As a result, income inequalities, whether within homogeneous regions or across global landscapes, can be traced back to variations in the effectiveness of these institutional frameworks. The authors vividly illustrate this notion through the contrasting cases of Nogales, Arizona, and Nogales, Sonora, situated along the Mexico-U.S. border. While Nogales, Arizona, flourishes with a higher per capita income due to its inclusive institutional setup, Nogales, Sonora, suffers from crime and stagnation, attributed to its extractive institutional environment. This disparity underscores how the lack of robust institutions in the Mexican city hinders productive investment and innovation.
The 2024 Nobel Laureates in economics lament the stark differences between the two cities, stating that the reason behind such wealth discrepancies is “very simple”:
- The cities exist within different worlds, shaped by their respective institutions, creating divergent incentives for their residents and potential investors. This institutional divergence is the crux of the economic disparity observed across the border.
Ah, but is it really that simple?
Many analysts, including some classical liberal voices from Mexico, have embraced this example as potent evidence supporting the institutionalist claims made in Why Nations Fail. This perspective is particularly resonant within the context of Mexico’s current institutional landscape, which has been eroded under the leadership of Andrés Manuel López Obrador (AMLO) since 2018, and continues under Claudia Sheinbaum’s administration. This deterioration includes a controversial judicial reform proposal to elect judges by popular vote, the dismantling of autonomous regulatory bodies, and a troubling lack of transparency regarding federal fund allocations for infrastructure projects—factors that contribute to an increasingly extractive institutional state.
However, the narrative surrounding Nogales is more intricate than Acemoglu and Robinson suggest, and indeed, more nuanced than conventional wisdom acknowledges. The case of Nogales, Sonora, actually supports the authors’ institutional thesis but in a manner that contradicts their conclusions. With a population of 264,000, more than ten times that of Nogales, Arizona’s 19,000, the dynamics between these two cities shifted significantly following the implementation of the North American Free Trade Agreement (NAFTA) in 1994. This agreement catalyzed a transformation in their productive frameworks, leading to a robust expansion in the manufacturing sector and substantial job creation on both sides of the border. Currently, manufacturing accounts for 35% of employment among Sonora’s maquiladora workforce.
The surge in exports has been a key driver of economic growth in Nogales, Sonora, with growth rates rivaling those seen in Asia and significantly outpacing the national average. This has positioned Nogales as a vital entry point along the entire U.S.-Mexico border. Trade between the two cities now exceeds $26 billion annually, further challenging the narrative that they are “so close, and yet so different.” In fact, the city has evolved into a strategic nexus for trade between Mexico, the U.S., and even Canada, facilitating a diverse array of commodities including auto parts, electronics, and fresh produce. Remarkably, Nogales handles nearly 40% of all Mexican agricultural imports into the United States, a figure that swells to 60% during winter months.
Despite Mexico grappling with issues of law enforcement, crime, and infrastructure, both Nogaleses have adeptly navigated the challenges posed by open markets, maintaining competitiveness and adapting to new export-oriented manufacturing models while expanding services related to international trade.
Moreover, Nogales, Arizona, has undergone its own economic metamorphosis, emerging as a critical hub for wholesale markets that distribute goods across various destinations, while also facilitating U.S. exports into Mexico—now the largest buyer of U.S. goods, surpassing China and Canada. The interconnected nature of the labor force, with many individuals commuting daily across the border, exemplifies the symbiotic relationship between these two cities.
Significant disparities in income and rule of law undoubtedly persist between Nogales, Arizona, and Nogales, Sonora. Yet, the case of Nogales serves as a compelling demonstration of the economic advantages stemming from North American integration—contrary to the assertions of Acemoglu and Robinson. It illustrates how the North American trade framework facilitated the importation of inclusive institutions into Mexico, thereby enhancing the incentives for investment and productivity growth. As Luis Rubio aptly notes, “NAFTA recognized the shortcomings of existing institutions to provide the long-term certainty investors need for sustainable growth.” Essentially, NAFTA allowed Mexico to “borrow” the institutional strengths of the U.S. for its advantage.
This analysis leads to two key conclusions. First, while Acemoglu and Robinson’s argument regarding the role of institutions in shaping prosperity might hold water, the transformation of Nogales into a logistics and growth powerhouse suggests a counter-narrative: that by adopting inclusive institutions from the U.S., Nogales and Sonora have reaped the rewards of increased trade and supply chain dynamics.
If anything, the most glaring institutional deficiencies arise from burdensome customs processes, resulting in lengthy delays for trucks and vehicles crossing the border. Streamlining these procedures could yield significant benefits, reducing opportunity costs for both cities, which have effectively become a singular, interconnected urban area. With North Americans trading over $3 billion daily—90% of which is conducted over land—the traffic congestion at the border represents a staggering loss of approximately $8 billion each year.
“… the story of Nogales vs. Nogales is a dramatic example of the long-run benefits of open trade, notwithstanding the asymmetries in income per capita, and access to basic human needs such as security, education, and health services.”
Thus, the tale of Nogales serves as a striking illustration of the enduring benefits of open trade, even amidst stark inequalities in income and access to fundamental human necessities. As a border city divided by mere regulatory barriers, Nogales embodies a miniature common market characterized by the relatively free flow of production factors, including human capital. Notably, over half of the residents on the U.S. side hail from Sonora, crossing the border multiple times daily. The industrial development in Nogales, Sonora, has accelerated since the establishment of a trade-integration framework, resulting in new business ventures, increased labor productivity, wage growth, and improved living standards.
This phenomenon is mirrored at other highly interconnected border points, such as Laredo and Nuevo Laredo.
In summary, the Nogales case is a potent empirical illustration of the evolving advantages of open trade integration, rather than simply a dichotomy between inclusive and extractive institutions. While Why Nations Fail has faced criticism for being overly simplistic, its core message holds some validity. However, one might argue that the authors have missed the mark. Under the assumption that they are correct regarding institutional effectiveness, it appears they have unwittingly provided evidence that runs contrary to their thesis. The Nogales case cannot be equated to the stark contrast between South Korea and North Korea. It would be prudent for Acemoglu and Robinson to revisit their assessment of Nogales in future editions of Why Nations Fail.
For more on these topics, see
Regrettably, this reflection may already be a mere academic exercise. In the U.S., the use of tariff threats as geopolitical leverage has undermined the long-term institutional stability that once characterized the North American trade agreement. Meanwhile, in Mexico, a wave of illiberal populism that began with AMLO and continues under Sheinbaum poses a significant threat to the institutions necessary for a thriving open society.
These developments portend challenging times for the frameworks supporting North American collaboration—indeed, they may ultimately unravel.
Footnotes
[1] Acemoglu, D. and Robinson J.A. (2012) Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Crown Publishers. The authors’ approach extends the institutionalist perspective developed by Douglass North. In our article “Nogales, Instituciones, y la Empresa Familiar en MĂ©xico,” La InternacionalizaciĂłn de la Empresa Familiar: TeorĂa y Práctica (Escuela Austriaca de EconomĂa), ed. Fernando Lozano, UniĂłn Editorial Colombia, 2018, JosĂ© Torra and I argue that the five categories outlined in the Economic Freedom of the World index can effectively explain the “inclusive” institutions discussed by Acemoglu and Robinson. Thus, to proponents of economic freedom, the premise is not entirely novel—income disparities across nations can be adequately explained by varying degrees of economic freedom.
[2] Why Nations Fail, p. 9.
[3] A notable example is Sergio Sarmiento, “Los Dos Nogales”. Reforma, October 15, 2024.
[4] For an in-depth evaluation of the institutional deterioration during the AMLO administration, see Enrique Cárdenas’ report, Signos Vitales, “El (funesto) legado de López Obrador,” November 2024.
[5] Rubio, L. (2015), A Mexican Utopia: The Rule of Law Is Possible, monograph published by the Woodrow Wilson International Center for Scholars, Washington, D.C., p. 59.
[6] Bob Pastor, in Pastor, R. A. The North American Inda: a Vision for a Continental Future (2015), Oxford University Press, has compellingly argued for the urgent need to reform customs processes along the U.S.-Mexico border, advocating for the adoption of smart technologies to enhance cross-border trade.
[7] Robert H. Topel noted that Acemoglu and Robinson are not merely contrasting the two Nogales cities but rather using them to illustrate the broader economic disparities between Mexico and the United States. While this is a valid observation, it remains open to the same critique. States linked to NAFTA have exhibited markedly faster growth and attracted greater productive investment, leading to higher per capita income compared to non-NAFTA states, a phenomenon often referred to as “Two Mexicos.” For further reading, see Rubio, L., and Remes, J. (2014). “The Two Mexicos.” McKinsey. August 2023.
[8] This is particularly evident in the authors’ subsequent work, The Narrow Corridor: States, Societies and the Fate of Liberty, Penguin Books, 2020, which emphasizes a stronger statist perspective.
[9] Deirdre McCloskey has critiqued the authors’ stance, arguing in “The statist neo-institutionalism of Acemoglu and Robinson,” Journal of Public Finance and Public Choice, Vol. 38, Issue 2, April 2023, pp. 175-204, that they have the causal relationship reversed.
[10] ABC News could serve as a valuable reference for revisiting this analysis. For instance, see their report on the trade dynamics in border cities in this YouTube video: Multi-billion-dollar trade industry relies on bi-national workforce in Nogales.
[11] A detailed examination of the erosion of checks and balances during the AMLO administration, particularly concerning the fragility of property rights in Mexico, is presented in my case study “Property Rights, Open Trade and Prosperity: The Case of Mexico,” published in The 2023 International Property Rights Index, Property Rights Alliance, August 2023.
