The De Facto Strategy

Luis Rubio

It never fails to impress me to hear that the cost of labor in China rose and that this would benefit Mexico. The logic implied is that the rise of labor costs in China will translate into more investment in Mexico because that cost here is less. That is, the country’s development strategy is based on the permanence of poverty, in the form of low salaries. It is a bad strategy that needs to be changed.

Discussion with respect to the minimum wage of the past weeks has been poorly focused because it follows an electoral rationale: both the government of Mexico City as well as the PAN believe that they can  profit from a sour issue such as the population’s deteriorated income. Although it’s not very clear to me how the PAN can benefit from this matter, it’s obvious that this is a sensitive issue, given the pathetic overall economic performance for many years but, above all, due to the growing abyss among distinct segments of the economy. There are an enormous number of enterprises, formal and informal, without growth potential and that implies that they survive thanks to diverse mechanisms of protection, including low salaries.

Worst of all is that the existence of these, low productivity enterprises, entertains the defect of depressing the salaries of the most successful and productive sectors of the economy. This fact should oblige us to reflect on productivity as the key to the growth of incomes but that would only work to the degree that the entire population has the capacity to contribute and add value. To the extent that this is not valid, the population not possessing those capacities depresses the wages of those who do have them or who at least have greater human capital. In other words, the existence of an informal economy and of a huge, virtually paralyzed,  traditional industrial sector entails dire consequences not only for those companies but also for improvement of the income of the whole population, including that employed in the most productive and successful sectors.

What’s paradoxical about the debate on wages is the absence of discussion with respect to the essence of the problem: the inexistence of a strategy of development for the globalization era. Forty or fifty years ago, within the context of a closed and protected economy, salaries were determined by means of political criteria and among lawyers: that was era of corporativism and vertical controls. Many of those who proposed raising the minimum wage are living out the scenario from that perspective not in bad faith but because they leave to one side the relative prices and, above all, the impact of salary on investment decisions that, due to the bet on low wages that the country has made de facto, is critical. That is, the level of real salaries can be low but it’s much more important than it seems, even if for the wrong reasons.

In the era of the information and knowledge economy, that which lies at the heart of globalization, the only thing that is worth is the capacity to add value and that depends, increasingly, on the combination of individual capacities (that which is called human capital) and technology. Successful countries are those that achieve the optimal combination of both factors. In Mexico, unfortunately, it appears that we have pledged ourselves to making that combination impossible.

The real discussion that we should have is about education, health, communications and security. Those are the key factors for the development of individuals and the proliferation of enterprises prone to exploiting those capacities. From that affirmation one could suppose that I am speaking of creating a Silicon Valley in Mexico (which wouldn’t be bad) but the matter is much more far-reaching and transcendent. On the one hand, all economic sectors progressively depend on technology: in Chile, for example, fruit production is high-tech and requires an ever more qualified workforce. The same is true for industry and services.

But it’s the other side that’s the crucial one: the absence of those capacities has seen to it that much of what is exported or that competes successfully inside Mexico has relatively little added value because the employees don’t have the skills necessary for a more productive economy. There are industrial plants in the country that are among the most modern and sophisticated in the world, and that, however, depend on a limitedly qualified labor force, one that possesses relatively little capacity to add value. If the quality of the capital of individuals were raised, the wager on development would change radically. Insofar as that does not occur, the bet is on low salaries, thus interminable competition with increasingly poorer countries. If things don’t change, soon we’ll be worried about Nigeria…

The bet on high and growing salaries does not depend on a decree but on the political decision to confront the interests intent on preserving an educational system dedicated to control, extortion and keeping the country permanently impoverished and underdeveloped. The same goes for the police and the absence of a strategy –and of the conviction for making that strategy successful- in matters of security. The country is eroded by the old system that is alive and well in all parts, corrupting everyone but, above all, impeding development.  Until the country transforms the essence of its development strategy and focuses on creating State capacity for problem-solving and creating conditions for the country to go forward, including protection of property, the reforms advanced with such earnestness will, as in the past, fall short of the mark.