Why Nogales Fails

Thus, income disparities across homogenous regions and throughout the world can be attributed to differences in the quality of institutional frameworks. The very first example that the authors use to highlight the thesis about the determinants of wealth gaps is the case of Nogales, along the Mexico-U.S. border—specifically, the contrast between the city of Nogales, Arizona and Nogales, Sonora (Mexico). The former thrives and enjoys higher per capita income because its institutions are “inclusive”; whereas the latter, south of a mere fence that divides both sites, suffers from crime, corruption and backwardness due to an “extractive” institutional arrangement. Consequently, the level of prosperity on the Mexican half is lower than the level of its northern neighbor, due to the lack of high-quality institutions capable of attracting productive investment and developing the incentive structure for innovation and establishment of businesses south of the border.

The 2024 Nobel Laureates in economics bemoan two cities “so close, and yet so different.” The reason for such large wealth disparities, they say, “is very simple”:

• They live in a different world shaped by different institutions. These different institutions create very disparate incentives for the inhabitants of the two Nogaleses and the entrepreneurs and businesses willing to invest there. [This] is the main reason for the differences in economic prosperity on the two sides of the border.

Alas, yes but no.

Many observers of Mexico’s modern economic performance, including a handful of native classical liberals, cite this now famous example as (almost) conclusive proof of the institutionalist aims and claims of Why Nations Fail. The commentary is well-taken, and particularly understandable in Mexico’s current context, in light of the widespread institutional deconstruction of checks and balances that began with the AMLO (Andrés Manuel López Obrador) regime in 2018, and is continuing, at warp speed, under the administration of Claudia Sheinbaum. This includes a disastrous proposal for judicial reform, which calls for the election of all judges at all levels of government, by popular vote; the elimination of a variety of autonomous agencies responsible for financial and regulatory oversight in key sectors of the economy; and a blatant lack of transparency in the (ab)use of federal funds for public infrastructure projects; among other highly “extractive” setbacks in the country’s institutional state of affairs.

The story of Nogales, however, is more complex than what Acemoglu and Robinson suggest, and conventional wisdom supposes. It is also a fascinating phenomenon. Nogales vs. Nogales does actually confirm the authors’ institutional thesis, but in a fashion that is the exact opposite of what they articulate. Nogales, Sonora, boasts a population of 264,000, more than ten times the population of Nogales, Arizona, which has only 19,000 inhabitants. Since the North American Free Trade Agreement (NAFTA) came into effect in 1994, there has been a paradigm shift in the productive dynamic of both border cities, with a noticeable expansion in the manufacturing industry. This has led to significant job creation on both sides, and a corresponding flow of new human capital into the Sonoran counterpart. Today, the manufacturing structure represents 35% of employment for Sonora’s maquiladora workforce.

The remarkable increase in exports has become the driving force behind Sonora’s economic growth, which has averaged Asia-style growth rates, significantly higher than the national average, during the NAFTA-period and has transformed Nogales into one of the most important points of entry across the entire Río Grande border. The framework established under NAFTA (now USMCA) established the institutional foundation for a much more reliable investment climate able to attract historically unprecedented flows of new capital investment into the city and the surrounding zones of the northern Sonora region. The expansion of economic freedoms for international trade (combined with the advent of monetary stability) has triggered significant growth in Nogales, Sonora, and across the state of Sonora.

In Nogales alone, total two-way trade is equivalent to more than $26 billion USD per annum—a datum that clearly seems to belie the claim that Nogales vs Nogales are “so close, and yet so different.” Rather, the proper conclusion is that the city has become a strategic gateway between Mexico, the U.S., and even Canada. Every day, a vast array commodities crosses the border, in all geoeconomic directions across the North American region. This includes auto parts, computers, televisions, mangoes, beer, chips, tomatoes, electronics, apparel, grapes and much more. Indeed, Nogales has become the most important site throughout the border for imports of fresh produce, handling almost 40% of all Mexican imports into the United States, which increases to 60% in winter months. Stories are now commonplace on the huge lines of trucks transporting Corona and Pacifico beer, among many other brands, as well as tons of avocadoes, on the eve of Super Bowl weekend.

This means that, despite Mexico’s struggles with internal rule of law, crime and poor infrastructure, both sides of the border have managed to meet the challenges of open markets—maintaining competitive positions, adapting to new productive structures (mainly export-oriented manufacturing centers), and developing a wide-ranging variety of services related to international trade.

Not surprisingly, Nogales, Arizona, has likewise experienced an important economic transformation, different in kind from its southern counterpart but equally visible: it has become a pivotal hub for large wholesale markets, where various agents receive multiple goods crossing the border, to thereafter distribute them to a wide variety of final destinations. Naturally, it also facilitates the entry of U.S. exports (especially agricultural goods) into Mexico, which has become the top customer of U.S. sales abroad, surpassing China and Canada. This robust trade relationship is supported by a significant bi-national workforce, with many individuals crossing the border on a daily basis to engage in various employment opportunities on both sides of a highly intertwined city.

There is no doubt that significant income and rule of law disparities persist between the two cities. However, the case of Nogales vs Nogales represents a powerful example of the enormous economic benefits of North American integration—contra what Acemoglu and Robinson advance. In particular, it shows how the North American treaty made it possible to import those inclusive institutions south of the border, enabling places like Nogales, Sonora (along with many others) to improve incentives to attract productive investment flows and boost productivity. In the words of Luis Rubio: “What is crucial about NAFTA is the recognition of the incapacity of existing institutions to give investors the long-term certainty they require… for long-term growth.” Indeed, NAFTA became a vehicle to “borrow US institutions for the benefit of Mexico.” This analysis yields two conclusions. On the one hand, Acemoglu and Robinson’s thesis about the role of institutions as the differentiating factor in prosperity levels may be correct. However, the transformation of Nogales into a strategic logistics and growth hub would confirm the institutionalist thesis in reverse: by borrowing those very inclusive institutions north of the border, both Nogales and Sonora have been able to benefit from the massive expansion in trade and supply chains that the entire mega-region has experienced.

If anything, the greatest institutional deficiencies in both cities lie in cumbersome customs procedures, with endless lines of trucks and cars waiting long hours to cross from one side to the other. Streamlining these processes would provide fundamental benefits and opportunity cost gains to both sides of what has, in effect, become a single highly interconnected city. North American citizens trade more than $3 billion per day, 90% of which is transported by land. The congestion at the border represents a loss of foregone output of approximately $8 billion per annum.

So construed, 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. As a border city, divided by a simple fence and regulations (transaction costs), Nogales is a miniature version of a common market with (relatively) free flow of all factors of production, including human capital. In fact, more than half of Nogales’s residents on the U.S. side are Sonoran-born citizens, crossing the border up to three times per day. The industrial platform of Nogales, Sonora, has developed at a rapid pace since the institutional framework governing North American trade integration came into effect, fostering the emergence of new businesses, sophisticated investment projects, labor productivity above the national medium, real wage appreciation, and higher living standards.

The very same phenomenon can be observed at other border points that are highly intertwined, especially Laredo and Nuevo Laredo.

Our contention is that as an empirical case study, the case of Nogales is much more powerful as a representation about the evolving benefits of open trade integration, than as a contrast between inclusive vs. extractive institutions. Why Nations Fail has been criticized on many fronts. Some argue that it is unduly reductionist, collapsing into a nonfalsifibale form of institutional determinism. Others suggest that is embodies an implausible dirigisme. Others yet, especially Deirdre McCloskey, have also inveighed that the authors have it backwards: it is ideas, not institutions, that are the key factor that decides the fate of nations between poverty and prosperity. We believe there is an important kernel of truth in Acemoglu and Robinson’s remarkable account. Our claim is different, however. For the sake of argument, we assume that the authors are right in their thesis that the lack of credible institutions constitutes the main reason for differences in prosperity. Our claim is that, under this assumption, the Nobel Prize winners do have it backwards: they are right, but for the wrong reasons. The Nogales case is clearly not an example comparable to, for instance, South Korea vs. North Korea. We suggest it would be advisable to substantially revise their assessment of Nogales vs Nogales in future editions of Why Nations Fail.

Sadly, this reflection may already be purely scholastic, if not immaterial. Today, north of the border, weaponizing tariff threats as a geopolitical bargaining tool has dealt a severe blow to the long-term institutional certainty that exemplifies the key value of the North American trade agreement. And, south of the border, a wave of illiberal populism that began with AMLO and is now continuing during the new presidency of Sheinbaum seems to be committed to fulfill, at all costs, the call to arms that AMLO popularized with his infamous cry after he lost the presidential elections in 2006: “to hell with institutions.”

This, unfortunately, entails very challenging times for the institutions that underpin an open society in North America. Indeed, they may ultimately fail.

[1] Acemoglu, D. and Robinson J.A. (2012) Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Crown Publishers. In truth, there is nothing particularly new in the Acemoglu-Robinson approach, as it is an extension of the larger institutionalist approach elaborated by the late Douglass North. In our article “Nogales, Instituciones, y la Empresa Familiar en México,” La Internacionalización de la Empresa Familiar: Teoría y Práctica (Escuela Austriaca de Economía), ed. Fernando Lozano, Unión Editorial Colombia, 2018, José Torra and I develop the argument that the five main categories used in the Economic Freedom of the World index can be used to explain the “inclusive” institutions described by Acemoglu and Robinson. In other words, to advocates of economic freedom, their approach is nothing new—income per capita and levels of wealth across nations are adequately explained by differences in economic freedom.

[2] Why Nations Fail, p. 9.

[3] A good example is Sergio Sarmiento, “Los Dos Nogales”. Reforma, October 15, 2024.

[4] For a detailed exposé of the institutional devastation orchestrated during the AMLO administration, see the report edited by Enrique Cárdenas, 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 argued convincingly on the dire need to reforms customs procedures along the U.S.-Mexico border, and for the adoption of smart technologies to facilitate greater cross-border trade.

[7] On this point, Robert H. Topel commented to me that the point Acemoglu and Robinson are making is not so much about contrasting the two Nogales cities, but rather presenting it as an example of the larger economic differences in wealth between Mexico and the United States. This is a good observation, but it is also open to the same criticism. The NAFTA-linked states have grown at a much faster pace, and accumulated much greater productive investment, with the consequent results in per capita income, than the non-NAFTA states. It is the phenomenon known as the “Two Mexicos.” On this point, see Rubio, L., and Remes, J. (2014,). “The Two Mexicos.” McKinsey. August 2023.

[8] This is especially clear in the stronger statist emphasis of the authors’ The Narrow Corridor: States, Societies and the Fate of Liberty, Penguin Books, 2020.

[9] For instance, see Deirdre McCloskey, “The statist neo-institutionalism of Acemoglu and Robinson,” Journal of Public Finance and Public Choice, Vol. 38, Issue 2, April 2023, pp. 175-204.

[10] Incredibly, ABC news would be a good reference to undertake this revision! See the report on the trade dynamics of the border cities in this YouTube video: Multi-billion-dollar trade industry relies on bi-national workforce in Nogales

[11] For a detailed description and criticism of the onslaught against checks and balances during the AMLO administration and especially related to the fragility of the country’s property rights framework, see my case study “Property Rights, Open Trade and Prosperity: The Case of Mexico,” in The 2023 International Property Rights Index, Property Rights Alliance, August 2023.

* Roberto Salinas León is President of the Mexico Business Forum, where he works on assorted projects of policy analysis, media, investment advisory, and economic consultancy. He is currently the Director of the Center for Latin America of Atlas Network and is President of Alamos Alliance, which organizes an annual symposium in the town of Álamos, Sonora.

Earlier versions of this article were published in (together with José Torra) “Nogales, Instituciones y la Empresa Familiar en México,” La Internacionalización de la Empresa Familiar: Teoría y Práctica (Escuela Austriaca de Economía), ed. Fernando Lozano, Unión Editorial Colombia, 2018; and in “Nogales versus Nogales,” Literal Magazine, March 2, 2025.