Alice and Kafka

The ongoing discussion on Mexico’s labor law offers us an exceptional window onto the world of unreality in which the whole of Mexico’s political class lives. Although there are doubtlessly many interests and values involved, not an iota of the debate has been concentrated on the only three things that are important in economic matters: creation of sources of employment, growth of productivity and connecting the manufacturing sector to that of exports. These are the three axes that matter and on which the attention of the Congress and of the next government should center.

Unfortunately, the discussion appears to be more of a combination of Alice in Wonderlandand aKafkian vestige of bureaucratic unreality.As in Alice, it arises from assumptions that have nothing to do with the reality.As with Kafka, it assumes that the status quo works and generates high economic growth rates and keeps the whole society satisfied.

We tend to prefer grandiose and complex solutions when much of what differentiates Mexico from economies that grow with dispatch refers more to regulations and quotidian stumbling blocks than to great constitutional reforms. In economists’ terms, the country’s growth problems have much more to do with affairs of the microeconomy(the overwhelming majority of which are under the control of the Executive branch and state and municipal governments) than with the Legislature.

If we accept that the paramount objective is raising the economic growth rate as a means of creating job sources and increasing satisfiers for the population, then all of the government’s action (in the broadest and most comprehensive sense of the term) should be addressed to creating conditions for this to occur. Certainly, there are many elements of action that can be undertaken to achieve this. Among these are public expenditures and infrastructure projects, as well as the assortment of reforms that is commonly bandied about (such as energy and taxation). While indispensable, these reforms and tools do not always lead to a more substantial growth rate.

Much more relevant for growth is the array of obstacles that confront business enterprises and potential investors for developing new projects and making successful existing ones. The economy is the sum of millions of decisions that consumers and the producers of goods and services make every day. Everything that impedes or affects these decisionsimpacts the level of general activity of the economy.

The bill approved by Congress in labor matters is a good example of what works and what doesn’t: on the one hand, the bill that materialized from the Chamber of Deputies opens spaces for novel ways of contractingpersonnel that, in time, would foster greater dynamism in labor relations. Things such as contracting on a trial basis, dealing with unpaid salaries during a strike and flexibility in the training of personnel allow greater competitiveness for companies, thus these should be welcomed. However, it seems to me that the pertinent question is whether these changes would make the formalization of companies that opted for this other world of the economy –underground- more attractive. There is vast evidence that the majority of jobs worldwide are created in small and medium enterprises, the overwhelming majority of which belong to the informal economy in Mexico. To what extent does this legislation contribute to attracting these enterprises to formality? This should be the gauge for success and for the relevance of a new law in this matter.

As I mentioned at the outset, the crucial issues for growth of the economy are productivity, jobs, and the linkage of the “traditional” manufacturing sector with that of exports. This concerns three issues of very distinct characteristics and dynamics, but in their entirety resides the key to growth.

Productivity is the result of all of the efforts made by the producers and of the obstacles imposed against these by the environment.On employing their tools  -such as the technology, production methodology and labor relations- the entrepreneur produces goods and services. Any change or obstacle in these elements increases or decreases the businessman’s costs, thus his/her capacity for producing better goods, at a lower cost and of better quality. The milieu in which companies operate determines their capacity to compete in the market. The smoother the environment the lower the costs and the more potential for raising productivity, the crucial factor in the creation of sources of employment and in the compensation received by workers and employees.

When one compares the environment in which a Mexican business concern operates with that of its competitors, the panorama begins to cloud over. There is no need to dig too deeply in order to identify the sources of the problem: import-tariff dispersion, discriminatory subsidies, selective protection (against imports), criminality, red tape, contraband, the cost of services, traffic, bureaucracy, etc. If one observes these factors in countries such as China, Korea, Chile and others with whom Mexican companies compete, the problem immediately becomes evident. And the solution to all of these depends not on great macroeconomic reforms but rather on small regulatory changes, transformation of the modus operandi of local and state governments and much greater competition in internal markets. Nothing legislative in all this.

Perhaps there is no issue of greater relevance for short-term growth than that of the ties of the manufacturing with the export sector. The Mexican economy is characterized by the existence of two distinct manufacturing sectors, which are nearly divorced from each other. Instead of domestic industry becoming the supplier of the export industry, the former has stagnated and ended up dependent, in good measure, on formal and informal protection mechanisms. A good microeconomic strategy would lead to the liberalization and deregulation of the manufacturing sector and to the creation of mechanisms that drive the shaping of a formidable industry of suppliers, by both domestic and foreign enterprises. Perhaps there is no better opportunity for growth of employment as well as of production in the short term.

Employment depends on the existence of favorable hiring conditions for companies. The best jobs are formal ones that, in addition, are those exerting the strongest influence on the economy’s long-term development.From there the importance of simplifying the fiscal and regulatory environment, as well as that of labor, to drive the expeditious creation of formal enterprises.Nothing like terminatingAlice’s dreams and Kafka’s realities.