FORBES – Agosto 2014

Today Mexicans no longer speak of the “unwritten rules” but these remain as valid as ever. The rules are not written because they refer to the preferences of the individual occupying the presidency. It’s his word that counts and, for obvious reasons, cannot be codified in the law or, when that happens, can be changed at will. From the perspective of the president, the short-term benefit to managing according to unwritten rules is obvious: creates loyalty, can reward and punish and, above all, gives vast powers to advance projects of his choice. The social benefit is also great because, as the ease with which the constitutional reforms were carried out in 2013 illustrated, the country can change quickly. The problem is that there is another side of that coin.

In the twentieth century the issue of power was resolved through the imposition of two rules that were “unwritten” but evident: on the one hand, the president is everyone’s undisputed and indisputable lord and master; on the other hand, it is valid to compete for succession as long as the first rule is not violated. It was a simple and effective mechanism that, however, did not emerge out of the blue. Its success was the product of the establishment of the rule and the capacity to make it stick. The latter was not automatic: it was only accomplished when Cárdenas exiled Plutarco Elías-Calles and submitted General Cedillo. Once the capacity to exact compliance with the rules was demonstrated, the system went into effect and functioned until the PRI ceased being representative of the Mexican society and the unrepresented began to dispute the system’s legitimacy.

The “unwritten” rules of Mexican political life were strict. The PRIist political system of the XX Century operated under the principle of having implicit rules and, more importantly, that the whole legal scaffolding of the country –from the  Constitution to the latest regulatory law– was no more than a mere formality that could be violated at will. Evidently, it is impossible to construct and strengthen the legitimacy of a system, including the acceptance of the rules of succession, when the institutional foundation of a political system is sustained on no more than unwritten rules and a legal system that is a mere formality for the actors involved. This problem is aggravated within the context of the expectations that reforms generate, such as that of energy, that require, to be successful, a legal structure that is reliable for potential investors. It will be difficult for a de facto political system sustained on unwritten rules to comply with this requirement.

The worst harm that the country endured as a consequence of the era of unwritten rules is that no one can believe in written rules at present. Instead of seeing a law as a norm that is obligatory in character, the Mexican sees it as a guide, that is, when it is not an aspiration. No one feels obliged to comply with the law, chiefly when he observes that many others do not do so and that, in the worst of circumstances, application of the law can always be “negotiated”, an absolute contradiction to the existence of the rule of law.

Unwritten rules permitted supporting the concentration of power and served as a means of control and discipline for the population as well as for the politicians. Given their “unwritten” nature, the rules were ultimately unknown to the majority of the country’s inhabitants. The citizens, but especially the politicians, had to infer them. Like every normative system, that of the unwritten rules had its limitations.  A system of that nature works as long as the rules are not abused (that is to say, that they do not change frequently and capriciously) and when they achieve consistent and satisfactory results for the population in general.

The crucial theme is that the Mexican has never lived under a scheme of known and predictable rules that include legal recourse to protect the citizen; that is, rights and obligations, both part of an integral concept of the government-citizen relationship.  Explaining why that was is relatively easy. What is complex is imagining ways in which to break the vicious cycle that the political system of yesteryear has left to Mexicans today. That is particularly important in the light of the inherent contradiction regarding the letter of the law and its application, above all because the PRIist narrative continues to comprise a central component of the ideological perspective shared by a great part of the population.

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Luis Rubio

Ralf Dahrendorf, German-British professor, wrote that “conflict is a necessary factor in all processes of change”. As the reforms that the government has proposed begin to be implemented, the complexity that such a process entails becomes clear.

In its economic dimension, the thrust inherent in all reforms is that the incentives of all of the parties involved require alignment –sectors, social groups, and the government- in order for the country to progress. The sense of this concept is that currently a divergence lives on in the actions and motivations of the political and economic actors in Mexican society and that all that needs to be done is to align them. In conceptual terms, the proposal is impeccable but it suffers from a contradiction from the start: the problem does not lie in the incentives but in the objectives. That is, it’s not that some participants in the society or in the markets are mistaking their chosen path, but that, in effect, they espouse distinct objectives.

From the viewpoint of market functioning, informality –a prototypical example- presents a fundamental challenge due to the difficulty encountered in the carrying out of exchanges between formal and informal actors because the latter cannot emit invoices. For similar reasons, informal enterprises cannot grow because their condition of informality hampers their obtaining credit or attracting personnel with skills that are tradable in the modern marketplace. The question is whether informality is what the economists term a market “failure” (a mere distortion) or whether it is a distinct phenomenon.

A great deal of informality derives from the complexity of the  paperwork and red tape involved in registering new businesses and maintaining the condition of formality, above all in terms of tax-compliance and labor requirements, those of social security and the rest. In addition to the latter, there are circumstances that have made informality attractive and not only because informal businesses evade certain outlays (such as taxes) or costs (such as labor and tax bookkeeping) but that, for example, electricity costs go up when consumption rises or when the user is a company, and the costs of labor registration rises when the number of employees does.

All of these factors make the formalization of companies expensive but, as in the case of inconclusive (or failed) political transitions, they’re not the only explanation. If the entire problem were to reside in the cost of formalization, the fiscal, labor, and Social Security authorities would have an enormous incentive to diminish those costs in order to promote their legalization. However, the problem is more complex than that and has a distinct explanation.

Much of the cost of registering enterprises refers to municipal authorities, which have turned the informal businesspersons into a political base. For those authorities, the incentive does not lie in entrepreneurs becoming formalized, growing, and prospering, but in maintaining their political support base so that the career of the municipal president, representative or party member will flourish. That is, the politician’s incentives are in perfect alignment with informality and there is no reason, from their perspective, to modify the status quo. In addition to this political logic, there is an economic rationality that is inherent to the development of a political clientele: because what is not charged in the form of taxes is levied as informal dues, traditionally by representatives of the formal authority and, more recently, by organized crime.

Something similar is happening in the manufacturing sector that has not modernized, that is not highly productive and that is pummeled by imports, which frequently enter the country as contraband. That non-modern and highly unproductive industrial sector has survived in its present state in good measure due to subsidies and other means of protection, such as import duties. All of these instruments keep a vast sector of the economy alive and without modernization mainly because the authorities fear the unemployment that can be generated by the collapse of these companies.

But, as with informality, protection begins with a logic of serving the public (in this case fear of unemployment). While from an economic perspective it would be better to induce a gradual liberalization that would have the effect of modernizing these enterprises, it wouldn’t take politicians long to identify the benefit of perpetuating their hunting grounds. In this way, what begins as a job preservation strategy rapidly becomes a mechanism for developing political clienteles at the service of a private cause.

Informality and protection, those sources of unproductivity that deduct growth from the Mexican economy, possess a flawless clientele rationale that renders them permanent. Within the context of the political transition that the country is undergoing at present, clientelism has the effect of obstructing the democratic maturation of the country because it ministers to the beneficiaries of the control. That is, political clientelism lies behind informality and both undermine the growth of the economy: they subtract from it.

Thus, it is not that the country is incapable of reforming itself (the reforms that didn’t advance for years or those that were thwarted in the secondary stage), but instead that there are all-powerful interests that profit from the status quo.

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FORBES – Luis Rubio

Thomas Piketty’s book on inequality has created an enormous commotion because it touches a sensitive nerve worldwide. The financial excesses, the extraordinary valuations of the technological companies and of the Internet and the appreciation of the value of intellectual over manual work have created a new social reality that is the natural raw material of responsible politicians as well as of opportunists. The very fact of inequality becomes an opportunity that offers infinite possibilities for being exploited although, unfortunately, these rarely lead to diminishing it. Frequently what is done leads to its exacerbation.

Picketty’s argument is very simple and very relevant:  comparing census and fiscal data he explains that income grows much more slowly than wealth, which inexorably leads to its concentration. According to Piketty, the rate of return on financial investments is systematically superior to the growth rate of economy and this is an uncontainable tendency. From his statistical analysis he engages in a series of extrapolations from which he concludes that unless the growth of wealth is controlled (by means of taxes) concentration and polarization will grow without limit. In other words, for Piketty the solution resides in the incorporation of governmental control mechanisms.

There was no wait for objections to the argument of the French scholar to ensue. Some are extraordinarily technical, others merely superficial. Some embrace their arguments without thought. What come next are some arguments and arguments that have emerged, directly or indirectly linked with Piketty:

For Tyler Cowen wealth derives from the assumption of risk and not from the fact that it exists: that is, wealth does not grow in a natural manner but as the result of decisions that often are erroneous, entailing immense losses for their owners. Tyler argues that at the beginning of the XIX Century David Ricardo affirmed something similar to Piketty on ownership of the land but that, however, this source of wealth ceased to be relevant. Ricardo’s conclusion is that the two factors that really have had bearing in the creation of wealth are not financial but rather derive from technological change and globalization. The solution Tyler proposes is that “creating more value in an economy would do more than wealth redistribution to combat the harmful effects of inequality”. 

Donald Boudreaux utilizes a metaphor to dispute Piketty’s argument: “I spend about six hours weekly (and weakly) lifting weights at the gym. The modesty of my effort combines with my age (early 50s) to ensure that I’ll never be as buff as younger guys who spend more time at the gym than I do. The result is muscle inequality! And I’m tempted to feel envious. I want to be bulging-biceped, broad-shouldered, and as chiseled as are my young gym-rat friends. Really, though, how seriously do I want this outcome? I could build more muscle if I spent not six hours weekly at the gym but, rather, six hours daily. But I choose not to do so. Spending more time at the gym means spending less time working (earning income), less time with family and friends, and less time doing other things that I judge to be worthwhile. The fact that I’d be more buff if being more buff were costless is irrelevant. It’s not costless; therefore, the size of my muscles is largely the result of the way I choose to make trade-offs. So I resist the temptation to envy men with bigger muscles, men with muscles (do note, were not built with fiber taken from my muscles). And if muscle distribution by government were possible, I’d oppose it. Not only would the result be less muscle bulk to ‘redistribute’ (Would you pump weight for hours each day knowing that a large chunk of what you build will be stripped away and be given to someone else?) but, more importantly, I’m not entitled to the confiscated fruits of other people’s efforts”.

Paul Krugman, true to his nature, carried out a diligent and interesting analysis of an analytical publication (New York Review of Books, NYRB), while he simultaneously launched a politico-ideological diatribe in his article in the New York Times (NYT). In the former he examines the phenomenon of inequality from the impoverishment of the U.S. middle classes without wholeheartedly embracing the fiscal argument of Piketty. In contrast, in his journalistic article he accuses the “apologists of the oligarchies” of burying their heads in the sand. What Krugman evidences is that, in effect, there is a problem, but that its root cause is never arrived at.

Beyond the U.S. debate, I ask myself whether the circumstances are similar in Mexico. No one could dispute the fact of the inequality in the country, but its dynamic is radically distinct, To start with, there are two “structural” phenomena that distinguish the two countries: in the U.S. both the tax as well as the estate law promote the distribution of great fortunes through foundations. The two wealthiest men in that country –Bill Gates and Warren Buffet- devote themselves body and soul to distributing their money to causes that they consider worthwhile: that is, at the end of their days, a good part of their fortunes will have disappeared or will have been transformed into something else, negating part of the argument of the French author. On the other hand, the U.S. market is vastly more dynamic than the Mexican market and its opening to competition frequently implies that that’s the way great fortunes are made, and others disappear overnight: the losses of thousands of investors during recent years have been huge. Although in Mexico there’s always some of the latter, the former certainly is (almost) non-existent in Mexico.

In Mexico it is much more likely that the government will seek out those who are already wealthy for these to start new businesses that create conditions for the emergence of new entrepreneurs. The success of so many Mexicans in the U.S. should tell us a lot: why there and not here. The same is true concerning the incapacity of Mexican governors to confront the educative problem and to create conditions for true equality of opportunity. Inequality is not exclusive to Mexico, but here we persist in preserving it and rendering it permanent.

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Luis Rubio

In one of our first arithmetic lessons, we all learn that the order of the factors does not alter the product. That which is so clear in keeping accounts is not always valid in politics: there it does indeed matter who does what and when. The democratic euphoria of the last decades and its results obliges us to reflect on the conditions that are necessary for a country to achieve the construction of a functional system of government and one that is simultaneously responsive to citizen demand.

In the last half century a series of transitions toward democracy have come about that have been exceedingly successful (Spain, Korea, Taiwan) but also others that clearly failed. The protests that a quarter of a century ago were violently snuffed out in at Tiananmen Square were nothing other than one of the manifestations of attempted transitions, few of which were as successful. Cases such as Arab Spring, Ukraine, Russia, Iraq, Thailand and Mexico, each with its characteristics and circumstances, illustrate the complexity involved in constructing a regimen at once functional and democratic.

Some of these show the contradiction that frequently lies between the demand for transparency and accountability on the one hand, and the capacity of the government to indeed be transparent and accountable. Beyond the disposition of the governor to respond to the citizenry, perhaps the main obstacle to successful democratic transition has less to do with the persons than with the structures of governance that would need to be modified.

The preponderant characteristic (and common denominator) of transitions to democracy is the authoritarian precedent, a circumstance that explains much about the former capacity to govern and function. Authoritarianism made governing easy; its disappearance makes it very difficult to govern, as is the case of Mexico at present.

For years now it has been evident that the “old” system worked in good measure because of its immense capacity of imposition. The PRI-presidency link-up permitted the swift implementation of presidential decisions in a generally effective manner, while the system of control that the party and diverse instruments of the government made it possible to avoiding or “pacifying” unmanageable dissidents. Time eroded the system of control and the first alternation of parties in the presidency “divorced” the PRI from the government. What followed was not a seamless transition but rather a partial collapse of the functions of the government. It is possible that more skillful hands would have been able to drive a process of change with greater success, but what is clear is that, instead of focusing itself on the construction of a new political and institutional regime, the country entered into a downward spiral of progressive deterioration. In some ambits, the deterioration was partial, in others dramatic (e.g., security). The whole gave rise to a disorderly country that constituted the very invitation that the PRI needed to be able to affirm, in the words of one of its lofty personages, that “we may be corrupt but we know how to govern”.

Recent times have not proven the veracity and validity of the second part of that statement,  and perhaps that’s where part of the explanation of our current difficulties lies: the problem is not one of persons but rather one of structures and although it is persons who shape the institutions and structures of the government, the relevant fact is that in these last decades little has been done to construct government capacity which is, at the end of the day, the key for the country (any country) to be able to function.

In recent decades, multiple governmental or State institutions have been constructed: from electoral and economic regulatory entities to human rights commissions and those devoted to the access to information. Each and every one of these institutions have been advancing within their ambit and creating new political realities, enlarging spaces of citizen participation and obliging the diverse levels of government to respond. What those institutions do not do –were not designed to do- is to improve the capacity of the government, which is the essence of a properly working government in key areas such as security and justice.

The case of transparency and access to information is suggestive: the IFAI was created as an entity dedicated to guaranteeing access to information, a necessary condition for political development in every democratic society. What it didn’t do was create the mechanisms necessary within the governmental entities so that the government could respond. The result was a clash of paradigms: the existing system of government, constructed to control the population and not to inform it, did not possess the instruments (or the internal logic) for responding to the citizenry or the filing systems adequate for doing so effectively. Thus, instead of creating a cooperative system of citizen and institutional development it triggered a collision between bureaucratic logic and that of the political activists.

The case of transparency illustrates the nature of the problem: Mexico urgently needs an integral transformation of its system of government. The present structures derive from the era of the end of the Revolution, a time that is in no way similar to the realities and citizen demand of today. Where cooperation is required we have conflict; where it is urgent to support adaptation (for example, of teachers fearful of not passing an exam) all incentives favor confrontation. The logic of the control of yesteryear is incompatible with the reality of a globalized economy and a country keen on developing itself. A XXI-century system of government is urgent.

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Luis Rubio

What do soccer, the telecom reform and the Supreme Court have in common? At first glance, it would appear to be unconnected issues. However, the thread that weaves these and other themes together is the enormous disorder that characterizes our society, disorder that has many manifestations but one consequence above all: the disowning of responsibility.

The symptoms and examples of disorder are ubiquitous: some Mexicans recently ended up in jail in Brazil for improperly touching a woman and they supposed they’d be unpunished for that like in Mexico, where impunity reigns; a government grants enormous benefits to the television networks as a result of prior campaign-commitments; a union that blocks streets at will and the local government protects them, holding the citizenry as hostage; a government that leaves national finances hung up with “safety pins” (and a major financial collapse follows); a “social activist” is recorded receiving cartloads of cash and nothing happens; a businessman seizes control of some television antennas with an armed commando; the government allocates contracts, skipping the results of duly organized bidding processes; Congress does not make decisions on matters of its concern, thus obliging the Court to rule on themes not falling within its radius of competence; a goal scored against the national team is always the fault of the referee. Wherever one looks, all of Mexico -society, politicians and governors- is characterized by great disorder in which there are no rules that are respected and in which everyone –parents, teachers, governors, legislators, entrepreneurs, etc.- disowns his responsibility.

When Franco died, Spanish society “let its hair down”, as registered in one of the chronicles of the epoch. Young people threw themselves into a world of sexual lasciviousness and adults caught a glimpse of a world of freedom that they hadn’t known for decades. (Nearly) all of Spanish society, each in his or her own way, welcomed a new moment of its history. What’s interesting is that although all of a sudden anything could be written, people could say whatever they wanted and do anything they liked, life in society went on as it had been: automobile drivers respected traffic rules, police sanctioned wrong-doers, civil and commercial processes functioned and taxes were paid. In other words, the end of the dictatorship did not entail the end of order: freedom did not wind up equivalent to disorder.

The question is why in Mexico have we have evolved to such a degree of disorder, impunity and uneasiness (or, as a law teacher of mine correctly said, a “disorder with an accent on the m” -an “unmentionable” here). Some days ago, in an analysis by Robert Kaplan on Saddam Hussein, I read that the latter’s regime was “anarchy masquerading as tyranny” that suffocated the society and that worked thanks to the fear it instilled of the population. While it may have seemed like great order, beneath the appearances it was nothing more than chaos in potential. As soon as the regime disappeared, all vestiges of order vanished and the country collapsed.

Without attempting to equate Mexico with Iraq, there are some evident similarities with the old PRIist regime: as diverse observers have indicated over time, the regime endured due less to its apparent legitimacy than to the (generally) benign authoritarianism that characterized it. The “unwritten” rules worked because of the fear that the regime inspired and not because of its credibility. Illustrative of this reality was that the decomposition process (which began in the late seventies) started to become uncontainable disorder perhaps at the height of its apparent might: it was in 1994, under Salinas, that we observed, for the first time since the twenties, a wave of political assassinations, very-high-profile abductions and the ushering in of the era of insecurity.

What is relevant is that, in contrast with Spain, in Mexico the end of the old regime evidenced the total absence of a functional institutional framework. Up to the seventies, the people were afraid of the police, today they tip them as car watchers. Impunity was perhaps more visible among the powerful of any pedigree, but the reality is that Mexicans continue to act the same, whether in mundane things such as the trash, traffic lights, double parking or lack of responsibility in the affairs of our daily lives. The end of the PRIist era was not accompanied by a society with the potential to achieve development without a degree of anarchy that, although fortunately distant from that occurring in Iraq, is not distinct in concept. In Mexico there has not been an institutional transition.

The matter of disorder is one that now-President Peña-Nieto addressed in his campaign. However, the answer that his government has afforded is inadequate because it does not respond to the origin and cause of the matter. It is not that Mexicans are disorderly by nature or culture: the problem is that, although there are thousands of rules for everything, in practice there are no rules for anything and there is no punishment for those who violate these, except when it is to the advantage of a powerful one.

The problem is not one of control but of rules. Unless the government believes that it’s possible to put the toothpaste back in the tube –or its political equivalent, which consist of submitting the entire population, all of the communications media and all of the politicians- his effort will not bear fruit in terms of order but rather in greater unease. What Mexico requires is effective leadership that advances toward the establishment of a framework of rules that allow for peaceful coexistence, eliminate impunity and lay the foundations of sustainable political development.

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Luis Rubio

Insanity, said Einstein, is doing the same thing over and over again and expecting different results. Thirty years ago, within the context of a severe recession, Mexico opted to undertake the course toward economic liberalization as a means for recovering the growth that, since the end of the sixties, had been in short supply. In that first era of reforms a broad number of enterprises were privatized (telephony, banks, television companies, steel, fertilizers). The result was not to the liking of part of the population: while some of the privatized enterprises prospered uncontrollably, others (mainly the banks) ended up collapsing and generating an enormous cost defrayed by the taxpayers. But more important for the current debate is that many of those that did prosper became oligopolies that hindered the creativity of the population, reducing the potential for growth of the economy. Unfortunately, everything indicates that in the reforms now being discussed the country is advancing in exactly the same direction.

Countries that have been successful in opening their economies –above all in liberalizing protected markets, especially those dominated by state-owned companies- share a common characteristic: they all built competitive schemas for the functioning of the specific market. That’s what happened in England and Chile, two successful cases according to any measure. In Mexico this proceeded in a distinct manner: the property of the old monopolies was transferred to private investors without creating a competitive market in which transparency and competition comprised the determining factors of the result.

I remember a panel at the end of the eighties on which there was a prominent member of the team that was responsible for privatization in the Mexican government, as well as the man who had been in charge of privatizations in the Chilean government some years previously. The Mexican functionary explained the rationale that the Mexican government was pursuing on the process of privatization and what lessons they had learned. With regard to the former the Mexican participant affirmed that the most important criterion was for the highest bidder to win because that guaranteed the transparency of the process. About the latter he explained that experts in the matter had recommended that they begin with small businesses to acquire experience but what they had observed was that they would rather proceed with big ones to send a solid signal to investors. The Chilean functionary had brought with him a long presentation but he stood up and said that he had understood that the process had not yet begun and that thus he would not present what he had prepared because he did not want it to appear to be a criticism of what the Mexican functionary had expressed. He concluded his commentary –which lasted inside of two minutes- by saying that in Chile the criterion had not been money but the structure of the market that would remain after the privatization because the important thing for them had not been the collection of revenue but rather the subsequent development of the industry. His critique was short but devastating. The following years showed that he was right, there and in Mexico.

A quarter of a century after, the current debate in Mexico reveals that nothing has been learned. Instead of deliberating over how the energy market will be left after the opening of the sector, everything of import seems to be to what extent the state monopoly should be preserved; instead of seeking the way to create a vibrant and competitive energy market, the discussion centers on ensuring that the so-called sovereign fund continues being an interminable source of unaccounted-for money for obvious purposes. The same is true for the recent electoral reform, in which the last thing important for the esteemed legislators was competition for power; the only thing relevant was maintaining the control of the process among the three big parties and the monies involved. In the case of telecommunications, the rumor mill –the only market that indeed does work in the country- affirms that all kinds of arrangements are being made under the table, through personal concessions, in some cases not to the companies but to the functionaries on an individual level. That is, Mexicans are continuing with the traditional logic of patronage, influence, control and corruption. Einstein would say there’s no reason for expecting a different result.

The experience of both historic moments suggests that there’s something in the DNA of the Mexican politician (and many activists, whether legislators or not) that impedes him or her from doing things openly and transparently through competitive markets, betting on the creative capacity of the Mexican and, above all, abandoning the tradition of utilizing the public sector as a source of personal enrichment or as a vehicle for purchasing wills as a means for accessing or maintaining power; in other words, slush funds.

We all know that the learning curve is always costly. In this perspective, these mistakes would be explainable had there been no prior experience. The problem is that this isn’t the first experience and, in contrast with the former one, the evidence today is overwhelming. What resulted from the Mexican privatizing process of the eighties and nineties as well as that of other nations is more than convincing that only a competitive and transparent market would permit achieving the objectives set forth by the constitutional reforms. The case of telecommunications –both television as well as telephone- is particularly revealing: there it is, in living color, the most brutal evidence that oligopolies are contrary to growth. Unless, that is, the objective is distinct from the one made public.

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Luis Rubio

Mexico is suffering the consequences of all of the crises that it underwent from the seventies to the nineties. That is the conclusion that the participants in a discussion panel arrived at on the causes of Mexico’s poor economic performance*. The driver behind this notion is that Mexicans do not believe the government and suppose that no change is going to benefit them because everything is biased toward preserving the privileges of a few (“those of always”). That is, beyond technical issues, behind the paralysis that characterizes the Mexican economy and its very low levels of average productivity, there is a profound distrust of the population in its government and in the institutions. If this conclusion is valid, the reforms that the government has been promoting are not going to resolve anything because that’s not where the problem is.

The analyses and explanations –the alleged “over-diagnosis”- of what ails the Mexican economy are concentrated on matters that are circumstantial as well as structural: the lack of growth of the U.S. economy; the housing industry crisis; the fiscal reform; the excesses of power and attributions that the government is accumulating; the alienation of the business community on the part of the government; the Rule of Law; overregulation; bureaucratic arbitrariness; the lack of reforms.  All of these matters are real and constitute impediments to the acceleration of the economy. However, the conclusion of the panel is that all of this must be seen to, but that the true challenge is that of trust. Back to the future.

This is the summary of what I learned from the panel:

• The economy is growing with enormous rapidity but only one part of it: the modern one. There is an enormous gap in the growth of productivity: while this is growing in some sectors and companies at 6.5% annually, in others it contracts by 5.7%. That is, the average doesn’t tell us anything; thus, it is indispensable to understand the causes the gap. A general policy aimed at fixing one single problem simply won’t do.
• There is a deep bias against the market, capital and the entrepreneurial activity, which is expressed in the most diverse ways.   On the one hand the gigantism exhibited by the monopolies: in Mexico everything is big and the consolidation of great entities is promoted, similarly in the business world as in the worlds of unions and politics. In other countries there are no political parties as big and as powerful nor are there companies like Pemex. It’s not only large enterprises: in all ambits there is an enormous concentration of power and wealth. Even the narco cartels are massive. It’s a political phenomenon: it’s the product of the regulations that exist and not of the size of the assets. Its permanence is at the beck and call of a political decision.
• On the other hand our culture punishes and flagellates the creation of wealth. Deirdre McCloskey affirms that growth is only possible when creation of wealth acquires legitimacy. It is not by chance that in Mexico few want to risk their capital, a requisite of the essence for the growth of the economy.
• The institutional structure is not conducive to growth: there are too many rules for everything but these are not made to be complied with and, when they are, it is in discretionary fashion. Many of the recent reforms (e.g., competition) have accumulated instruments for threatening businesses and investors, conferring vast discretional attributions on the authority. Twenty years ago, with NAFTA, the government committed itself to not modifying the rules of the game for investment. The new faculties comprise a menace to that huge achievement, which explains virtually the totality of the growth of these years.
• In addition to the absence of strategic vision, the content of many of the reforms suggests that there has not been the capacity, or disposition, to understand the nature of the problem, above all its complexity (problems that are distinct in each sector or activity) and a great penchant for amassing changes that entertain neither logic nor coherence. None of the reforms address the creation of institutions that guarantee stability or transparency.
• In sum, at the root of the economic problem lies a yawning deficit of trust. Until this is resolved, everything that’s done will fail to change the trajectory but would indeed have the effect of discrediting the political parties and the traditional politicians, throwing open the door to the populists of before and those to come.

Gordon Hanson, Economics professor at UCSD, has for some time argued that few countries have carried out as many changes and reforms as Mexico and, despite that, have been able to harvest so little. His conclusion is that more reforms, although they are required, will not solve the “idiosyncratic” problems that Mexico faces. Those problems are reduced in good measure to the only thing that the current government has not been willing to do: devote itself to convincing the population and the actors that are key in making growth possible of its commitment to the rules of the game, the permanence of the reforms and the trustworthiness of its project. Along the way, it risks undermining the only thing that had indeed functioned well in the last twenty years: the certainty that businessmen and investors have had (had?) to risk their capital.

Tolstoy was once asked how it had been possible that thirty thousand Englishmen subjugated 200 million Indians. His response was pure logic: “The numbers make it evident that it was not the English who enslaved the Indians but the Indians who enslaved themselves”. Something like this seems to happen with economic growth in Mexico today.

*http://www.wilsoncenter.org/event/mexico-today-1

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 FORBES -Luis Rubio

Mexico is encountering extraordinarily complex and simultaneous dilemmas at present. On the one hand, an economy that for decades has been yielding a performance that in the best case scenario is mediocre and on the other hand, a stale government system, inadequate for the current realities and circumstances and, in any case, ineffective. The most evident manifestations of these challenges are observed in the lack of personal security under which the population lives, beginning with extortion and abduction, very low average productivity and generalized malaise. However much a multitude of reforms has been driven, there is no evidence whatsoever, after a year and a half of government, that President Peña’s government has a clue as to how to solve the problem.

The presidential discourse emphasizes that “we did not come to manage but to transform”. However, after various decades during which it has not been administrated, the country requires a functional government, appropriate for today’s reality. Of course fundamental transformations are required, but it is not evident that those that are driven are the adequate ones, that the government understands what their implementation demands or that there is the willingness to conduct these to a safe haven. More important yet, there is no awareness in the government that many of its actions are in effect the cause of an economic performance worse yet than the historical one.

It is this context within which the legislative discussion is approaching. With regard to the energy reform: many reforms, high insecurity, enormous expectations, inefficient government and an environment of political conflict that does not let up. In the energy theme the gamble is very large due not only to the fact that this could, potentially, free up the enormous resources that the country possesses, but rather because of its potential impact on the entire economy. The legal transformation that the Constitutional Reform of 2013 entails is monumental. What’s not obvious is whether the secondary reform will make it possible.

There are four enormous challenges that have to be solved well in order for the energy reform to be successful: the role of Pemex, the legal structure, the regulator and security. In terms of what Pemex, the industry’s factotum, is responsible for, the question is whether there will be anything left for other potential investors after the legislators –and all of the interests bringing up the rear- have been up to their old tricks. In a conceptual sense, the PRI proposed a modest reform, the PAN demanded a real opening and that was what in essence the constitutional reform produced. Today the struggle is to return to the modest proposal, the two great natural promoters of which are Pemex and the PRD. A reform that permits co-investments with Pemex wouldn’t be bad, but it is imperative to recognize that an unreformed Pemex, now without the paraphernalia of federal controls, would be the cave of Ali Baba and the Forty Thieves taken to its maximal expression. I suppose that not many of the target-investors would be moved to invest in that context.

The second challenge is that of the legal structure that characterizes the country. In order to invest, those potential investors require a legal framework that is clear and transparent. Most important for them are not great incentives but clear rules of the game, because they base their decision on that. Accustomed to investing in Cuba, Indonesia, Russia, Vietnam and other nations with poorly consolidated legal and political regimes, they seek clarity. Mexico’s legal tradition doesn’t offer much certainty in that regard: the law is rare that doesn’t confer enormous discretional powers on the authorities to change the rules of the game at any time. Strike two.

The third challenge is that which is relative to the regulator. In the same way that the potential investor requires certainty in the rules of the game, its main source of confidence lies in the regulator. A regulator perceived as independent and capable of enforcing the rules established in the law is the only way that investors will be willing to participate in the process. To date at least, it’s not obvious that the legislation will produce a reliable and independent regulator. There aren’t many of those in the country, thus this prerequisite paramount to invoking Sisyphus and his great stone.

Finally, the great problems of Mexico aren’t the drugs or the imports or the public expenditure. Mexico’s problem is the very poor quality of its government. The insecurity is the product of that circumstance and the decreasing popularity of the president is nothing more than a manifestation of this. Without functional but delimited government, the country will continue losing its bearings, albeit with a president infinitely more capable a politician and executor of legal changes.

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@lrubiof

Luis Rubio

Déjà vu, the illusion that results in remembering a previous world. That appears to be the logic of the economic policy: recreate a world that no longer exists and that is no longer possible. But the attempt entails enormous costs and risks, beginning with the illusion that it is possible to separate and differentiate the external from the internal world. Globalization of the productive processes transformed not only the manufacturing of goods but also the political relationships among society’s actors. Unless the government is willing to emulate North Korea or other repressive dictatorships, its margin of action is infinitely smaller that it thinks.

A half century ago, the overwhelming majority of human activity took place within an earmarked territorial space. An entire automobile was manufactured at one plant from raw materials. That productive schema went hand-in-hand with systems of government with responsibility and full sovereignty over their territory. The regulations and mechanisms of supervision and control ignored what went on outside the country: that was of no relevance. In the political arena, governments of that time exercised absolute control and frequently censured information published in newspapers, books or in the electronic media. With regard to the economic, the government established regulations that were generally oriented toward protecting domestic producers and fostering the growth of economic activity through investment in infrastructure. It wasn’t a perfect world but it was without a doubt a government’s and politician’s paradise.

That world folded with the development of so-called globalization that, in essence, consists of the integration of productive processes across borders. Instead of an automobile being manufactured at a sole geographic site, today there are factories of car parts and components, each more specialized than the other. Following the logic of productivity, this permits the quality of the components to rise, creates economies of scale and scope and reduces costs. Specialization has translated into better automobiles that break down less and that last longer. The same is true for electronics, furniture, computers, pharmaceuticals and so on.

The change in the way of producing brought with it an alteration of political relations. With the inveterate crossing of borders that globalization entails, the rules of the game changed. Instead of controlling or regulating investment (e.g., Echeverria’s 1973 law on foreign investment) today investment is desperately sought out. Before power was rooted in the government: today in the company that possesses an infinity of alternatives for localizing its investment. Governments were required to update their regulations and ways of conducting themselves in order to compete for investment, offer it a king’s ransom and trust that the benefits bestowed would translate into jobs, the generation of wealth and better opportunities. From entities solely devoted to control, governments became promotional offices.

That affirmation may seem excessive but, at least conceptually, it is far from being so. Everything that the Mexican government has attempted across the last three decades responds to this logic: how to attract more investment. For that, numberless adjustments have been made in laws and regulations, free trade agreements have been signed, promotional offices for investment have been established (e.g., Proméxico) and the president has dedicated infinite time to courting potential investors. And the ministers and governors, much more.

It is clear that the traditional politicians don’t like this reality, but nothing better illustrates its validity than the recent behest of the PRD president to potential investors in energy that they had better not come near Mexico. What’s impacting in this is that the statement was made in Washington: were the government thought to be in control of the process it never would have occurred to him to speak like that.

The loss of power on the part of the governments with respect to markets, investors, enterprises and cosmopolitan actors is an inescapable reality. That transfer of power is not only to international actors (for example, multinational companies) but to all of the economic actors integrated in the global world. This circumstance renders inexplicable the manner in which the government has tried to differentiate between foreign and domestic investors, not to mention the citizenry in general.

Much before being elected, today’s government had devoted great efforts to cultivating investors and media from Europe and the US, even coming to articulate or promote the expectation of a “Mexican moment”. What’s paradoxical is that that effort (that persists) has gone hand in hand with a conscious strategy to ignore, reject and lash out at Mexican investors and citizens, as if in this era of instantaneous communication those actors would not be communicating among themselves all the while. The pretense that it is possible to differentiate between the internal and the external is a costly (and risk-ridden) illusion.

The connectivity inherent in globalization makes everything relative and that the population will only be satisfied to the degree that it is better off than others in the world. The absolutes disappeared as did the viability of the government that imposes upon them. Today what’s necessary is a government that constructs and exercises positive leadership. Today the government depends on economic actors and citizens, not the reverse. Pretending that it is possible to return to the past is an expensive illusion.

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@lrubiof

Luis Rubio

What does the most recent electoral reform tell us about the future of the country? It was doubtlessly a great success for the legislators of the three big political parties to have achieved resolving differences that had seemed impossible to work out. However, the fact of approving legislation does not imply it’s constituting an improvement over the existing one or that its implementation will improve political life (why speak of well-being) of Mexicans. The new legislation reminds me of an exchange that Alice (the Wonderland one) sustains with the Cheshire Cat: Alice: “Would you tell me please, which way should I go from here?” CC: “That depends a good deal on where you want to go”; Alice “I don’t care much where”; CC: “Then it doesn’t matter which way you go”; Alice “… so long as I get somewhere”; CC: “Oh, you’re sure to do that, if you only walk long enough”. Different from Alice, it does make a difference to us Mexicans where the politicians lead us and the road they’ve chosen does not augur at all well.

There are many details that the new legislation incorporates in procedural as well as in financial matters of the campaigns that are praiseworthy. However, what are worrisome are not the details but the whole. In contrast to many critics, it seems to me that there should be an option of independent candidates, but the law should not promote them because in a split second we’d end up with a world of opportunists. Expressed in other terms, were an aspirant to the presidency unable to get 780,000 signatures he’d better not even try. On the side of financing political campaigns, Lewis Carroll, the author of Alice in Wonderland, would never have never been able to imagine the Surrealism that characterizes Mexican politics: all of those who voted for more restrictions and controls in this matter know perfectly well that they will be the first to violate their precepts in the next campaign. Instead of transparency, they opt for opacity, corruption’s little sister. The case of reelection is even more pathetic.

What is specific in the law entails some advances and some setbacks, but the general tenor is one of denial of reality and human nature. In 1996 electoral legislation was achieved that opened up opportunities for political participation, delineated the possibility to construct a democratic polis and placed the citizen at the heart of Mexican politics. It wasn’t a perfect law (no law is), but it constituted the end of an epic struggle to break the monopolistic control of one party over national politics.

From then on, all subsequent reforms have gone in the opposite direction. If one analyzes the details, each new version entails greater restrictions, controls and impediments. Each of the versions is more ignorant of and distant from the political realities and from human nature: each restriction invites surreptitious responses that do nothing other than negate the purpose of the legislation. The details tell us that politicians and political parties attempt to resolve basic differences by means of rules that are inapplicable in real life. But what’s paradoxical is that this way of acting has the opposite effect to that desired: instead of strengthening credibility in the political processes and conferring confidence on the citizenry as to the veracity of the results, what is achieved is greater disbelief and distrust in electoral processes as evidenced by surveys.

The reason for the latter is not difficult to elucidate: the details responds to specific problems, particular crises, previously experienced suspicions and situations that the new law attempts to resolve or at least attenuate through an ever greater number of articles in the law.   But, clearly, the general purpose is not to resolve but rather to reinforce the three-party oligopoly that Mexican politics has become and in which competition is no longer important (as it definitely was in 1996) because it has been replaced by clientelism, appropriation of monies and the eternal permanence in power. The world of transfers from society to the individuals in power.

Between 1997 and 2000, when the PRI lost its perennial congressional majority, the opposition parties made a big fuss about the new reality, but it was not greatness that exhilarated them, but vanity. In their speeches in response to the annual Presidential Address to the nation, Porfirio Muñoz-Ledo (then of the PRD) and Carlos Medina-Plascencia of the PAN presented themselves as young upstarts attacking the institution of the presidency and claiming equality of powers. Offensive in their style, they at least evinced a bid for opening and frank competition. Today no politician could be encouraged to deliver a similar speech: the offensive ones have become permanent, but now none bets on an open and competitive system. Parties and legislators have become one more of the many monopolies that they so scathingly criticize in other ambits.

The issue becomes even more serious when one compares what has been achieved with the country’s true challenges. The political problem is not one of financing campaigns or electoral authorities but rather one of government. The country stands in need of basic governance in many regions and the general nature of the government is, needless to say, mediocre. Legislators concentrate on straggling little reforms, instead of constructing an effective political system that allows for the development of a system of government likely to confront the problems of security and economic growth, the two issues that really matter to the citizenry.

www.cidac.org

@lrubiof