of the many services the government provides that most take for granted, such as electricity, telephones, a sewage system, public health, a road network linking them to other cities in the area and to the rest of the United States, and, last but not least, law and order. The people of Nogales, Arizona, can go about their daily activities without fear for life or safety and not constantly afraid of theft, expropriation, or other things that might jeopardize their investments in their businesses and houses. Equally important, the residents of Nogales, Arizona, take it for granted that, with all its inefficiency and occasional corruption, the government is their agent. They can vote to replace their mayor, congressmen, and senators; they vote in the presidential elections that determine who will lead their country. Democracy is second nature to them.

Life south of the fence, just a few feet away, is rather different. While the residents of Nogales, Sonora, live in a relatively prosperous part of Mexico, the income of the average household there is about one-third that in Nogales, Arizona. Most adults in Nogales, Sonora, do not have a high school degree, and many teenagers are not in school. Mothers have to worry about high rates of infant mortality. Poor public health conditions mean it’s no surprise that the residents of Nogales, Sonora, do not live as long as their northern neighbors. They also don’t have access to many public amenities. Roads are in bad condition south of the fence. Law and order is in worse condition. Crime is high, and opening a business is a risky activity. Not only do you risk robbery, but getting all the permissions and greasing all the palms just to open is no easy endeavor. Residents of Nogales, Sonora, live with politicians’ corruption and ineptitude every day.

In contrast to their northern neighbors, democracy is a very recent experience for them. Until the political reforms of 2000, Nogales, Sonora, just like the rest of Mexico, was under the corrupt control of the Institutional Revolutionary Party, or Partido Revolucionario Institucional (PRI).

How could the two halves of what is essentially the same city be so different? There is no difference in geography, climate, or the types of diseases prevalent in the area, since germs do not face any restrictions crossing back and forth between the United States and Mexico. Of course, health conditions are very different, but this has nothing to do with the disease environment; it is because the people south of the border live with inferior sanitary conditions and lack decent health care.

But perhaps the residents are very different. Could it be that the residents of Nogales, Arizona, are grandchildren of migrants from Europe, while those in the south are descendants of Aztecs? Not so. The backgrounds of people on both sides of the border are quite similar. After Mexico became independent from Spain in 1821, the area around “Los dos Nogales” was part of the Mexican state of Vieja California and remained so even after the Mexican- American War of 1846–1848. Indeed, it was only after the Gadsden Purchase of 1853 that the U.S. border was extended into this area. It was Lieutenant N. Michler who, while surveying the border, noted the presence of the “pretty little valley of Los Nogales.” Here, on either side of the border, the two cities rose up. The inhabitants of Nogales, Arizona, and Nogales, Sonora, share ancestors, enjoy the same food and the same music, and, we would hazard to say, have the same “culture.”

By narrowing down their area of study – the two halves of Nogales rather than the whole of the US and Mexico – Acemoglu and Robinson are able to exclude a number of factors which could explain the different economic outcomes, such as geography and ethnicity. The remaining variable, in this case institutions, must explain at least a majority of the observed differences.

We can zero in in a similar fashion by looking at differences in the economic outcomes of bordering counties. Washington County, on one end of the I-94 bridge over the St. Croix, is pretty similar to St. Croix County on the other end. The big difference is that one is in Minnesota and the other is in Wisconsin. Their different governments, state and local, can follow different policies in terms of taxes and regulations, like minimum wage laws. Any differences which we see in terms of economic outcomes can be attributed, in large part, to differences in those policies.

John Phelan is an economist at the Center of the American Experiment. 

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