How This Ends

Luis Rubio

The problem with bets is that they are binary: all or nothing. When a government plays the betting game, as when one plays with fire, it can end up badly. For three years, the Mexican president has placed odds on a series of factors that to date and despite the pandemic, have come out essentially well. What no one knows is whether those same factors will continue to be favorable. Bets can come out well, but they do not cease being bets. And they can also come out badly…

The government of President López Obrador has made three fundamental bets: first, the infrastructure projects (the refinery, the train and the airport), as sources of economic growth, to which one must add the attempted revitalization of Petróleos Mexicanos (Pemex). These initiatives have advanced against sea and deluge, the pandemic and recession, thanks to the conviction of the president that this is the way to the future to ensure the consolidation of his eagerly awaited transformation.

The second bet is on improving the standard of living of the population that has been his electoral base (not always the poorest or most needy), which he trusts will guarantee the politico-electoral continuity of his (historic) project of government. That population reiterated its support at the recent midterms, but proved insufficient for achieving the ultimate objective of underwriting the project’s continuity or its legitimacy.

The third bet is on the country’s economic and financial stability, measured principally by the steadiness of the exchange rate. What many consider this an obsession, particularly those who argue insistently (many of them with legitimate and persuasive approaches) for greater expenditure in the context of the pandemic, is the product of a cold political calculation summed up in the celebrated phrase “the president who devaluates is devaluated.” For the president it is obvious that this variable is transcendental for the entire Mexican society and that it, therefore, comprises a fundamental factor in his assessment.

Beyond the boos and ovations, the presidential project has been successful on its terms. While the issues that drove his candidacy have not been corrected (such as insecurity, corruption, growth or poverty), the mere fact that the country has been able to navigate the turbulent waters of the pandemic with the acute impoverishment that it implied, earned the president an infinitely less pernicious electoral result for his party than could have been.

The problem of the second half of the six-year presidential term is that it is the time of harvesting what was sown during the previous years and this government will not have many fruits to gather. The infrastructure projects are not particularly solid nor do they have multiplier-effect benefits for the economy as a whole, and it is even possible that they will end up as white elephants; for its part, instead of being a source of demand and growth as it was during in the seventies, Pemex is an interminable drain of fiscal resources and, in any case, it no longer entertains (nor will it ever entertain) the relative weight it had a half century ago and even less so in today’s, ever more digital economy. The complexity characterizing the Mexican economy of the XXI century is such that no government can pretend to control all its variables or conduct all of its processes. Worse still, the concentration of power that lies at the heart of the governmental strategy constitutes a damper on investment and growth. To top the overall picture, the government has done nothing to combat evils such as corruption or insecurity, factors that, had they diminished, would have held, in themselves, enormous political and social appeal for the country’s long-term development.

In addition to the latter, much of what facilitated the stability of the past three years has less to do with the internal management than with the international financial markets, which have been especially favorable. I have no doubt that much of the support that the president continues to enjoy depends on that economic stability, but this is combined with the deep-seated nature of the electorate. Mexicans understand how limited their options are; thus, they respond to the largesse dispensed by politicians with electoral motives (particularly transfers to the president’s base), corroborating the wisdom of Mexican voters, but not necessarily their convictions: it winds up being an exchange, pure and simple.

In a word, electoral support is more volatile than politicians suppose, and the president has acted under the assumption that he can eliminate much of the traditional expenditure (such as in health or childcare centers) to dedicate these monies to his clienteles while simultaneously expecting the international context to favor him. The question is: What happens if these premises turn out to be in error?

Today it is not inconceivable for the Federal Reserve, to begin to raise interest rates at some point, which would immediately have repercussions on the Mexican peso–U.S. dollar exchange rate. In the same fashion, remittances from Mexicans living in the U.S. may begin to diminish to the degree that the huge transfers that the U.S. government has made due to the pandemic begin to wind down. On the other hand, given the unfavorable environment for investment, there are no reasons to anticipate that the Mexican economy improve its performance. Furthermore, the issue security, which has not been a priority of the president’s, could further deteriorate.

At the end of the day, everything will continue to depend on bets, as always.
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