It is difficult to imagine a more striking contrast in government response to the coronavirus than that evidenced by the Mexican government vis-à-vis the United States and, in general, the majority of the developed world. The president has refused to contemplate anything that is alien to the strategy that he has been promoting since the beginning of his administration. As the saying in Spanish goes, “I am going straight forward and will not deviate.”
I have no doubt that a proactive response from the government to the brewing economic panorama is imperative; however, it is not evident to me that the proposals circulating today in this regard are either suitable or possible. At its core, the generic proposal is for the government to hire (more) debt to support companies that suddenly lost their customers as well as people who became unemployed. The proposals vary, but almost all involve tax credits, postponement of tax payments and of other government-provided services, as well as direct support to companies or individuals. The most complete and disinterested proposal is that of Santiago Levy in Nexos, where he focuses on minimizing the regressive impacts of the crisis by protecting the unemployed, especially the poorest, all while preserving macroeconomic stability so that there can be a recovery as soon as the sanitary emergency ends.
The first lesson that history teaches us and that, I suppose, is what motivates the president, is that every time the government gets into excessive debt, crises come about. In concept, there is no reason to think that this has to be the case, since there are circumstances that justify incurring into debt, but as long as the use of the proceeds allows not only to pay the debt in the future, but also to create public goods that improve the quality of life of the population, increase productivity and/or create assets that contribute to generating wealth for society.
The problem is that Mexican debt, almost never, throughout history, has been used productively; rather, the opposite is typical: public debt is contracted and then used to finance current spending. In other words, unproductive public spending -frequently politically (or electorally) motivated- which not only does not create conditions for greater prosperity, but also distracts productive resources. I would bet that a large part of the indebtedness loaded into the Pemex balance sheet was never used to develop new fields, but for objectives that have nothing to do with the basic activity of the entity. Perhaps they never even reached Pemex… In these circumstances, it is sheer temerity to assume that incurring new debt willreallylead to mitigating the costs of the pandemic. And worse from a government characterized by so many biases against economic growth and those who make it possible.
In addition to the above, the political moment cannot be disassociated from the risks inherent to the health emergency and the recession that deepens literally by the minute. Under normal conditions, as in 2009, the financial markets and the population understand the nature of an emergency and do not panic. In the current circumstances, in which there has not been a single new investment project since the Trump campaign back in 2016 (and the only exception, in Mexicali, has just been knocked down by the president himself), any movement in tax or additional debt could have direct impact on the exchange rate, which is already under pressure. The warning by the top rating agencies that the federal government’s investment grade is at risk certainly does not contribute to a favorable outlook.
What can be done in this context? The obvious is that people who lost their sources of income must be supported, especially those who work in the informal economy, since they are the most numerous and vulnerable. If in so doing those people would also commit to joining the formal economy, everybody would benefit. Also, it’s crucial to support the key industries that have been hardest hit by the crisis, such as those related to tourism.
The second thing that should be done is to modify several lines in the government’s budget to finance this objective; no government in recent memory has made as many such changes in spending as the current one, so there is no reason why this could not be done. The most obvious would be to stop financing white elephant projects that do not contribute to regional or national development, such as the Dos Bocas refinery and the Maya Train. The mere fact of canceling them would show fiscal sense, thus broadening social tolerance for a small growth in public debt.
The crucial thing is not to lose clarity of the objective that is being pursued: all this is to reduce the impact of the recession on the most vulnerable population and to ensure a rapid recovery once the health emergency has ended. To the extent that the priority continues to be transfers to favorite clienteles -the most unproductive spending in economic terms and of dubious political productivity- the country’s economy will contract without the least probability of recoverin. All that withthe risks in terms of governance and criminality that such a scenario entails.