Structural Abuse

Luis Rubio

It never fails. As dawn heralds each new day, on the initiation of each governorship or municipal presidency complaints begin to flow on the excessive debt that the previous administration acquired. The scene is typical: the new governor arrives at his post with enormous plans and projects, only to find himself with empty coffers and, worse, that the funds that the entity will receive were already mortgaged by his predecessors. This structural problem will not be resolved until the conditions that create it change.

The perennial discussion reminds me of a Hindu legend that I once read. According to the tale, apparently deciphered from a photograph of the Krishna deity playing chess with the Radha, the local king, the latter had an inclination for challenging his guests to play a round of chess. One day there appeared a wise traveler who accepted the challenge, modestly asking the king for a few grains of rice were he to win: one grain for the first square and later double the number of grains per square in each of the following matches, until the gaming table was filled. The king lost and ordered payment to the wise man according to the terms established and it was then that he noted the trap that had been set for him. What the wise man had requested as payment was none other than the exponential growth of rice grains that, after sixty four filled squares, represented 210 billion tons of rice. In other words, what half of humanity would consume for some centuries to come…

Large or small, state and municipal debts are the result of a structure that rewards the today at the cost of the future. Worse, it rewards the first local government that had the opportunity to put its entity in debt, in order to usually squander it in the most unproductive ways. Let’s take this by parts.

Credit serves for carrying out works that benefit the population. In theory, these works permit better lifestyles, attract investment, therefore jobs. Just as a businessman who requests a bank loan to expand his productive plant, the state government seeks to construct today an infrastructure project that will be of service in the future. However, in contrast with the company, whose credit would be paid off with the additional production generated by expanding the business, public works –if carried out well- involve very long maturation times and, in the majority of cases, do not generate direct revenue. That is, even though the project is well conceived, the credit afforded to a state or municipality depends on the income obtained by the entity through taxes or federal transfers that are not related with the public works themselves.

In recent years, the states have discovered new instruments for obtaining resources, all of these tied to future income deriving from these two sources. In this manner, countless states have committed these resources for the next three generations. That is, they obtained resources today that will be paid for with the product of taxes and transfers in the upcoming decades. The first state governor or municipal president who contracts the debt enjoys the benefit; all of the others and, of course, the locality’s inhabitants, suffer the consequences.

The first structural problem derives from the very fact of a governor even being able to shamelessly mortgage the future in such a way. Independently of how meritorious his projects are (and many of the latter, perhaps the majority, are not), the fact is that the future is compromised. The evident consequence of this situation is that all of the governors implicitly dream, suppose and expect that the federation will absorb their state’s debt; thus, with this, a new vicious circle begins. And that is the second structural problem: instead of constructing a healthy fiscal structure, everyone prefers to negotiate (or blackmail) the federal government rather than collecting taxes directly.

Credit, whoever the beneficiary, is granted depending on capacity to pay off of the potential debtor. This payment capacity is determined by the current income sources that whoever requests the credit possesses. As illustrated by the contrast between a company and the previously cited government, the problem of state governments in Mexico is that they do not collect taxes. That is the basic problem; the rest is just acting.

The discussion about state and municipal debts brings to the fore other much more transcending angles than the money itself. Although formally the country possesses a federal structure, that is, one that separates the attributions and responsibilities of each of the three levels of government, the objective reality is that, throughout the greater part of the past century, the federal government claimed unto itself all of the functions and left local-level political and administrative structures weak and undeveloped. Worse yet, it created a culture of petitioners among the governors and impeded the development of a system of checks and balances between local legislative powers and the respective executive power. With the decentralization of political power in the last decades, the governors acquired huge amounts of resources with no supervision whatsoever. The indebtedness was not the product of chance.

But the consequences of this reality can be observed, among others, in the violence characterizing a good part of the territory. During the era that the federal government controlled all political and police activity, security was in its charge. With the decentralization of power, the federal government no longer had the ability, power or resources to maintain security and, in general, the governors have not taken charge of constructing modern and effective police departments as well as functional judicial system. The security crisis did not occur because of the decentralization of power, but it did take place within this context: it came about simultaneously with the growth of the mafias of organized crime in the national territory. The result has been that the country does not have the mechanisms to deal with the phenomenon.

Debt and criminality are only two symptoms of the fundamental problem. Today’s federal structure is very good in theory, but is dysfunctional in the present reality. The problem goes back to the fiscal structure lying at the heart of federalism. In a word, states and municipalities must collect the taxes that will allow them to carry out and pay for the services (including, of course, the police and the judiciary) that their inhabitants require. Without a healthy fiscal structure that is sufficient for resources and expenditures at the local level, safety or prosperity will be impossible.

Instead of controlling the resources, the federal government should create a system of incentives for this change to occur, which would entail the greatest political revolution of our times.