False Premises

In memory of Manuel Medina Mora

Luis Rubio

The streets are clean, tourism has exploded, merchants seem happy and hotels are full. Oaxaca seems to have finally broken with its historical impediments and enjoys a new moment of peace and growth. If it only were so easy. The only thing that has changed is that the federal and state governments have given in to all the demands of the so-called Teachers Coordinator, the famous CNTE. Thus, the blockades disappeared, which means that the (alleged) teachers granted the citizenry the favor to live in a normal way, at least until the new round of demands, threats and extortion begins. All of which makes economic growth impossible.

The discussion regarding economic growth is permanent and is enlivened by the political rhetoric that does not address the causes of the phenomenon and that is exacerbated when the growth rate is low. The relevant thing is that the underlying problem never ends up being solved. In the course of the past few decades, various strategies have been undertaken to address the absence of high rates of growth and progress has been made on some levels, but no consensus has even been reached on the ultimate cause of such a low average rate, to the extent that, instead of looking for ways to raise it, what’s celebrated is the fact that there was no recession.

The first big problem to reach a diagnosis that everyone can share is what happened in the seventies, because there lies the heart of the political dispute. In that decade, the economy grew close to 8% annually and that is the memory that critics of the subsequent reforms keep in their memory and therefore always propose to return to that era. Now, with AMLO, they feel the time has come to recover that idyllic moment in history.

There are two problems with that memory: one is that it is false and the other that it is unrepeatable. The false part of it is that it’s impossible to isolate the period in which there was indeed a high growth rate from the consequences that followed, because the fuel that drove that growth was the combination of a rapidly increasing external debt, the expectation of permanently higher oil prices and exacerbated public spending. If one takes not only the seventies but the seventies and eighties together, the photograph ends up being very different: in the eighties the excess of the seventies had to be paid back in the form of a permanent recession and extremely high inflation. That era is unrepeatable because it was a unique moment in which exceptional circumstances combined to produce a pathetic rate of economic growth and ever more social conflict.

Secondly, the problem is not the lack of growth, but the lack of generalized growth: when one visits Querétaro or Aguascalientes, it is immediately evident that the notion of low growth is simply ridiculous; the opposite is true in Oaxaca or Guerrero. So, the problem is not that the growth is low, but that something differentiates the northern states from the southern ones.

Thirdly, the government’s permanent propensity to modify the rules of the game in a country where the president (or the authority in general) has excessive discretionary powers creates an environment of endless distrust. That was the reason why the NAFTA was sought: to create a space in which the rules were permanent and reliable and is a good part of the reason why the North grows so rapidly.

Santiago Levy has long been arguing that the informal economy is the great scourge of the country because it prevents companies from growing and developing and has proposed a series of measures to reduce the tax burden and facilitate their formalization. The approach makes sense, since if one compares the tax collection of those in the formal economy with respect to GDP, the tax burden is not very different from that of the developed world: the problem is clearly in the enormous dimension of the informal economy and the mechanisms that promote it.

The example of Oaxaca suggests another (additional) explanation to the problem of growth. Luis de la Calle summarizes it eloquently: “The prevalence of extortion in the country has become one of the main brakes to the growth of micro and small businesses, many of which are forced not to grow and remain in informality, where extortion tends to be centralized and known. This implies that they do not have an incentive to invest, grow, explore new markets and products, expand outside their local markets and less to hire a growing number of employees… Moreover, the chance of extortion increase with the success of small businesses.”

The reality is that it is not very difficult to elucidate the cause of the economic stagnation, but Mexico is on track, once again, in the wrong direction. The current government is exacerbating uncertainty for investors at a time when NAFTA is at risk and believes that with a great fiscal stimulus everything will change. It would be better to attack the causes of extortion and informality because therein lies the heart of the structural problem that prevents growth. It would also help to strengthen, rather than destroy, the institutions that generate trust, but that would be too much to ask.