Americas Quarterly

  LUIS RUBIO | APRIL 15, 2019

The not-yet-ratified USMCA has already impacted Mexican institutions, beyond the economy.

For Mexico, the North American Free Trade Agreement as originally designed was much more about politics than trade. The George Bush administration that negotiated the agreement understood that and, in fact, saw NAFTA in geopolitical, rather than economic terms. A senior adviser to the White House at that time once told me that it was “a no-brainer: a prosperous Mexico is in the best interest of the United States.” How times change.

The importance of NAFTA cannot be overstated, which is why uncertainty over its replacement, provoked first by Donald Trump as a candidate for the presidency and now by the Democrat-held Congress, is so dangerous.

NAFTA was conceived as a mechanism through which the Mexican government obtained a kind of certificate from the U.S. government as a guarantor that the rules of the game would be preserved, that an open trading regime would be maintained and that the commitments made in the agreement would be strictly adhered to. In this sense, NAFTA constitutes an anchor of stability, a source of certainty that enjoys international support and recognition. This certainty is key both for internal confidence and for attracting foreign investment.

Mexico proposed the trade and investment agreement in 1990 after having gone through a series of economic reforms that streamlined the federal government’s finances, liberalized the economy and modernized its regulatory framework. The objective was to attract investment in order to foster fast economic growth. However, potential investors, both domestic and foreign, worried about the country’s propensity for changing the rules, carrying out unlawful expropriations and making capricious decisions without notice.

Through NAFTA, Mexico’s government committed to preserving the rule of law implicit in the agreement and submitted itself to the procedures established by Chapter 11 on dispute resolution. The result was an extraordinary source of certainty for investors, which led to the establishment of new ventures, plants and operations in the country. Mexico’s expectations for attracting investment were far superior to what actually materialized, not because of NAFTA, but because of a new player in the field to which neither the Americans nor the Mexicans had given even the slightest thought: China.

But over the past quarter century, NAFTA fulfilled its political role beyond expectations. Mexico accepted dramatically limiting the latitude of future governments for making changes to the basic framework of economic policy (the open trading regime) in the event that a president with a different economic philosophy came to government. In this regard, NAFTA was fundamentally a political act, a proxy for a lack of checks and balances that are present in the United States. It is thanks to NAFTA that Mexican economic policy was not altered in the midst of the massive crisis of 1995.

In contrast with the geopolitical clarity that motivated the first Bush administration, Trump’s rhetoric and actions altered Mexico’s politics in a dramatic way. First, by putting the existing NAFTA in doubt in 2016, it created a political vacuum that was filled by the winner of Mexico’s presidential contest in 2018, Andrés Manuel López Obrador. Second, and most importantly, it opened the way for a series of decisions that slowly but surely will eliminate or neutralize autonomous regulatory agencies that were created over the past two decades in energy, competition, telecoms and, now, the Supreme Court. Put simply, NAFTA’s erosion has had an immense impact on Mexico.

Despite the rhetoric, NAFTA has fulfilled its core objective of supporting Mexico’s political stability through the creation of a framework that made it possible to attract investment and for about half the country to grow above 6% and, in some states, such as Aguascalientes and Queretaro, at Asian rates. Surely, NAFTA did not transform all of Mexico, for that would have required much deeper reforms for which the Mexican establishment was not ready. In fact, NAFTA (and migration to the U.S.) helped preserve the status quo, an unintended consequence of a trade and investment agreement that nonetheless served its core purpose.

One could speculate what might have happened had China not become such a powerful force in the world trade arena, but the one certainty is that Mexico lost significant opportunities as a result.

The USMCA, which resulted from last year’s renegotiation of NAFTA, updates some key components – particularly as it incorporates rules for intellectual property, online commerce and the like – but dramatically waters down the key political element from Mexico’s vantage point, Chapter 11.

The challenge for Mexico lies in the fact that it has not developed internal sources of certainty that would make it less dependent on NAFTA or the USMCA to attract investment and maintain stability. That challenge would have been easier to face with an administration less willing to undermine each and every reform that has been carried out over the past three decades. However, without either NAFTA or the USMCA, the risks, for both the U.S. and Mexico, would be staggering, precisely the opposite of what the Bush administration hoped to accomplish.

ABOUT THE AUTHOR

Luis Rubio is chairman of the Mexican Council on Foreign Relations. He writes a weekly column in newspaper Reforma,and is the author and editor of dozens of books. His most recent book is A World of Opportunities, published by the Wilson Center.
https://www.americasquarterly.org/content/why-nafta-critical-mexico

Luis Rubio

The handiest hypothesis on the causes of the electoral result of the past year refers to the population’s being fed up, the evident corruption of the government of the moment and, above all, the paltry outcomes of decades of reforms in terms of incomes, poverty and equity.  All of this is doubtlessly valid, but it does not explain the truly extraordinary change exhibited by the electorate between January and July of 2018, in which the preferences of the body politic for today’s President mushroomed from 30% to 53%.  Part of the explanation surely lies in the poor conduct of the other two presidential candidates (each in his own way) and, especially, of the former President, but it appears evident to me that a high percentage of voters decided that the promise of “more of the same” would not improve the economy of the country.

The proposal of Andrés Manuel López Obrador to alter the course seemed attractive to more than one half of the electorate and, from the day after the election, he has devoted himself to implementing his vision through decisions, many of which have been controversial and costly. The result to date, scarcely a few months into the new government, is not commendable: instead of a project, the evidence reveals that the President and his complicated –and strikingly diverse- coalition entertains more obsessions, occurrences and opposing agendas than a plan structured and headed toward constructing a platform for development.

For several years, AMLO has been very clear in his conviction that the country lost its way from the beginning of the reforms in the eighties: his central approach is that the government should be the rector of the economic process, that is, the conductor of the country’s development because “neoliberalism” has done nothing other than produce poverty and a growing inequality.

While it is evident that the reforms have not solved the country’s problems, an integral evaluation of the phenomenon that Mexicans experienced during these years in which Mexico incorporated itself into the world’s commercial, technological and financial circuits, requires understanding the international context within which all this has come about, in that the phenomenon is, in general terms, global in nature.

Three books attempt to explain what happened and why. Each of the works has its own objective and bias, but together, they create a very interesting patina. Charles Dumas* offers an essentially technical analysis of what took place in the decades during which world commerce accelerated and in the way productive processes were altered (concentrating on the production of parts and components to raise the quality of goods and services and reducing their cost), but above all the incorporation of India and China, especially the latter, into the industrial process. From Mexico’s vantage, China purloined from Mexico the export market that NAFTA promised; without China having competed for the industrial production that withdrew from the U.S., the past thirty years would have been very different.

Robert Kuttner** contributes a diagnosis that is very consistent with AMLO’s vision:  the world worked well when the unions were powerful and had the capacity to defend the interests of their members, the welfare state satisfied the interests of the population above that of the capitalists, the economy was focused on the internal market and there were no short-term financial flows across borders. Although he refers to the U.S. (and admixes Europe along the way), Kuttner’s argument –more political than economic- is nearly indistinguishable from the vision that AMLO has sketched in his books and speeches. Like AMLO, Kuttner’s vision is nostalgic: he says that there are no easy ways out, but that what exists is not good and that the mainstays of development that worked in the past must be recuperated.

Barry Eichengreen*** studies the evolution and future of populist movements over time in the U.S. as well as in Europe. Assuming an analytical stance, this author observes that behind citizen anger and disillusionment with the Western democracies lies the combination of economic uncertainty, governments incapable of responding to the populations’ demands and needs and the threats to the integrity of the identity of the citizenry. His reasoning is lucid with regard to the causes as well as the consequences:  he concludes that the “technical” solution is not difficult to elucidate, but that governments generally do not have the political capacity or vision to do this, while populist governments do not see the need for attending to the causes of the phenomenon.

Where there is an absolute coincidence between AMLO and these authors concerns the unpopularity of the bank bailouts in Mexico and the U.S., respectively. For AMLO, the bank rescue comprised a catapult in his political vision and in his perspective about what is wrong with the country. The other coincidence is that relative to migration: for Trump’s Americans, migration constitutes a menace to their identity; for AMLO, migration represents a failure of Mexican economic policy.

Eichengreen concludes that non-conventional governments are typically indifferent to the restrictions imposed by the markets, the availability of labor, or the needs of private investment.  The latter will probably end up being AMLO’s greatest challenge in the years to come.

*Populism and Economics. **Can Democracy Survive Global Capitalism? ***The Populist Temptation

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Luis Rubio

At the beginning of this century, Russia found itself at a crossroads. The end of the Cold War had opened limitless opportunities, but its process of transition -from an economy that was controlled, centralized and one without private property to a market economy- had been disastrous. Instead of spreading the property among millions of families and potential entrepreneurs, the enormous Soviet industries had been overtaken by a group of plutocrats who sold off the public resources, beginning with the oil, as if they were theirs. By 1998 the contradictions of the privatization and adjustment process had become uncontrollable, giving rise to one of those financial crises that Mexicans have long known. The backlash led to power the individual who to the present day continues to be the acknowledged ruler, Vladimir Putin, who, with prodigious skill, concentrated the power once again and submitted the so-called oligarchs.

Armed with a new plan and with centralized control, Putin reorganized the economy and reestablished economic stability, gaining with this the support of the public. Great changes, ideas and projects followed to reactivate the economy and transform the productive base, attempting to move it away from its (nearly) sole source of wealth, the oil.

Years later, Viktor Chernomyrdin, once Putin’s Prime Minister, aphoristically encapsulated the country’s often tragic past by saying, “We hoped for the best, yet things turned out as usual.” Will the “fourth transformation” end up the same?

The point of departure for the AMLO government is that everything done from the eighties until now was bad. Everything is corrupt, nothing works and those who led to this are traitors. The names vary, but the tonality is the same: the country was better when it was worse. A placard outside a restaurant summed it up impeccably and relentlessly: “We are worse, but we are better because before we were well, but it was a lie; not like now that we are bad, but it is true.”

The grand plan of the government is easy to discern: concentrate the power, go back on all the reforms –as much as possible- which advanced from 1982 on and, with this recreate the nirvana that existed in the seventies so that, perhaps, the President can be reelected. It is not a complicated plan, although the political management with which it is conducted makes it look so. The objective is clear and moves ahead step by step. The tactics are modified along the way, but the core project goes ahead.

What is relevant is that an extensive portion of the population is convinced that the project is worthwhile and that the President is heading it up without conflicts of interest and without looking back. That the economy is going downhill, consumption being at a standstill (or diminishing) and that public finances can undergo problems in the medium term appear to be of consens to no one. The majority of the population is spellbound believing that it is possible to achieve what one wills without having to work or construct it. The President is convinced that just desiring it will make it happen. If something is going poorly everything will be resolved –or a shortcut may be taken- with the emollient of more transfers to clienteles and identifying the guilty as scapegoats.

Given that the causes of the disaster evidenced by the robustness of the middle class (and of a country that, with all its defects, did advance), those who had some participation in the government during the last thirty years, the wellspring of potential conservatives, poseurs and turncoats, is literally infinite. If to that one adds all of the companies –and their employees- who are increasingly more productive and successful, the potential to identify those who caused that national disaster of which so many of us are so proud (and that is the sustenance of the economy), is doubly infinite.

There is not the least doubt that the country is undergoing many ills and that the sum total of an unstoppable technological change with an (almost) totally integrated global economy renders it difficult to resolve all of the problems in one fell swoop. It is likewise certain that the solution does not lie -it is not possible for the solution to lie- in the fact of concentrating the power or in revitalizing the cadaver of Pemex, since the core problem consists in the rejection of the future that is evidenced in the government’s incapacity –this and all of the former of the last half century- in carrying out an educative reform that privileges learning in the digital era above union blackmail. The political project is transparent, but the difference between the seventies and the present is that the economy is open and this in itself alters all the premises.

A dear friend says that “Mexico will never be a developed and civilized country, at least, not in the next 100 years” because rather than building a consensus that allows for broadly-approved decisions, “the government endorses discord and polarization, strategic arms in its arsenal of destruction of the present.  What we will indeed be in brief –quicker than a cock crows- is a less civilized country, more primitive, more unjust, more polarized, one with more spitefulness, one that is less desirable…” Up until now, more than 70% of the citizenry has given AMLO the benefit of the doubt. The experience of the last half century is less generous: when the fiscal, political and civilization equilibriums break down, the crises will not be long in coming.

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Luis Rubio

The objective of Mexican President Andrés Manuel López Obrador with his referendum proposal is to eliminate the existing mechanisms of representation –the legislature- from the process of decision making.  In his vision, the “people” should ratify his decisions, which were previously taken, because in that way he would maintain, and elevate, his control over political life and the citizenry. “Revocation of mandate,” part of the same scheme, secures the vision: the objective is control, not citizen participation. The legislators, beginning with those of the president’s Morena party, should understand their role in this matter is that of representing the electorate and acting as a counterweight.

The issue is very simple: Who can believe that the citizens are going to vote in favor of raising their own taxes or against jailing the rapist of a girl in Ciudad Juárez? Both are decisions that correspond to the authority –legislative and judicial, respectively- when the circumstances demand it.  Submitting that type of decision to the “people” is nothing more than a cunning maneuver to avoid responsibility or, more frequently, to impose the preferences of the one who submits the decision to poll, knowing full well that the population is really evaluating the president because it does not have the capacity to nor the interest in analyzing the alternatives and implications of their decision.

The referendum is an instrument that is utilized with regularity in some nations and their experience is illustrative. In Switzerland, a nation with a feeble central government, every year an infinity of decisions is submitted to the popular vote. The citizens read the materials and engage in serious discussions. The issues are announced months beforehand and the postures in favor and against are made public and their proponents not only respect their contraries, but also assume these as advocates, not enemies.

The case of the state of California in the U.S. is very distinct. There, the referendum acquired popularity when a group of citizens proposed the establishment of property tax limits, which opened Pandora’s Box. A measure as popular as that was immediately accepted by the voters, which produced two consequences: on the one hand, it drastically reduced tax collecting, affecting the providing of municipal services; on the other hand, it initiated an avalanche of incidences of polling that, typically, are decided not by the substance of the issue but rather by the charisma of the proponent or by the interest of the media.

I have no objection at all to lowering taxes or to laws and decisions being revised; what seems dangerous to me is the procedure inherent in the referendum because it is a deception.  In the state of California, as well as in Mexico, the citizens lack the willingness of the Swiss to evaluate each decision at length and discuss it with knowledge of the facts. The experience of the European nation must be understood within its context: the national government is extraordinarily weak, presidential terms last two years and citizen participation is not only committed, but also transcendental. There the referendum is not utilized as a (biased) means to decide on the continued construction of an airport without contextual information that, in addition, is a construction already underway.

The experiences of Switzerland and California illustrate the kid-glove nature –and the danger- of implanting a decision-making mechanism such as the referendum. The British themselves have not yet emerged from their astonishment at the manner in which their leave-taking from Europe was decided. That referendum ended up a Russian roulette. More to the point, while there are always opposing opinions, what we Mexicans have been able to observe since the first of July is that the polling mechanism is understood as an instrument of manipulation and legitimization and not as a means of the development of the citizenry, the improvement of democracy or the promotion of higher living standards. Under these conditions, the referendum is in the last analysis a mechanism of control and not of participation. Worse, plebiscites are divisive and what Mexico needs is a coming together.

The idea of the plebiscite or referendum is good and healthy: it derives from the supposition that the citizens, as the beneficiaries of or the payee in the result of public decisions, should have greater participation in the decision-making process regarding things that could come to affect them.  The experience is very distinct: these mechanisms wind up in the hands of politicians and the media that possess an enormous capacity to manipulate public opinion in order to legitimatize previously made decisions. With that rationale, a referendum in Mexico would lead to the perpetuation of a president in the government, which is, at the end of the day, the idea of revoking the mandate: that it never be revoked.

Mexican democracy is young and precarious in the extreme, in addition to that, as a county, Mexicans have not broken with the old political system based on control and manipulation. On adopting the referendum as the official mechanism, would do nothing other than consolidate, through the rear door, the post-revolutionary authoritarian regime. The legislators must recognize that they themselves would be the first to lose in such legislation, in that they would disappear as a relevant power. It is not good for anyone for the power to be in the hands of a sole individual.

www.cidac.org
@lrubiof

Luis Rubio

The 2008 crisis was a watershed for China. Up to then, the great Asian nation underwent an accelerated transition from the socialism of Mao Tse-tung toward the liberalization headed by    Deng Xiaoping, which yielded more than thirty years of annual growth rates of more than 10%. The expectation for the West was that, sooner or later, China would converge with the rest of the world not only in economic development, but also in political opening. Independently of the internal political dynamics, what appears clear today is that in 2008 a new path was defined inside China, one much less opening-oriented economically, more authoritarian politically, and much more assertive in the international arena.

The direction that China is adopting goes hand in hand very well with the retraction of the U.S. on the international arena, which furnishes a scenario of enormous transcendence for Mexico. During past decades, China, emerging power that operates with absolute geopolitical determination, has avoided Mexico; while there have been some industrial installations (the majority assembly plants) and at least two infrastructure projects, both failed ones, the Chinese presence in Mexico is minimal, above all when compared with that in other countries in the South of the continent or in Africa. China has always recognized the geographic location and economic links that characterize Mexico, the reason for which it has maintained itself relatively to one side.

Two circumstances have altered this: on the one hand, the new U.S. tone under the Trump administration has re-opened discussion within Mexico concerning the elevated concentration of economic ties with the U.S.  In addition to this, there are protectionist undertakings such as that relative to steel but, in the main, the permanent threat to cancel NAFTA demands a review of Mexico’s national priorities. Although I have no doubt that the logic of industrial integration will continue to dominate entrepreneurial decisions and that this, in turn, will persist as the principal growth engine of the economy in general, we Mexicans should review the constellation of possibilities with a view toward the future.

On its part, the new Chinese assertiveness follows an implacable rationality: take advantage of the weakness of the U.S. in order to establish new geopolitical realities. If one observes the manner in which artificial islands have been constructed throughout the South China Sea, to the degree of formalizing them as a new province, China’s way of acting leaves no doubt with respect to the clarity of vision, and the continuity of same, which is reinforced with the new internal tonic of a new “permanent” unipersonal leadership. The decision of Xi Jinping to circumvent regular elections says everything about his objectives both political and international: while it entails the evident complexity of the succession (that tends to be the weak link because it exhibits a tendency to be unpredictable, like what happened to Mubarak in Egypt and now to Putin in Russia), it permits a continuity of command and of vision that no other country can achieve.

Mexico has had a long relationship with China: from the establishment of diplomatic ties in 1972, the political relationship has been profound, albeit not so the economic one. Certainly, Mexico imports merchandise in the dozens of billions of dollars from that nation (in addition to others via the contraband route), but it exports relatively little. The same is true of the capital balance:  several Mexican enterprises have a presence in the Asian giant and there are Chinese companies in Mexico but the aggregate is relatively modest.

Over the last year, Mexico has been reviewing its international relations, part by design and part due to the way things have come to pass. The greatest surprise comes not from China, but rather from Brazil, a nation that for decades has regarded Mexico with suspicion and as a competitor; however, in recent times, Brazil has sought to intensify its economic and political bonds.  While the two nations -Brazil and Mexico- have assumed radically distinct strategies over the past decades -Brazil entertains a strong protectionist bias, Mexico has embarked on a marked liberalizing approach- the rationality of carrying out more exchanges and developing greater cooperation in the political realm is evident.

The question is what is possible and desirable with China. On the one hand, Mexico is firmly anchored in the North American region –especially through the industrial supply chains, but also in strategic political logic- and that establishes an outright limit to any exchange, in addition to obligating a triangular conception –Mexico, the U.S. and China- in the relationship. On the other hand, within this framework, there are many opportunities to deepen the relationship and develop novel ways of interacting, in political as well as economic spheres.

What plainly makes no sense in terms of reality is the notion of there being a “Chinese playing card” in the relation with the U.S. China would never accept being a bargaining chip, but its thrust as a major world power obliges Mexico to define its own priorities and establish frameworks of possibility in the relationship with the U.S. as well as with China. There is no way out of this triangle, but there is one of progressively amplifying it.

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Luis Rubio

A few years ago, when Beijing was getting ready to receive the heads of government that make up APEC, the city government closed hundreds of factories and banned the circulation of millions of vehicles, all in the interest of reducing air pollution and trying to give it a less dirty facade to the city. Despite these efforts, a telephone app that published the pollution index of the big city showed scandalous numbers, far superior to those tolerable according to the World Health Organization. The government did not take long to solve the problem: it blocked the use of that application and with that it gave a holy sepulcher to the pollution.

This is how President López Obrador appears to act. Instead of solving the country’s problems, he is determined to destroy everything that already worked and, in many cases, worked extraordinarily well. The country was on the right track, even with huge shortcomings and unresolved issues, but significantly better than it was in the seventies and eighties. Now the objective seems to be to break the dishes, destroy everything that exists and pretend that the problems are solved by themselves.

The strategy of labeling everything as evil and corrupt already paid off in the form of increasing unemployment, an economy that is going down and a total absence of new investment, which only worsens the first two indicators. The president is not willing to acknowledge that his strategy is causing these phenomena and that, if it continues, it will not succeed but to plunge the country into a crisis of immeasurable dimensions. The signals sent by the financial markets regarding the reliability of the Mexican debt are not promising; rather, they anticipate risks that, if not addressed immediately, will cause just what the president says he wants to avoid.

The problem is not Pemex’s finances, even though that is a huge problem. The problem is the whole conception of the government, which wants to destroy what exists, when what the country requires are actions that resolve current and ancestral problems that nobody has wanted to face for a long time and for which the President has the legitimacy needed. The economic strategy of recent decades is the only one possible, although it would have to be carried out better: it is no coincidence that, literally, all the nations of the world have gone down a similar path. The exceptions are precisely the examples that we should not want to imitate, such as North Korea and Venezuela. Even Cuba has entered into the logic of globalization, albeit modestly.

The starting point for AMLO is that everything that was made after 1982 was wrong. That premise errs on two fronts: first, he does not recognize that the crisis of 1982 resulted from prolonging for too long -and, in fact, exacerbating- the strategy of stabilizing development, to the point of provoking a debt crisis that took decades to control. Secondly, he does not accept that the strategy of introspective, almost autarchic development ceased to be sustainable because it did not meet the needs of an increasingly demanding population, and because the world changed with communications, technology and the way of producing. The strategy adopted after 1982 has many shortcomings and errors, which need to be addressed, but it is the only one possible.

President López Obrador has the legitimacy and leadership to do what governments of past decades could not or would not do: eliminate the obstacles to development that were preserved and protected and which lie at the heart of the low rate of growth (in average) that the country has sustained for too long. The problems that the country faces have to do with stagnant political and social structures that favor what Luis de la Calle* calls the “extortion economy,” where authorities, unions, monopolies, bureaucracies and criminals extort money from citizens, businessmen, students, proprietors and merchants, thus preventing companies from growing and the country from developing. If the president really wants to trigger high growth and give opportunities to the most disadvantaged Mexicans, his strategy should be to break with this impunity.

What he is doing is exactly the opposite: he is strengthening fiefdoms, encouraging (and rewarding) trade unions that hinder everything and cultivating and captivating companies that impede competition. Causing union conflicts, attacking companies that generate energy and stoking a polarized environment will only achieve less growth, less investment and, if the destruction of everything existing persists, a crisis of the dimensions of 1995. Or worse.

Oaxaca does not progress because the social, political and union structures all interfere and create obstacles to development. One needs no more than to observe what drives successful places like Aguascalientes or Querétaro to see what a favorable political, social and business environment can create. The question is whether what President López Obrador wants is to convert the whole country into Oaxaca, the path he has adopted, or to confront the problems of Oaxaca and, in general, of the south of the country (although not exclusively) so that the whole country can join in the high rates of growth of the aforementioned states, the only way the most disadvantaged citizens may end up having the same opportunities and rights as the most successful. In a word: leveling the field from the bottom up or from the top down?

https://www.wilsoncenter.org/publication/extortionomics-and-ideas-to-leverage-the-digital-revolution

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@lrubiof

Wilson Center    Mexico Institute

                                                                                  by Luis Rubio
@lrubiof

 One hundred days to consolidate a power grab. That seems to be the rationale and, gradually, the reality. López Obrador arrived at the presidency with an agenda but not with a plan: the agenda is to backtrack on anything and everything that was built and created after 1982. The plan does not go further than centralizing power in order to recreate the old order and, maybe, to introduce reelection into the Constitution. This is no mere change of paradigm, it is the beginning of a new era, not necessarily for the good.

There is a clear vision behind López Obrador’s thrust, although it is somewhat of a caricature: the notion that the presidents of the 1960s were all-powerful and could get their way at no cost. He represents the revenge of the statists against the technocrats in the fight that began in the late 1960s and early 1970s over the direction Mexico should take when the economy began to falter. The economic side of the government argued for gradual liberalization; the political side, which won the day in 1970, argued for a greater role of the government in the economy. The strategy appeared to work, at least at the beginning; however, by 1982, the government had gone bankrupt and the country was burdened with an extremely heavy foreign debt. López Obrador has fond memories of that era, when the economy grew at close to 7 percent on average and there was no violence, but he dismisses the risk of leading to a similar financial crisis. Thus, he is plowing ahead at the fastest possible rate.

While the scheme is clear from the very beginning, the oddity of the moment is that he enjoys a level of popularity previously unknown in the country. He exerts an exceptional leadership, and people want to believe that things will get better; this combination has produced spectacular results. The flip side of the coin is that private investment is completely stalled, and the government is not trying to attract more. In fact, the president’s party is even threatening to limit foreign investment. Furthermore, by cancelling the construction of the Mexico City airport, new ventures in energy, and reneging on existing contracts, the damage being caused is exorbitant.

The financial situation at the start of 1982 was bad enough, but it took a turn for the worse, and became a full-fledged political crisis, when the government expropriated the private banks. It took Mexico at least two decades to recover from that blow, and it was only possible thanks to NAFTA, which created political and legal guarantees to overcome the fears among investors. López Obrador has not gone that far, but unless he corrects course, Mexico could end up in a similar position not too far down the road.

The views expressed here are those of the author.

https://www.wilsoncenter.org/article/the-vision-and-the-power-grab 

Luis Rubio

All the governments of the world, of all colors, want private investment, but none can get it by force. Nobody -big or small, national or foreign- assumes risks or commitments without feeling comfortable and welcome, and those feelings do not depend on political speeches or the will of the ruler, but on the existence of clear and reliable rules. It’s that easy and that hard.

The notion of an “obsession” for investment sounds enticing and attractive, but it is a chimera. No one obsesses about investing. Who should be obsessed is the politician who needs private investment to achieve his development objectives, poverty reduction, employment and, in general, a generalized improvement in the life of the population. But a political or discursive obsession is anathema to private investment: the key lies in the reliability of the rules.

1. Investing involves risk taking: she who puts her money into a project -be it in the form of savings through a purchase of shares in a company, or he who undertakes a certain productive objective- is betting that they can achieve attractive returns. Their bet represents the recognition of a risk that the project will be successful. Many restaurants open their doors with a bang, only to end up closing a few months later. A failed bet.

2. Investing is an act of faith and trust both in the specific project and in the context in which the investment is made. The franchises are successful because they reduce the risk of the project. The same is required for the environment in which the investment would take place.

3. Nobody invests without a reasonable chance that their project will be successful and success depends on two big circumstances: the first is that the project itself is viable; the second, that there is a reliable and stable regulatory framework. The latter is what should concentrate the obsessions of the ruler.

4. Despite this obviousness, most governments focus on changing laws, launching major initiatives, creating bureaucratic monsters, rewarding their favorites and developing clienteles, when what is required is to strengthen the environment (a better educated work force, better infrastructure and multiple sources of certainty), that is, something very simple, but very difficult to achieve: stability in the rules of the game. Simple because it’s obvious; difficult because it implies going against endless accumulated prejudices.

5. The virtue of the NAFTA, and its enormous success in attracting investment, was rooted in the normative framework that was its essence: clear, reliable and non-changing rules. More specifically, in the original NAFTA the key was not the thousands of pages of procedures, but its chapter 11, which gave certainty to the investor regarding the security of their investment. It is no coincidence that NAFTA has become, through exports, the main engine of the country’s economy. Instead of inventing the hot water, as the Mexican saying goes, what would be required would be to extend the rules inherent to NAFTA to the entire national territory. It would be the most expeditious way to create a regulatory environment conducive to investment, while solving the mess created by Trump in the matter: certainty generated within Mexico.

6. And this implies a great lesson for the Mexican government and its base: in the interconnected world of today there is no difference between national or foreign investors or savers. They all follow the same rationale, everyone wants clear and reliable rules. Many Mexican companies have invested in Mexico through the North American or European FTA precisely to enjoy the same certainty. When Morena’s contingent in Congress proposes to limit foreign investment, it is in fact threatening all investment, beginning with the domestic one.

7. The current government wants to subordinate economic decisions to its political preferences. It sounds good and it is logical in its perspective, but there is nothing more pernicious for private investment than political decisions. Investment goes where there are clear and reliable rules, not where politicians change the rules or subordinate them to their political preferences. That’s why the decision about the airport was so damaging.

8. Private investment does not respond to speeches or prodding: all it requires is certainty or what is known as “trust,” which is nothing other than the conviction that the rules of the game will be the same on the day the investment is made and when the project comes into fruition.

9. The government can beg, implore, demand or criticize, but it cannot force a person to risk their savings through an investment.

10. The only thing a government can do is to control its checkbook, develop strong institutions that confer certainty, and ensure, through leadership, that the entire country is dedicated to attracting investment and enhancing it. It’s that easy and that hard. The better the labor, educational and infrastructure environment, the lower the risk and the greater the investment. It’s not rocket science.

It is still time to obsess about creating conditions for the country to really focus on attracting investment, all  of which has not been done in the past decades.

www.cidac.org
@lrubiof

Luis Rubio

The numbers do not lie, but they tell two very different stories. On the one hand, the president enjoys an unprecedented level of approval; a parallel indicator, that of consumer confidence, reaches figures not seen in almost two decades. The paradox is that these figures are not related to consumption, which has been diminishing both in automobiles and sales in general. The enthusiasm shown by the citizens is not the result of an improvement in their personal welfare, but in their perception of the president and the expectations that he has generated. On the other hand, INEGI’s index of business confidence entered negative territory in January, while 75% of investors consider that the country is in worse condition than a year ago. The big question is whether these two groups of people live in the same country.

Each one will have his explanation for the phenomenon of contradictory perceptions, but I do not have the slightest doubt that the nodal factor lies in the leadership exercised by the President, who has acquired almost mythical dimensions in certain segments of society. The combination of a longing for leadership with a hope that current and ancestral problems will be resolved turned out to be an exceptional combination that the President has been able to take advantage of brilliantly. Perhaps the key that separates the two cohorts -those who are full of hope and those who see the future with concern, if not fear- is the almost religious bond that exists between a part of the first group with the President, just as the second group attempts to explain to itself,  in a rational and analytical manner, something whose central characteristic is precisely that of not being based on rational considerations.

At the heart of the mismatch between the prosperity that has been experienced in the past three decades and the unease of half of the population that led to the election results of 2018 lies the inability and unwillingness of all governments of that period to explain and convince the population of the complexity inherent in a world of integrated economies, technological change, the digital dilemmas and, in general, the key in which productivity -and education-  have become as  a factors of progress. Faced with this absence, AMLO has managed to discredit all that era by calling everything “corrupt,” obviating the need to explain or propose an alternative program that is viable, capable of leading to high growth rates.

There will come a time when the discredit of the past will prove insufficient to preserve the legitimacy of the government, but nobody can deny the astuteness and excellence of the political and media management that AMLO has brought and how easy it has been precisely because of the vacuum of legitimacy that existed in the past decades, especially since the 1994 devaluation and the crisis that followed. In fact, what is shocking is that he did not have, nor is he having, any competition to the narrative that, since 2000, he has been advancing. This was accentuated after Ayotzinapa in which the current president took control of the narrative and never faced any response or push back from the then president or his government.

The two stories that characterize the country today are opposed, but inexorably they feed back: both end up depending on the progress of the country. Expectations can be manipulated for a long time, finding new scapegoats every time the car is stuck, but what counts, at the end of the day, is a sensitive improvement in living standards. Palliatives as the subsidies that the new government is scattering right and left diminish the urgency of delivering results but, in the long term, they will prove insufficient, simply because there is no money in the world to compensate for lack of delivery. However, as Fidel Castro showed, in the presence of plausible enemies it is possible to achieve a systematic impoverishment of an entire country for many decades.

For its part, the economy cannot prosper without investment and for that the willingness of companies and of new investors is required. In contrast to the era and geography of Fidel Castro, the Mexican is an open economy and the country is characterized by a huge border with the largest market in the world. The recipe for polarization has real limits.

The investment depends on very clear factors, such as the market, opportunities, the dynamism of Mexico against other economies, and how the US economy is doing, because, through exports, it is Mexico’s main engine of growth. No doubt, new infrastructure projects help, but they are not enough.

However, at the end of the day, the most important thing for investment is the confidence that the government generates towards national and foreign businessmen and this depends, almost in its entirety, on predictable and stable rules of the game. The latter is precisely what the President wants to alter: he wants to impose new rules of the game and subject them to changes determined by his political considerations. In this scenario, the investment will not materialize. Sooner or later, this factor will clash with the massive support that the president has today.

www.cidac.org
@lrubiof