Nearshoring is Unfeasible Without Investment in Human Capital

1. Nearshoring is gaining relevance in Mexico, driven by the need to diversify supply chains and reduce dependency on China as emphasized by the US.
2. Nearshoring and friendshoring are seen as strategic options to mitigate vulnerabilities caused by events like COVID-19 and geopolitical conflicts.
3. Mexico possesses advantages like the USMCA, established supply chains, and its geographical location, making it a potential player in the nearshoring process.
4. However, Mexico faces challenges like the lack of an industrial policy, inadequate infrastructure, and uncertainty due to temporal inconsistencies.
5. The pandemic’s impact on human capital formation and the learning setbacks of graduates at all educational levels are not fully known.
6. Prior to the pandemic, Mexico’s education performance in international assessments was below the OECD average, especially in science and mathematics.
7. The graduation rate for upper secondary education in Mexico is considerably lower than some other countries.
8. The pandemic exposed the lack of preparedness in terms of digital infrastructure for online education.
9. Mexico’s education system faces a shortage of graduates in STEM fields.
10. To succeed in nearshoring with higher value-added sectors, Mexico urgently needs to prioritize and strengthen its educational system and invest in human capital.

Nearshoring has rapidly become a highly relevant topic for Mexico, especially since the United States explicitly brought it to the table as a strategic option to geographically diversify supply chains and reduce dependence on China.

In addition to this, companies have seen nearshoring and friendshoring as a strategic option to become less vulnerable to disruptions such as COVID-19 and geopolitical conflicts like the war between Ukraine and Russia. In this context, Mexico can play a significant role and benefit from this process.

Different analyses have pointed out that Mexico has advantages to participate in this process, such as the USMCA, deeply-rooted supply chains like the automotive industry, its geographical location, among others. However, it is also recognized that there is a lack of elements that would enable better utilization of the benefits of nearshoring, such as the absence of an industrial policy, necessary and adequate infrastructure, uncertainty associated with temporal inconsistency problems, and so forth.

Despite numerous factors identified in the discussion, there is a virtually widespread gap concerning human capital, which is a key element in materializing the benefits of relocation processes. Currently, the extent of the pandemic’s impact on human capital formation and the backlog in learning and skills development of graduates at all educational levels is unknown.

What is known? Regarding the current state of education, there is no recent information available. Prior to the pandemic, in the 2018 Programme for International Student Assessment (PISA) evaluation, Mexico scored 419 points in Science, 70 points below the OECD average, ranking 38th out of 42 countries. A similar situation was observed in mathematics, with 80 points below the average. On the other hand, according to statistics from the SEP in 2019, the graduation rate for upper secondary education was 66%, much lower than countries like Chile (90) or Korea (96). Data from 2020 regarding educational achievement show that the percentage of adults who completed secondary education was 22%, 20pp, and 17pp lower than Chile and Korea, respectively.

On the other hand, it must be acknowledged that we were not prepared for an event of the magnitude of COVID-19. According to the INEGI’s Survey for Measuring the COVID-19 Impact on Education, in the population aged 3 to 29 years enrolled in the 2019-20 school year, only 25.4% had access to a computer for online classes, and the vast majority (65.7%) took classes on a cellphone.

Regarding infrastructure for the 2021-22 academic year, only 29.8% of basic education schools had internet access, and 51.6% of upper secondary schools had it. Out of all graduates at the higher education level in 2022, only 27.5% pursued STEM (Science, Technology, Engineering, Math) careers, barely 0.5pp higher than in 2017.

In essence, human capital development was already facing significant challenges before the pandemic, and given that we were not prepared to face an event of this magnitude, it is likely that conditions have worsened. In this sense, there are significant challenges for the education system, which is why it is urgently necessary to prioritize and strengthen the educational system in the country. Nearshoring in the medium and long term – in sectors with higher value-added generation – cannot exist without investment in human capital.