Luis Rubio

There are two theories on the incapacity of the country to break with its various forms of destructive inertia. Some argue that the country embodies cultural constraints that can be explained by anthropological and historical factors and that lead to rejecting a change in the way of being. Thus, these constitute a structural impediment to the success of the reforms that, from the eighties on, the nation has undertaken. One derivative of this perspective is that informality, the rejection of competition and, in general, of globalization, reflects a satisfaction with the status quo, therefore a repudiation of the essence of the reforms. In its most extreme version, this theory proposes that the political class wants to keep Mexicans poor to control them and perpetuate the power for themselves.

The other theory emphasizes the absence of conditions for the country to prosper. Among the contentions employed by those who sustain this view we find the following: the discretional powers of the authority, the insecurity, the absence of the Rule of Law and, generally, the lack of clear rules, ones that can be complied with and that can guide the development of the country.

The first theory attempts to provide an explanation for the situation that the country is experiencing that has held the country back from capitalizing on the changes it has embarked upon due to the complexity that characterizes Mexico. The most analytical of the proponents of this tenor affirm that the Mexican possesses a natural attachment to tradition and that, in any case, the reforms do not address the core issues of the national reality, such as the fact that the vast majority of producers or entrepreneurs belong to the informal economy, survive within a context that makes it impossible for them to compete and prefer the existing conditions than having to do battle in the marketplace with imported products or linking themselves with exporters. For those espousing this view, development lies in scaling back many of the reforms, impeding the generation of new sources of competition and easing of the live of the small business owner with mechanisms, above all fiscal, that reduce the burden and, chiefly, the associated bureaucracy. One candidate’s future rides on this vision.

The other view embraces modernity and transformation as a fact and a necessity for creating wealth and jobs and attempts to determine the exact nature of the phenomenon that has thwarted the unabridged success of the reforms. From this derives an entire series of complementary proposals of reform to bring the country to higher levels of sustained economic growth. For those who advance this view, the North American Free Trade Agreement (NAFTA) is a perfect example of a strategy oriented toward paving the way for the acceleration of investment.

It seems to me that NAFTA also illustrates the reason, or the fundamental reason, why the remainder of the economy has not worked. What NAFTA achieved was conferring legal certainty on investors (above all foreign) already possessing an integral notion of globalization and its dynamic. That is, large and small companies that already understood the need to raise their productivity, specialize in business niches, and act strategically. As soon as they were certain that the rules would remain constant, their decision to invest was immediate. Except for those enterprises that for some time had been immersed in the same global logic, that has not been the response of the overwhelming majority of Mexican companies.

Instead of attempting to find esoteric, anthropological or cultural explanations, it appears evident to me that the national business community tends to operate in an environment of sparse competition, the absence of information and a permanent disregard for authority that, in the main, is bidirectional. Under these latter conditions, medium and small business owners have been able to survive, clinging for dear life to what exists instead of seizing the opportunities (and the enormous intricacy) that the world of globalization entails. Many companies have succumbed in the face of competition, but many more outlive their stay in meagerly productive but directly or indirectly protected markets.

I have tried for a long time to understand what has generated that dynamic in the Mexican business population. In some cases the explanation is simple: protection generates greater profits (rents, as economists call them), which in turn generate an obvious incentive for the entrepreneur to preserve things as they are. But my observations over this time have convinced me that this latter case is relatively exceptional. I know innumerable entrepreneurs who do not enjoy rents, only marginal (and usually declining) profits and who would be disposed to transform themselves if they understood what their options are.

A recent, ongoing, study on Mexicans deported from the U.S. led me to understand part of the problem: Mexicans who had been very successful in the States began to try to do business in Mexico, only to find this very difficult, because everything conspired against them. One of these persons summarized this in a pithy phrase: “There the rules are clear and here they are not”. That difference is dramatic and provides a summation of the challenge: what NAFTA resolved for the foreign investor no one has resolved for the Mexican.

The Mexican does not reject modernity, free trade agreements or change. What the Mexican needs is a government that rather than preaching outside devotes itself to creating conditions inside for the country to prosper. Medium and small business owners require a government that informs them, offers ways for them to understand, helps them to update themselves and obliges them to do this, all in a suitable manner. That is, clear rules, the same for all.

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Luis Rubio

The moment was unique: Jawaharlal Nehru, India’s first Prime Minister, observed the workings of the London Stock Market. Legions of operators bought and sold stocks according to the traditional procedure: by shouting. Impressed by this spectacle, Nehru decried those “who sit in stock exchanges, shout at one another and think themselves civilised”. Years before, a reporter asked Gandhi what he thought about Western civilization, to which he responded:  “I think it would be a good idea”. The matter is less frivolous than it appears: What is civilization and how do we know whether we’re part of it or when we are?

A few weeks ago I wrote about some contrasts between Spain and Mexico. Many kind readers complained to me that Spain is experiencing enormous problems, high unemployment rates and generalized discontent, suggesting it’s not really a relevant model. Spain is without doubt a country in problems: although its economy has improved, its economic situation is complex and a good number of cases of corruption have surfaced. How easy it would be to conclude that Spain is all washed up and that it, like so many others, has failed in its modernization process.

The reality is another. Spain is a country that is very distinct from Mexico and I do not pretend that it constitutes a desirable or feasible model for us. But observing other nations allows one to better understand our own. In Spain the streets are well paved, police function and people pay their taxes. Beyond the government of the day, Spaniards know that governmental services work because they do not depend on the elected government. This comprises a transcendental difference: the existence of a separation between the government and the bureaucracy is one of the crucial factors in the process of civilization. In this Spain is a nation that was meticulously transformed and the contrast with Mexico is incommensurate.

Spain was transformed in its culture and in the attitudes of its people. After Franco, the country, everything, was liberated and passed on to another stage of its history. It is obvious that there have been good and bad governments and it is evident that many things do not work. Similarly, it is clear that its government in 2008 erred in its diagnosis of the nature of the crisis, which led to its raising its expenditure radically, instead of correcting the financial aggregates. Living within the Euro was a blessing while they were able to enjoy, as ex-President Felipe González once stated, German interest rates with a Mediterranean lifestyle. When the crisis broke out the Spaniards pretended that it was possible to continue in the same fashion, resulting in their postponing the necessary adjustment and ending up where they are today.

Their problems today are the product of two circumstances: first a series of bad decisions at a specific moment in time, on top of years of lethargy during which the productivity of its economy did not rise, while many special interests and sources of privilege were perpetuated. In the meanwhile, day-to-day life functioned thanks to Spain’s professional bureaucracy, something non-existent in Mexico even in the best locality in the country. In Mexico everything depends on politicians who change every three or every six years and their particular states of mind and interests.

Second, and much more importantly, Spain’s essential problems, those transcending the financial situation, are deviations from the norm. For example, corruption cases are addressed and prosecuted. In Mexico corruption is the soul of the political world and is solely ferreted out when it threatens that world. In Spain, the police, the judiciary and basic governmental functions operate in parallel to the government itself. That tells the story of a civil service and civil servants, of a professional bureaucracy, which renders possible civility and civilization. Its flaws are deviations, exceptions, not the norm.

While politics is ever changing, as it should be, the bureaucracy is key because it is, or should be, what remains permanent. In England, for example, the Ministries are headed by a professional, a manager, in a manner of speaking, who is told by the politician in charge (the Minister) of the course of action of the government in turn and implements it:  the point is that the bureaucracy itself does not mix with the political. That is, they don’t leave streets unpaved or stop maintaining transport systems. Following this example, the politicians decide whether to construct a new Metro line or a new airport, but it is the professional bureaucracy that is responsible for this taking place. That difference is core. With all of its problems, Spain (or the UK) is very different from Mexico, because they have taken that leap to civilization that we fear or are unwilling to indulge in.

Mexico’s is monumental, nearly analogous to the separation of Church and State: it is that of disjoining politics from day-to-day administration. One example illustrates the difference: what comes to mind are the basic-goods stipends that some state governments dole out or monies that go to older adults, projects decided upon by politicians, as it should be. However, in a civilized country, those programs would be managed by the professional bureaucracy, not by the politicians themselves. The difference is obvious: were this to occur in Mexico, more than one political party would disappear because people would see those programs for what they are: a right with a cost and not as a handout, a mere electoral exchange. A world of difference…

What’s most important in life, said Mexican comedian Cantinflas, is to be “simultaneous and successive at the same time”. Mexico is living under the pretense of civilization but with the reality of underdevelopment. The day that the discourse and the reality are consequent, “simultaneous and successive”, the country will be another. Not a day before.

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FORBES – September

Luis Rubio

The so-called Pact for Mexico was slated to be the grand solution for triumphing over years of conflict and legislative paralysis. Although through those years of “paralysis” a great volume of legislation was passed and there was broad-reaching recognition that the country required important reforms to advance its development, none was passed that might alter the economic structure substantively. The Pact complied with a crucial objective -that of approving reforms- and creating potential opportunities that without doubt will translate into significant economic improvement, but it did not trigger growth. The governmental argument that reforms take time to congeal and exert an impact on the growth of the economy is not only reasonable, but entirely logical and legitimate; nonetheless, the problems that the country has experienced from the time of the conclusion of ratification of the reforms shows that a more profound and transcendental problem exists and that the Pact, rather than solving it, hushed it up. This problem is that of the structure and distribution of political power.

The Pact was a masterly idea proposed by the PRD with the objective of sharing the political cost of the reforms. Due to its peculiar internal circumstances –the relationship between Lopez Obrador and PRD party leaders- the PRD had been sequestered, constrained at the margin of the partisan negotiation processes of the previous years, which is why that party entertained a special reason for recouping its political and legislative presence. The PAN also came to form part of the mechanism; thus, the three parties achieved what had been thought impossible in the previous decade in matters of reform. Despite the logic of conducting themselves as statesmen and assuming the reform’s political costs, the decision of the PAN and PRD to join forces in a pact with the PRI continues to be strange, given that for those parties if the result of the reforms was indeed extraordinary they didn’t lose; but had things ended up being less benign they would lose everything. For the PRI, in contrast, the Pact was a way of achieving approval of its reforms in expeditious fashion, without counterbalance in Congress and with the knowledge that if the result was good, their bonuses would escalate and, contrariwise, the losses would be shared. In contrast with its partners, for the PRI it was all upside.

The Pact fulfilled its purpose and the country today has radically distinct constitutional underpinnings from those which existed previously, although, given the way that the country works, the existence of laws does not guarantee that these will be applied or that the reforms will enter into operation. However, once they are on the books, the potential for change is clearly enormous, even if it takes another administration to bring it about. But this contradiction –between the reality in the streets and that present in the Constitution- is illustrative of the underlying problem that ails the country. In the Pact, it was shown that the problem, in the last analysis, did not lie in the ease or difficulty of countenancing legislation, but instead in the inexistence of the capacity of governing.  The question is why.

The problem possesses two contrasting dynamics. On the one hand, the country has been without functioning government for decades. By this I wish to say that the capacity to administer essential public goods, keep the citizenry safe, resolve conflicts in judicial matters and, so as not to forget it, even fill the holes in the street, is laughable. Our system of government was organized for a distinct era, for a more simple country in which things could be cleared up with acts of authority and where the disagreements that naturally arose with each change of administration were tolerable. That stopped being true some time ago, first, because the nature of the issues that require attention is increasingly complex and costly, in addition to that specialists are required; and, second, in order to progress in this era of globalization and open markets, the country necessitates services that function in a regular manner, without which it is impossible for companies to produce, compete and generate wealth and employment. Thus, Mexico’s first great deficit is one of government, a phenomenon reproduced at the state and municipal level.

The other dynamic is concerned with the problem of power. Our system of government emerged from the Revolutionary Movement of 1910 and consisted largely of a coalition of all the victorious forces within the rubric of the PRI predecessor PNR. However, while the country has transformed itself in the last decades, the power structure has remained nearly intact. For the country to progress it will have to attend to problems more profound than that of the legislative approval process: it will be required to redefine the power relationships. That process will not be simple or swift, but not for those reasons any less transcendental.

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Luis Rubio

Something peculiar is taking place in the world’s economy. The crisis of the last years, the so-called “Great Recession”, has altered growth patterns, reduced income for a good part of humanity and put governments, countries and economic actors of the entire orb in checkmate. Within this context, it is ironic that despite the depth of the crisis, no serious politician in the world disputes the continuity of capitalism. In another era, something similar led to the rise of fascism. Today, however, voters in one nation after another have been consistent in electing centrist governors devoted to steadying the ship to a greater extent than changing it. What is strange is that that constancy among voters has not been accompanied by an appreciation of the generators of wealth in the society. Thomas Sowell sums up this circumstance as follows: “One of the sad signs of our time is that we have demonized those who produce, subsidized those who refuse to produce, and canonized those who complain”.

Critics of capitalism are legendary. Much prior to Marx inaugurating the era of “scientific” analysis, the New Testament teamed with critics of diverse aspects of the functioning of the markets. In recent years, scholars and activists have published tomes and manifestos convoking the dismantling of that economic system. Picketty, who enjoys the curious merit of being the author of one of the most sold but least read books in history (Amazon measures this through its electronic reader), started the trend, to which now a ponderous volume has been added by Paul Mason entitled Postcapitalism, anticipating the end of capitalism given globalization and the Internet. In spite of this, the market economy continues to advance without surcease.

In Mexico the creativity evidenced by informal businesspeople is an unmistakable sign of the vitality of the efforts of this entrepreneurial community in the country. The number of persons devoted to creative activities on their own increases unstoppably. While they don’t call themselves entrepreneurs, but that is what they do: buy, sell, create, add value. What is of greatest impact about the informal market in Mexico is its capacity for adapting, the versatility of its responses and the services that change from day to day, precisely what one would expect from a dynamic market. In similar fashion, thousands of Mexicans are active participants in the digital revolution of Silicon Valley and many more aspire to be so. Each in his world, these actors are transforming the economic life in Mexico and in the world. Why then the meager popularity of entrepreneurship?

The fact that thousands or millions of entrepreneurs refuse to call themselves this is significant. In Mexico, the designation of “empresario” is associated with a group of rich people and not with creative and dynamic individuals who satisfy the needs of the population. Part of the reason for this has to do with the perception that many business persons are not the product of their skill or capacity for satisfying the market but rather of governmental favors, concessions or other like means. Many calling themselves entrepreneurs do not do what one would expect from the entrepreneur: adapting, assuming risks and seeking new ways to respond to consumer demand. In addition, the gaps in wealth that characterize many of the most prominent entrepreneurs with respect to the ordinary citizen in the street are so great that it is easy to associate entrepreneur with wealth and not with creativity. Perhaps that explains the rejection of the use of the term in a sector as extraordinarily dynamic as that of the informal economy.

Independently of the veracity or falsity of the perceptions regarding the origin of the wealth of many of the most visible entrepreneurs, it is  evident that inasmuch as there are fortunes emanating not from the market but instead from abuse, protection and governmental favors, the solidity and credibility of capitalism is ending up severely undermined. Many fortunes have been built in the shelter of politics and many politicians employ straw-men to utilize their post to get rich. The circle is boundless and in no way favorable for the development of a healthy economy that requires, according to many of the most earnest scholars on the subject, that the entrepreneurial function be appreciated and recognized as socially relevant. Without this there will not be the conditions for there to be investments, for taking risks and for generating a vital environment of economic creativity.

At the end of the day, economic success cannot depend on the creativity of the informal sector because, despite all of its dynamism, there are limits to its potential. The vitality of the Mexican economy is going to depend on the existence of rules of the game that favor entrepreneurship, developing competitive markets, formalizing the informals to let them take flight and, with this, conditions will be created not only for the economy, wealth and employment to grow, but also the burgeoning of high regard for the entrepreneurial function.

The development of an economy requires trust between governors and the governed and this does not come out of thin air. A researcher at the University of California who has undertaken the task of interviewing migrants deported from the U.S. found one of these who explained that he had decided to start a business but that he ended up failing in this because in Mexico “there are no rules”. It is not by chance that many Mexicans of modest origin who triumph in the US fail in Mexico: over there indeed there are rules and that is the basis of trust in the institutions and of the esteem in which entrepreneurs are held.

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Luis Rubio

In his book on his experiences as a reporter in Beirut, Thomas Friedman relates the complexity of a society in the process of decomposition. In a trip to the airport, Friedman tells of the following: “I once watched a man being kidnapped in Beirut. I was on my way to Beirut International Airport when my taxi became stalled in traffic. Suddenly I saw off to my right four men with pistols tucked into their belts who were dragging another man out of his front door. A woman, probably his wife, was standing just inside the shadow of the door, clutching her bathrobe and weeping. The man was struggling and kicking with all his might, a look of sheer terror in his eyes. Somehow the scene reminded me of a group of football players carrying their coach off the field after a victory, but this was no celebration. Just for a second my eyes met those of the hapless victim, right before he was bundled into a waiting car. His eyes did not say “Help me”; all they spoke was fear. This was Beirut. Moments later the traffic jam broke and my taxi moved on to the airport. The Lebanese driver, who had kept his eyes frozen straight ahead the whole time, never said a word about the horror show which had unfolded in the corner of his eye. He talked instead about his family, politics, anything but what had happened alongside us”. He then goes on… “When authority breaks down, society collapses… in a state of nature, men will do anything to avoid being poor or solitary”.

Friedman’s description could be applicable in various regions of Mexico and to many at certain moments during the last lustra. It is not that Mexico in general is headed toward a Hobbesian state of nature, a situation in which the law of the jungle reigns, but yes, the deterioration of a society does not take place solely as a result of the activity of violent groups and criminals but also when lethargy, lack of governmental action and systemic abandonment of institutional construction become a way of (un)governing. Today nobody is building the Mexico of the future.

Ignorance, arrogance and, above all, the enormous distance that characterizes the governors with respect to the population and its needs, concerns, fears, illusions and jadedness lead to absurd decisions that put in jeopardy the country’s stability and viability. This can be observed equally at the local and federal levels.

In Mexico’s Federal District, for example, the government has just published a new driving code whose logic is, at least conceptually, reasonable: traffic penalties rise dramatically when there’s even the slightest violation of the new regulations. It sounds good, except that their translation into daily life cannot be other than to increase the cost of the bribes. More intense penalties within the framework of the corruption and impunity characterizing today’s Mexico will inexorably lead to –what else?- greater corruption and greater impunity. It couldn’t be any other way, something paradoxical for a government that possesses perhaps the most successful program of urban traffic regulation precisely because it attacks the heart of the problem: the breathalyzer that Mexico City established has worked not because it entails steep penalties (although it does have them: 36 hours jail time at “El Torito”), but because the presence of diverse and competing authorities at the place of the test impedes collusion, thus corruption. That is, the local government achieved something unique in Mexico: it succeeded in making the incentives inherent in the program’s goals coincide with the incentives of those who operate it, no small merit in our milieu.

The new traffic law is the opposite: a stick with no carrot. This will not improve coexistence in the city, but will bring about a new, and huge, source of corruption. A government that falls on its sword is not a very resolute government and much less presidential material.

On the federal plane, the matter is even more obvious. The environment is complex, inclined toward conflict and there are no institutions or mechanisms capable of channeling the conflict and maintaining social peace. Within this context, any situation can become explosive: the police are not particularly dexterous in conflict management, the Attorneys General haven’t a clue as to what a criminal investigation is and the military assigned to assume police activities have high proclivity for exceeding in the use of force. None of these situations is exceptional in the country: these are the realities with which we live on a daily basis and that necessarily lead, sooner or later, to crisis situations. One would think that the way to get started on the problems that would arise would be to construct responses that advance in the direction of institutionalizing public life, in this manner reducing the burden on the governor.

The federal government’s way of acting has been exactly contrariwise.  Instead of accepting that there are a thousand and one circumstances that will come to blow up on it, although not of their doing (Ayotzinapa is a paradigmatic case), it has been paralyzed every time crisis has struck. The ideal response would be to ride out the storm creating convincing mechanisms, susceptible to avoiding similar cases in the future, but that doesn’t happen.

When there was a political assassination in 1989, then-President Salinas recognized the explosive potential of the phenomenon and moved proactively:  he created the Human Rights Commission, a response that strengthened the institutional framework in the long term and that relieved him of the hot potato in the immediate term.

To confront cases of potential conflict of interest, the current government unerringly did the opposite: it not only submitted itself to the initial severe beating, but also it employed an inadequate mechanism –the Comptroller General which, oddly, reports to the president- thus the beating would be repeated some months later. It would have been much better to transfer the function of supervision of the executive to the legislature, thus creating a new platform for future cases of conflict of interest, corruption and similar occurrences.

The present government lacks accepting that the real world is not as it imagines it to be and that its capacity of action is infinitely superior than it conceives it to be, but only if it recognizes that the prerequisite to acting is to construct institutional capacity beyond its control.

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Luis Rubio

Those who idolize the old PRIist system speak of the predictability that characterized it. The rules were clear, the values consensual and the risks known. Those who were part of the system knew that there were ups and downs but loyalty was always rewarded. To be “institutional” constituted a distinction only bestowed upon those who had lived equally through triumph and political disgrace. Not exceptional were those who had crossed the desert. The system worked thanks to the combination of loyalty and hope: fealty to the chief in turn, hopes of attaining political redemption. From this arose a natural order: barring a justifiable exception, good behavior was prized and dissention was penalized. There was an order.

The old PRIist order was not based on the law or legality but rather on that peculiar misnomer invented by the system of the “unwritten rules”, which were nothing other than loyalty to the President in turn and respect for the form, the acceptable way of doing things. What is interesting is that the combination of these two elements constituted a factor of stability that distinguished Mexico for decades. Although the system conceived by Plutarco Elías Calles in 1928 did not accomplish the consolidation of a “country of institutions” as he proposed at the time of the creation of the National Revolutionary Party, the grandfather of the PRI, the great achievement was a regime of order and stability whose backbone lay in the six-year limit to power and fealty to the President of the moment. These mechanisms would not pass the test of an idyllic democracy such as that which tends to be dreamed about today, but that does not take away the enormous merit of having procured an era of peace and stability in tremendous contrast with the majority of countries in the region.

On one of his writings under the spell of his depression and melancholy, President José López Portillo affirmed having been the last of the revolutionary presidents. In effect, the author of the crisis of 1982 broke with all of the rules of the system and, with that, gave flight to the era of the economic debacle. Up to the eighties, all of the Mexican post-revolutionary presidents had been military men or lawyers, both committed, from their professional training, to the value of forms and formality: adhering to established patterns, repeatable and predictable, which implied a basis of trust on which the society could depend. Thus, although politicians’ careers individually rose and fell (often referred to as the wheel of fortune), the society knew that there was a minimum point from which they would never deviate: an order. Some presidents emphasized the Left, others the Right, but none departed from the accepted canons of the epoch. Additionally, compliance with the forms generated confidence in the business community and the presidents understood that this comprised an essential factor of trust. Everyone played the game.

The era of the crises began in 1976 and ended (one hopes!) until 1995. During those twenty years, the country lost its historic stability, sources of trust and economic viability. Changes in the world context had a great deal to do with the disappearance of the “minimal” platform that had functioned historically, but the greatest of the changes was the fact that the system held fast to the past and did not have the capacity to foresee and adapt to the transformation of the Mexican society itself (an incapacity evidenced in living color in 1968), as well as of the world economy and globalization.

In the eighties the technocrats arrived to the rescue: novel criteria and forms of acting that clashed with the old system. The economy was liberalized, government-owned companies were privatized and new forms of economic administration were adopted, forms that adhered to a greater extent to the international norms than to the national history but that, unfortunately, never delineated in black and white: they always left a margin for granting personal favors and, with that, the impossibility of arriving at full modernity.

But not only had the economy changed: the reverence also disappeared for “the forms”. What previously comprised unrestricted respect for the “unwritten rules” suddenly turned into legislation redacted by economists (instead of lawyers) that came to be, with great frequency, indefensible in a court of law. The end of the country of forms was accompanied by attempts to codify a partially open economic system but that never consolidated. Thus, although the economy reaped some good years of growth, the highs and lows have been the constant since the close of the eighties.

Thus, Mexico never forsook its past, therefore it never was able to construct a distinct future. The extreme is the current government, whose mantra is forget the future and return to what worked in the caveman era of the old PRIist system. Back to form over substance.

Order is a necessary condition for the progress of a nation. Without order everything is an illusion because the propensity toward disorder and instability is permanent. This does not imply that the system conceived by Porfirio Diaz (1876-1910) of “order and progress” is required, but Mexico does have to find institutional mechanisms, ideally within its precarious democracy, to consolidate a minimal platform of stability and trust as the old system did at its time. The world of today is not in any way like that of the middle of the past century, but one thing never changes: the need for the population to have trust in their governors.  That is something that even Mao Tse Tung, the Leninist communist, understood from the beginning, but that our government does not recognize even as the dollar hovers close to 18 pesos per.

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Luis Rubio

In one of his memorable interventions in the escalation of the invasion of Iraq, Donald Rumsfeld argued that “…there are known knowns; there are things that we know that we know. There are known unknowns; that is to say there are things that we now know that we don’t know; but there are also unknown unknowns ―there are things we do not know that we don’t know”. While this seems to be a tongue twister, the then U.S. Secretary of Defense laid bare a reality for anyone venturing into unknown lands and circumstances. Governors, businesspeople and investors confront these problems every day because it’s never feasible to have at their command the entire film of what is in store. That uncertainty has been aggravated dramatically in the last years.

Although it is beginning to stir, the European economy is experiencing disastrous times; the U.S. threatens to enter a descending stage of its economic cycle and China appears, finally, to justify its long time Cassandras with lower growth rates. Oil prices, the strengthening of the U.S. dollar and the worsening of the Mexican peso with the failed Pemex Ronda Uno and the growing fiscal deficit has done nothing other than obscure a panorama that itself was already cloudy.

Each of these issues entails its own complexity and potential consequences, but the combination is what is disturbing in all respects. The uncertainty that this causes is infinite and explains the mixture of fear and distrust that characterizes Mexicans at this time. The only one that hasn’t taken note of this is the government.

In his book Mass Flourishing, Edmund Phelps, who was awarded the Nobel Prize in Economics, asserted that the climate favorable for innovation was the trigger of economic growth from the XIX century. This thesis, similar to that of Deirdre McCloskey in Bourgeois Dignity, implies that where there exists a milieu of social esteem and support for creators and innovators the economy prospers. I ask myself: what has the current government done to promote innovation, something complex in itself, but at least to generate an environment of trust in the business community and potential future innovators? There’s not the least doubt that the devaluation of the peso responds to external factors, but it is absurd to ignore the internal ones that are worsen it by the minute.

According to Phelps*, innovation is diminishing due to the excess of regulations that overwhelm the producer of goods and services in growing fashion throughout the world. He states that every time a mechanism of regulation or protection is appended the capacity to innovate is reduced: extreme examples of this include the corrupt political systems that protect rent seekers of any ilk. Phelps observes that school systems have abandoned the sources of inspiration that endorse innovation and the rise of creative individuals. Forsaking the reading of the classics and, above all, foregoing the exaltation of individual merit through the readings and histories of discoverers, explorers, scientists, entrepreneurs and, in general, successful people, has had the effect of placating imagination and creativity, key factors in the economic growth of the present stage of the world.

For his part, Carles Boix** notes that on undergoing technological changes, (such as the introduction of new irrigation systems), societies based on simple agriculture experienced social changes that produced distinct political results. In its nomenclature, those whose who benefited from or who knew how to take advantage of the new technologies were denominated the “producers”, who evolved toward the construction of political regimes that today we would call republican with elected leaders, a legislative assembly and a system of government that would come to protect them from the losers. There where the producers triumphed, as in many Greek cities and the city-states of Europe, the society ended up granting privilege to economic growth, productivity and competition.

Those who remained at a disadvantage and who lost out before the producers, whom Boix calls pillagers or looters, devoted themselves to fighting over the crumbs, creating a Hobbesian context of insecurity, which lead to the preference for monarchial or dictatorial governments that would protect the status quo, oblige the producers and the government itself to provide food, work and income and to guarantee the existence of defensive and protective mechanisms for the vanquished. Societies in which the plunderers are the victors propitiate lower growth rates and the flowering of systems of privilege that distort competition and impede innovation and technological change. In Mexico there is no doubt that the pillagers always enjoy the support of the government.

These historical considerations are relevant because they demonstrate that the sources of stagnation and vulnerability are not new. International uncertainty cannot mask the enormous mistrust that the current government and its poor decisions have procreated and aid in understanding the sources of stagnation and the vulnerability in which the country finds itself in the face of the uncertainty presently characterizing the world.

Compete and innovate or protect and preserve? Seek to raise productivity or increase salaries by decree? The deterioration is growing; the sudden change of trend in the depreciation of the peso in the last several weeks should lead us to recognize that what is at stake is the heart of the country’s development: trust-building has been given the cold shoulder for the past three years. In contrast with Rumsfeld’s brief address, the causes of Mexico’s situation are perfectly known.

*What is wrong with the West’s economies?

**Orden político y desigualdad

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Luis Rubio

 A few years ago, when Italy was traversing an electoral moment, a European publication accused the Prime Minister of suffering from a disease so rare that it had yet to be found in any medical journal: “proclamitis”, the compulsive announcement of new rules of the game. Mexico’s electoral system seems to be like this. The sum of hypocrisy, distrust and the self-righteousness have led to the construction of a complex electoral system full of statutes unable to be complied with, restrictions to which no one is willing to adhere and infinite opportunities for the emergence of grievances, lawsuits and allegations. It is clear that the problem lies in that the electoral issue was resolved prior to that of the power, the reason why full electoral legitimacy will never be achieved. However, I question myself as to whether it wouldn’t be possible at the very least to rectify the absurdities and excesses that the system entails: Wouldn’t a less convoluted and more liberal system be better?

A long-standing legal principle –traffic laws come to mind- asserts that everything that is not expressly prohibited is permitted. But that’s not always the way it is: Enrique Jardiel-Poncela, the extraordinary Spanish playwright who lived through the autocratic Francoist dictatorship, wrote that the “dictatorship (is a) system of government in which everything that is not prohibited is obligatory”. Our electoral system also appears to be that way and this has not favored the procurement of greater legitimacy: nearly 40% of the population consistently rejects the result of an election when it does not endorse its favorite. In the past elections the Morena party president (Marti Batres) rebuffed disputes about the elections that his party won, but he without the least embarrassment demanded the modification of those that it lost: if I win it’s democracy, if I lose it’s election fraud. The paradox is that the majority of reforms of the last decade –reforms increasingly restrictive, extravagant and regressive- designed to satisfy those who from the outset repudiate the mechanism, especially the Morena leader (i.e. Lopez Obrador). Wouldn’t it be better to return to the spirit of the 1996 political-electoral reform, whose objective was a level playing field for there to be real competition? More freedom, fewer controls.

Even if one were to take this further, there are arguments postulating that any electoral conception is inane. Perhaps the best example is the commentary on the recent Nigerian elections of Don Boudreaux, a professor of Economics: it is interesting that the photographs that appear in the world press are of persons lining up to vote, which vindicates, he says, Western prejudices about the importance of voting in a democracy. However, he goes on, “The photos that I would most like to see are photos of Nigerians or Iraqis holding up or wheeling carts full of consumer goods, or giving cash or credit cards to store clerks—symbols not of the right to vote for politicians but rather of the right to choose freely in markets”.*

There’s no reason for one to have to choose: politics and the economy are two spaces where the population, in its character of citizen and consumer, respectively, makes decisions with respect to their personal life. Each of these spaces requires ordinances that permit the population to function. However, while it’s obvious that enormous distortions persist in the economy, in no way may they be compared with the electoral absurdities. The issue is of essence and within it dwells permanent tension, in all societies.

The tension between democracy and freedom is old and known: even in places where the political organization works well, there will always be tense circumstances between the political objective of achieving equity for all and the economic efficiency that creates disparities among citizens. That tension has been a constant in the history of humankind and every society has attempted to find the equilibrium point that works for it. In Europe, the U.S. and what is known as the West, the norm has comprised diverse variants of capitalism and democracy. In the socialist nations of the past century equality was favored over efficiency and in many Asiatic nations, notably China, emphasis has been placed on efficiency at the cost of freedom. Given the democratic disenchantment that Mexico has experienced, I ask myself what it is that the population would prefer, which equilibrium point between freedom and democracy it would favor. What I entertain no doubt about is that an overwhelming part of Mexicans think that the electoral system is excessively expensive, and that we really have no idea of the sum that it involves, surely on an order of magnitude tens of times superior to the official cost.

How can the electoral conundrum be solved? I see two possibilities. One would be to continue reforming –that is, restricting- according to the protestations presented concerning the most recent electoral contest. However, this path would demand that all law schools develop the academic specialty of negligible trivialities in order to be able to settle disputes on progressively irrelevant things. The alternative would be to recognize that the restrictions have not improved the quality of the elections, have not impeded the three great parties from undergoing significant losses nor –more importantly- have they been an obstacle to the constitution of legislative majorities. Of course, that would wind up in that interminable proclamitis (and its equivalent in electoral rules), but in the meanwhile, why not make life –in the economy and in politics- simpler and more reasonable?

*cafehayek.com march 29, 2015.

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FORBES – Luis Rubio

“Experience, wrote Frederic Bastiat, teaches us effectually, but brutally. It makes us aware of the all the effects of an action, by causing us to feel them; and we cannot fail to finish by knowing that fire burns, if we have burned ourselves”. The Greek drama of the last months has led me to reflect on our own experience with the crises of the seventies to the nineties and my conclusion is less benign that what I had anticipated.

We tend to congratulate ourselves on the fiscal health that the government enjoys, at least until a few years ago. After decades of poor management, excessive spending and a growing debt, the country finally achieved breaking with the piling of recurring crises and, although it has not attained high growth rates of the economy, at least there are no sudden ups and downs in the currency exchange rate or in prices, at least ones  directly attributable to internal factors.

Thus, while far from being perfect, our fiscal situation is infinitely better than that of innumerable countries, beginning with many of the developed nations. In contrast with the latter, our risk of overstepping ourselves entails causing a crisis in the balance of payments and fiscal accounts, with devastating consequences for employment and stability. It is for that reason that, from 1994, the greater part of the political establishment acceded to not being able to put fiscal equilibrium at risk.

This that we learned the hard way is something that various European countries lost sight of when they entered into the European Monetary System. On being part of the euro,  bucountries with weak institutions like Greece, Italy, Portugal and Spain achieved German interest rates with Mediterranean comportments. That is, they appeared to be enjoying the privilege of those who were elevating their productivity in systematic fashion, without having to work like they do. Two decades later, the costs have just become evident: the southern countries, such as Greece, have accumulated enormous debts but are trapped in the monetary system that made the lustfulness possible.

The Greek crisis has made me reflect on how it was that we achieved steering the fiscal accounts to a happy ending. The Greeks affirm that they have reduced their expenses, adjusted some salaries and improved the productivity of their economy; while that adjustment has been infinitely less grand than the similar one taken on by other European economies in distress, in absolute terms it has been ludicrous. The conclusion I’ve come to is that what has permitted us to procure fiscal adjustment in Mexico was the combination of two things: a group of technocrats with mental clarity about what had to be achieved (the condition sine qua non), but also a devaluation. It was the sum of these two elements that allowed for the adjustment. At least to date, none of these two is present in Greece.

Let us begin at the beginning, why is it a devaluation. What is visible about devaluation is the change in the relative value of one currency in terms of another. However, the immediate consequence is that all profits denominated in the devaluated currency depreciate, that is, salaries, pensions and fringe benefits possess, of a sudden, a new (lower) value. The Mexican devaluations from the seventies to the nineties, all caused by poor financial and fiscal management, implied an immediate adjustment of the internal costs. In this manner, while there were many difficult decisions that the authorities were required to make in budgetary matters in those years, a great part of the adjustment occurred due to the very fact of the devaluation itself, not because the government had fought with the unions, businesses or bureaucrats. The devaluation made their job easy, something impossible for Greece within the euro.

For the Mexican technocrats who had to deal with the devaluations,  the problem was acting in order to avoid internal prices from increasing rapidly, assigning scarce resources for the greatest economic benefit they could supply and dealing with the debt in foreign currency that multiplied without warning.

The problem of Greece is two-fold: first, on being within the euro it has not way of depreciating the value of its liabilities in order to begin to recover; but, second, on exiting the euro, it would need a technocratic team –which the current government plainly lacks- to convert the devaluation into an opportunity. Otherwise, Greece would end up in an even worse crisis. I never imagined viewing devaluations as a salvation, but Greece requires one.

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Luis Rubio

Korea and Mexico were more or less the same at the beginning of the sixties. That was a great time for the Mexican economy, with growth rates above 6% annually and a per-capita GDP higher than that of Korea, a country devastated and divided after a long and bloody civil war.

Fifty years later, the tables have been turned and Korea is today a developed nation, with a thriving economy, an impressive industrial base, leading enterprises in the most diverse sectors, including high tech, and an enviable democracy. I have visited Korea on various occasions over the years and am always impressed by the speed of the change that it undergoes, but above all the clarity of course that characterizes it and the diligence with which it has addressed its crises, overcoming authoritarian governments and constructing such an impressive economic, political and social platform.

Behind the Korean success lies an Asian ethic that is radically distinct from that which we know in our environs and perhaps that explains part of its performance. However, not all of the nations of Asia have been similarly successful and Korea is exceptional because its development was the result of a deliberate and explicit process of decisions to transform itself after the war. At the heart of its success lie two crucial factors: leadership and a model educative system.

Leadership has been a distinctive characteristic across decades and has been comprised a virtue that has allowed it to adapt itself to the times. The country endured crises of the most diverse nature: the assassination of its President and his entire Cabinet with a bomb explosion, authoritarian governments, financial crises and a permanent state of tension with its North Korean neighbor. What is impressive is how each of those crises became a platform of transformation. Its emergence from the 1997 financial crisis is illustrative for us because that country not only corrected its fiscal variables, as always occurred in similar situations in Mexico, but in addition it modified the structure of the whole economy, obliging its great industrial groups to compete openly. The point is that governments come and go, but there always was a clearness of vision of what was important. They learned from the crises and took a leap forward.

In Korea, as in the rest of Asia, corruption has been a permanent fixture of economic and political life, but that has not made them loose clarity of purpose, reducing corruption to something lesser in importance. Economic progress began in Korea by imitating the Japanese, but later they adopted their own strategies. When the trade patterns were altered, they emphasized a change toward high technology; when a political crisis presented, they moved toward a democratic system. Of course these things were not linear, automatic or spotless, but a bird’s eye view reveals an unmistakable clearness of course. The result is visible in the form of highways, bridges, universities, commercial complexes and, in general, in the vitality of its cities and communities.

In terms of education, Korea constructed one of the most competitive and at the same time one of the most demanding systems worldwide. Students are required to pass brutally tough examinations to get into college and that step determines their opportunities and future in life. The conduct of Korean students –there and everywhere in the world that they find themselves- manifests itself in an absolute devotion to study. Will that permit them to transcend the current limits of science and technology to which they aspire? Time will tell. Years ago, when the Japanese seemed to be on the verge of dominating the planet, the weekly periodical The Economist conducted an analysis on the potential of the Japanese educational, scientific and technological system of outsmarting that of the U.S. Its conclusion, surprisingly, was that the intensity of their education was insufficient to surmount the creativity made possible by the liberal North American education system.

I do not know to what extent this conclusion continues to remain valid, but Korea now finds itself before that tessitura. How can the U.S. capacity of giving rise to startups, technological companies susceptible to transforming whole economies, as was the case of Microsoft, Facebook and Google be reproduced? No one else has solved this enigma, but what stands out in Korea is that it finds itself in the midst of the same debate as France, Germany and Japan. Impressive for a nation that a half century ago was a rural country with a GDP per capita one half of Mexico’s. All that inexorably takes me back to CETEG, the CNTE and other superlative manifestations of Mexico’s educative system. Worlds apart.

Current debates in Korea are divided into two. The geopolitical debates, and those relative to its economic future, although these are often the same. When all is said and done, Korea is a “sandwich” country between two powers: the U.S, with a strong military presence in the zone bordering North Korea, and China. One recurrent saying there is that “in a fight between whales, the shrimp’s back is broken.” China has become Korea’s main commercial partner and Koreans have learned to operate with their two counterparts successfully. They are now seeking an FTA with China and have joined the new Asian Infrastructure Bank, promoted by the Chinese. It continues to impress me that, in spite of the complexity of their geography, they have known how to achieve what’s important. It would behoove us to learn some of that.

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