Luis Rubio

These have not been the best of days for the President. Difficulties accumulate, the economy doesn’t improve and now there are protest marches everywhere. The issue is not the horror of the killings, although that’s what’s caused the current impasse, but rather the fact that the government has been taken by surprise: as if it didn’t (and doesn´t) understand what’s at stake.

The world is falling all around it but the government has acted under a short-term, tactical logic: to score points at the expense of the PRD; in his speeches, the President does not assume responsibility for security: instead, he solidarizes himself with the victims (taking five weeks to meet the parents) not as the authority in charge but as if he were an NGO, a non-government organization. He reminds one more of Fox with his “and why me” than the calculating politician and expert political operator of the recent reforms.

Days go by and the government doesn’t respond or heed other voices. In contrast with the time of his presidential campaign when he bent over backward to anticipate future criticisms with an ambitious proposal in political matters (at least in terms of making a strong media splash), today the government seems to be clueless. This is the moment to set forth a distinct paradigm because the true problem derives from that the two most important assets that he possessed have been lost: the appearance of efficacy and the initiative.

For a year and a half, the government followed a perfectly articulated script, with competent operators in all key places, an effective communication strategy and an infinite capacity –by whatever means available- for engaging the opposition and clasping neutralizing interests to its bosom. Its impacting capacity of execution met with applause even in the most cautious quarters of society. That’s why its paralysis or incapacity of response today is so astounding, which could lead to the protests proliferating, inside and outside of Mexico. Not a very inviting scenario.

Iguala didn’t inaugurate the problems. For months, diverse, ominous signs have been clear, which were overshadowed by the process of passing reforms. Long prior to the recent slaughters the economy showed signs of paralysis that the aggressive fiscal stimulus hasn´t corrected but the debt is nonetheless on the rise. Oil prices are in a downward spiral, threatening already deteriorated governmental legers, and Europe warns of going into a recession, if not deflation.

Although the security conundrum had been suppressed from the media, the reality continues exactly the same: extortion has become an everyday occurrence for small businesses (and many bigger companies as well), abductions grow and theft does not desist, even (above all) in the entity that the President until recently governed. Impossible to turn a blind eye to this massive, albeit slow, destruction of social capital. The killings reflect the disorder holding sway in the country, the connivance between elected authorities and organized crime and the total absence of a strategy for combating criminality. Iguala is crucial because it wasn’t carnage among narcos: there the State was revealed as a henchman at the service of organized crime. Denying the reality is not a strategy. The President has to take charge.

The reforms project was ambitious in itself. But up until now, there’s been no more than a change in paper. Independently of the new circumstances, the complexity entailed in implementation of the reforms is enormous and, above all, calls for skills very distinct from those that the government has deployed to date. It’s not the same to negotiate with representatives or to buy votes in the Senate as to confront mafias devoted to stealing combustibles or biasing contracts inside government-owned enterprises. The former is political operation, the latter, what’s called governing.

Impossible to minimize the challenge that confronts the government and the country but that doesn’t imply that there are no ways out. Perhaps the greatest of the challenges resides less in the situation in the streets than in the vision of the government. The current governmental thrust reflects a vision that rejects the reality of the external world.  Although, for example, the government actively promotes foreign investment, it doesn’t give the impression of accepting the reality of a globalized world in which communication is instantaneous and decision-making criteria are on display for the entire world to see. The connection between protests in Mexico City and in Rome is real and the impact on investors inevitable. The government cannot pretend to be innovative and modern on the outside while inside there are millions of Igualas a hair trigger away from exploding. In a word, it’s impossible, in addition to futile, to attempt to recreate the old paradigm founded on outsiders not seeing what’s happening inside and insiders not communicating with those outside. It’s urgent for the government to recognize the need of a new paradigm of political development. As simple and as complex as that.

No one expects the President to solve the problem of Guerrero in fifteen minutes. What the population expects from the President is certainty and a sense of direction, that is, institutions which allow Guerrero, and the entire country, to enter into a dynamic of stability and political-legal development that, little by little, would render impossible, or at least exceptional, the existence of mass killings such as those of Ayotzinapa. Such a vision would compel the dedication of all of that extraordinary capacity of political operation to construct a new institutional scaffolding and to oblige the key actors –starting with the governors- to construct government capacity instead of simply “getting by” in order to get rich, without any benefit for the citizenry. This is the moment to act.

FORBES – October 2014

The great difference between the 1994 crisis in Mexico and the one that Spain has been undergoing during recent years lies in that the European country does not have the instrument that made it possible for Mexico to emerge with relative speed from its fiscal and financial predicament. In the Mexican case, the currency devaluation allowed for change, in no time, of the macroeconomic situation. Spain, a member nation of the euro bloc, does not enjoy this freedom. Its adjustment variable has been another, with devastating consequences. This difference is absolutely pertinent for the ongoing discussion on minimum wages.

When a country finds itself in financial problems, as was Mexico’s case in 1994, the economy had to adjust itself to the new reality. In our history of crises, devaluations typically occur because the excess of governmental spending has led to such a growth of imports that an exchange crisis was produced. Once that happened, the government had to act by controlling its spending and attempting to restore the fiscal balance. The main effect of a devaluation is diminishing the real value of salaries, because the latter are denominated in pesos. Spain, which cannot implement a devaluation, has had to lower nominal salaries, that is, many Spaniards now earn a lesser number of euros for the same work: the salary ended up being the adjustment variable.

The minimum wage in Mexico has been the adjustment variable that has permitted the mitigation of the additional costs associated with production in the country such as violence and theft, the bribes exacted by bureaucrats for a company to function, the poor quality of the infrastructure, the costs derived from the need to retrain personnel which did not get the minimal preparation necessary in the formal schooling system and, in general, the poor quality of public services with which Mexicans contend. Given that an entrepreneur has no way of solving the problem of the education or that of the insecurity, to cite two evident examples, his sole alternative is to pay less for the prices that he does control, such as employees’ salaries. The point is that salaries in Mexico are low because if they were higher the whole economy would collapse. Salary is the adjustment variable. This can be unfair, but that doesn’t make it any less real.

The government can decree an increase in salaries but cannot avoid the potential consequence of its action. In quantitative terms, the government can fix the price of a product or service (such as the minimum wage) but cannot fix, simultaneously, the amount demanded. And vice versa: it can fix the demand but not the price. This is about independent variables over which the government does not have simultaneous control.

In the case of the minimum wage, the political logic of increasing it is impeccable. Also impeccable is, at least in some measure, the argumentation that the managed salary has been so low for so long that it is possible that its elevation to a moderate level would not have a dramatic impact. The problem is that measurement of that impact lies outside of the ambit of government control. A 15% increase might not manifest consequences but it is possible that one of 20% would indeed entail these. No one knows beforehand and, given that the proponents’ objective is an increase various times the present minimum wage, the probability of triggering a series of uncontrollable (but certainly foreseeable) consequences is enormous.

The problem of establishing a minimum wage increase by decree is that it is an artificial measure. It is obvious that the country needs to raise Mexicans’ incomes and to do so decidedly and systematically. Given that the minimum wage has become the “adjustment variable” of all of the ills that the economy and the country endure, all of the energy expended on forcing a wage increase by decree should be channeled toward the solution of the underlying problems (i.e., education, security, infrastructure, and so on). Undeniably, there are some themes that, even in the most optimistic of scenarios, would take decades to resolve; but there are others that, with a decided and concerted act of the government could translate into rapid increases in productivity levels. For instance, radical simplification of the fiscal system would change the reality of businesses overnight and that wouldn’t require taking the teachers’ union on or constructing a new police and security system. It’s a matter of priorities.

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@lrubiof

Luis Rubio

I haven’t the least doubt that when the Peña-Nieto government was inaugurated, its main consideration rested on how to reconstruct the capacity of action of the State. It’s evident to everyone that governing capacity has been deteriorating over recent decades and that no country can prosper with a weakly government, incompetent and paralyzed, which is also overwhelmed by factors outside of its control. From this perspective, the proposal of an “effective government” that Peña-Nieto uttered during his campaign summed up not only a political philosophy, but a categorical imperative. Now more than ever.

The important question doesn’t reside in the need for constructing an effective government but rather in the causes of its ineffectiveness. One way to see it is to suppose that the government worked well before and that, due to diverse circumstances, stopped doing so. With a diagnosis such as this, what proceeded was to recreate what there was before, with adroit adjustments. But there’s another way to consider the problem: what if the former government was not so successful or not so competent, although some things worked well?

What there’s no doubt about is that the old political system – with its hits and misses- functioned within the context of a very distinct country from that of today: a country much smaller in population, with an authoritarian political system and an economy basically without liaisons with the rest of the world.

In the eighties and nineties, the country embarked upon a process of reform oriented toward recovery of the economy’s growth capacity. With a government still strong and fundamentally capable of administrating political processes, the reforms of those times modified basic structures (through privatizations, deregulation, liberalization of imports). Much change ensued, but the country did not attain raising the growth rate in a sustained manner. On the other hand, the forces that were triggered by that process changed the political reality of the country, creating the plight of the weak government of today, so visible in the atrocities of Iguala.

During that same epoch, the one-time Soviet Union undertook a similar objective, for which Gorbachev conceived a dual reform process: Perestroika would reform the economy while Glasnost would open up politics. Within the Mexican government, the Russian case was much discussed and the government at the time decided that a political opening prior to economic consolidation that Gorbachev was implementing would lead to a catastrophe. In retrospect it’s clear that the Mexican reading of the USSR was correct, but that didn’t imply that the diagnosis of what Mexico was finding fault with was right.

Without proposing it, the new Francis Fukuyama book* describes the Mexican dilemma in laser-sharp fashion. For Fukuyama there are three key components for the ordered functioning of a society: a strong State, the Rule of Law and accountability. He affirms that, although all three are indispensable, none works if the State is weak and dysfunctional. That is, for a country to be successful, it requires a system of government capable of complying with basic functions such as security, the legal system and economic regulation. The sequence, says Fukuyama, is key: countries that democratize themselves before having constructed the capacity to govern themselves effectively always fail because democracy exacerbates the problems and deprivations, eroding the government’s capacity to exercise its authority on finding itself submitted to a surfeit of conflicting demands.

The diagnosis is absolutely clear and devastating. The Mexican political system worked in an environment and within a context that no longer exists and that reality has rendered obsolete. Part of its obsolescence sped up with the reforms of the eighties and nineties, but a reasonable and realistic reading of history would reveal that the problems began much earlier. In reality, the reforms of those years were nothing but an attempt to correct the problems that had been coming to light and accumulating since the mid-sixties. The country’s growth problems date from that period and the political capacity to deal with them exposed its limits in the 1968 student movement, in the economic strategy of the seventies and in the virtual bankruptcy of the government in 1982. Behind the poor economic results lies the poorest of political performances.

A weak government creates a milieu in which growth of the economy is impossible in part due to its own dysfunctionality, but also because it is incapable of solving the problems ailing the country. The dilemma resides in how to resolve the weakness of the State. One way is centralizing and attempting to control all instances and chinks in the armor of political and social life. The government is trying to tap into this aspect, but rapidly finds itself contending with its own limits. A strategy like this exacerbates tensions that later need to be mitigated away with exceptions, creating a vicious circle. That’s what happened with the Educative Reform and with the security conundrum in Michoacán, two obvious cases. Iguala has shown the unviability of the strategy.

The alternative would consist of constructing a system of modern government, one appropriate for the internal and external realities of today’s world. The core change would reside in a distinct vision, in which the objective is government functionality and not control and where political participation is a means and not an objective. The government would professionalize itself, providing the population with certainty. That is, it would entail the recognition that the current system of government is obsolete and requires a thorough transformation. Only then would it be possible to consider its viability and the success of the country in the long term.

*Political Order and Political Decay: From the Industrial Revolution to the Globalization of Democracy

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Luis Rubio

John Lennon once said about the early years of rock and roll, “Before Elvis there was nothing”. Iguala promises to be something much like this for President Peña’s government. What was, was; now the reality sets in. The question is whether this breaking point will lead to a rethinking of the long term strategy of the government or whether it will mark the moment in which it failed, as it happened to so many administrations in the past.

In Mexico’s context, killings like those of Ayotzinapa or Tlatlaya are not the exception or unpredictable. Everyone knows that these things happen and that they’ll continue to happen and that’s the problem: in a civilized country these things don’t happen. That they’re “natural” in Mexico is what distinguishes it and places the government up against a challenge that, to date, it had been indisposed to assume. The pretentiousness that the insecurity and violence would be solved by denying their existence or by making it certain that no information of violence is presented in the media ended up being futile and even counterproductive. Paradoxically, these events are going to be more high-cost for this government than for its predecessor because the latter had no compunctions about recognizing them, not to imply that its strategy was fruitful at all. There is a total absence of long-term strategy that takes into consideration the consolidation of an institutional environment (police, judicial, governments) in which those events do not happen or, if they were to, would be a true exception to the rule.

The unusually long honeymoon that the government had was due in good measure to its extraordinary success in advancing an extensive agenda of reforms that captured the attention of the country and the world. The government evidenced great capacity of political leadership and negotiation within the legislative context, achieving a break with decades of paralysis in matters of economic transcendence. In parallel fashion, it ventured a combat strategy against criminality solely differentiated from that of the previous administration in that it included a political component whose merits have not been exceptional, at least in the case of Michoacán. All in all, the legislative advance as well as a novel tactic in security matters granted the government nearly two years of sweeping and almost fully uncontested latitude.

No sooner had the legislative process concluded than the matter of governing commenced, and from thence it’s been an uphill climb. There’s not the least doubt that the government’s capacity of management and political operation is remarkable, and more so when compared with that of earlier administrations; however, situations such as Ayotzinapa and the failed negotiation with the IPN students evidence the absence of a political project that transcends the mere objective of calming the waters (which clearly has not been accomplished either). That is, there is unmistakable response capacity but no solution strategy for the problems paining the country; worse yet, it is obvious that within the government this is not considered necessary. In Iguala it was clear that the municipal president doubled as a hired gun for the drug mafias; for its part, the notion of negotiating (for example with teachers’ unions or with the Polytechnic students) is the equivalent of conceding the entirety of the demands ended up being counterproductive and otherwise costly. The country demands solutions, not just politics.

Is the federal government responsible for the mayor of Iguala’s second job? Definitely not, but the fact that the narcos are in control of vast regions of the country, impose their law, extort the population, pose a threat to the peace of the citizenry, assassinate at will and submit (or buy off) many state and municipal governments constitutes a challenge to the nation’s governability but, above all, to the idea that a “strong” government is sufficient for the country to progress and gain stability. It is evident that an institutionalized and competent government is required at all levels and not only one characterized by short term management capacity. The government’s opportunity lies in rethinking its project in that direction, but its reactions these days don’t suggest that this is being considered.

Before Iguala the government enjoyed enormous latitude for imposing its style and law. Now it will have to deal with the protests that will doubtlessly beleaguer it inside and outside of the country and, yet more important, with a reality ever subject to deteriorating in the economic as well as in the political. Above all, President Peña’s government has been characterized by a systematic attempt to adapt the reality to its predilections instead of dealing with the reality and trying to mold it little by little in order to reach the transformation it promised from the start. In the political arena it began from the assumption that the problem was one of the lack of efficacy in the way the governmental operated, an efficacy that now is inadequate or insufficient (and which, in any case, has not been achieved except in legislative matters); in the economic arena it ignored the crisis era that preceded the last two decades of macroeconomic stability and is running the risk of leading the country, once again, back to those ill-fated times.

In Iguala the complexity of the country as well as the risk of ignoring the problematic that lies at its core were brutally exhibited for all to see.  It is this, more than anything else, which Iguala changes, without doubt permanently: the before and the after.

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Luis Rubio

“No problem can be solved from the same consciousness that created it. We have to learn to see the world anew”. That’s how Einstein described the way that problems can be solved. A good lesson vis-à-vis the breakdown starting to be observed in the country today.

Problems are beginning to mount. Some months ago, acting on a multiplicity of fronts seemed to start bearing fruits for the government and some numbers, above all in matters of homicide, appeared to justify its optimism. However, in recent weeks it seems like Pandora’s Box has flown open, deranging the panorama in its entirety. Violence and criminality has earned, once again, a preeminent place in the public agenda and no corporation or entity has gotten off free.

The deterioration was foreseeable in states whose history and geographic location has condemned them to violence. Although horrific, the situation of Iguala is not new. But it is Querétaro that changes the panorama because this is a state that, at least in appearance, had achieved becoming a paragon of order and tranquility. The recent arrest of one of the most sought narcos is not newsworthy in itself: that he had been an active (even distinguished?) member of Queretana society suggests that the rottenness runs much deeper –there and throughout the country- than it seemed.

This leaves Mexicans at a crossroads and the government confronted with the need to revise its strategy. I have no doubt that the policies advanced from the time of its inauguration were conceived as solutions to the problems observed and to the manner in which these were defined. It is now clear that that way of acting is not working. As Einstein argued, it’s time to revise the focus, the whole vision. A vision towards the future is required, not a simple revamping.

Beyond the specific problems and circumstances, the country is up against an array of challenges that are much more extensive than concrete categories. If one wished to itemize these, we would have to include matters such as economic growth, corruption, transparency, democracy, federalism and the unabridged plethora of complexities that characterize the country. Each of these leitmotifs can break down into the parts that make them up or into concrete affairs as they arise. For example, when Michoacán erupted, the government sent in the police, the troops and a politician, each concentrated on attending to specific parts of the general problematic. Months later, it is not obvious that even the most immediate objective of pacifying the state has been achieved. Guerrero is not an isolated case: integral solutions are required.

The real question is whether it is possible to address the problems individually as if this concerned unconnected issues. My impression is that the true dilemma lies between constructing something new and attempting to fix the one already there. Of course, this not about mutually exclusive concepts, but they certainly entail very distinct visions of the present and the future.

A transforming vision would imply defining the construction of a modern nation and from there deducing the nature and characteristics of the institutions and policies that would constitute it. In the eighties Mexicans had something like this: the strategy of reform of that era might have been correct or erroneous, but the vision of a new country was thoroughly understood by the population. What’s relevant here is that no Mexican in that era doubted where the country was going: some might have coincided with the objective, other might not have, but no one was doubtful. That permitted observing the problems under the perspective of a process. Of course, that vision ended up being grander, much more ambitious, than what the system and the government were willing to consider as changes, but the example demonstrates the difference between trying to renovate a building on the verge of collapse and the construction of an entirely new one.

A limited vision for attacking and containing isolated problems can help solve specific problems but, like the village carnival game of pop-up heads that spring up and keep on springing up, there’s no way to bring them to an end or to sort all of them out. Additionally, individual solutions have the effect of producing perverse outcomes in subsequent situations that materialize: they encourage future conflict.

This is about two distinct visions: one of remedying problems, another of creating a new reality. Many of the concrete actions that the government could carry out could be similar in both cases, but the crucial difference would be the what for. In one case this would be about the means for transforming, in the other about instruments of controversy so that everything would go on the same. In the first case the proposal would be to construct a modern country, in the second to maintain the structures of the post revolutionary era, that of nearly one hundred years ago.

For example, in the case of the National Polytechnic Institute students, the question is whether to engage in a dialogue (and cede) to avoid a greater conflict or whether to engage in a dialogue to construct a novel political paradigm. The first leads to ever greater demands, the second brings the petitioners into the political process. All Mexicans fit into one vision, including the students and the unruly Teachers College students, in the other it’s about enemies that have to be annihilated.  In the economy, new protectionist measures are introduced in order to maintain the status quo or could be turned into conditions that create an environment where all, or the majority, of firms can get ahead. In a word, the intention is to construct the country of the future or avoid difficult decisions for the sake of preserving what already exists.

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Luis Rubio

The great challenge that authoritarian nations faced in the last several decades was to change the economic and political frame of reference in the world and to transform themselves to achieve the development or, at least, a substantive improvement in the quality of life of their citizens. The dilemma was how engage in liberalization without losing social and political cohesion, and how to maintain that cohesion under economic referents that demand innovation, private investment, systematic growths of productivity, and respect for the capacity of individuals. Very few countries have resolved this well.

Mikhail Gorbachov began by procuring the support of his population resorting to the mechanism that he denominated “glasnost”. His expectation was that public and private discussion (and catharsis) about the past would permit the structural transformation that the economy required to survive and prosper. The so-called “perestroika” consisted of the adoption of market mechanisms to substitute for central planning. In the end, the plan failed: liberalization was not orderly, multiple interests seized the existing assets and the Soviet Empire eventually collapsed.

Carlos Salinas tried the opposite path: economic liberalization to avoid political collapse. The proposal was less ambitious than that of Gorbachov, but his conception was equally intrepid. Economic transformation was sought as a means for resolving problems of growth and revenue but without threatening the political status quo. In contrast to Gorbachov, the PRI survived, but many of the instruments employed for the greatly longed-for transformation entailed the seeds of their own limitations. Privatizations were biased and did not lead, in the majority of cases, to competitive markets at the service of the consumer, and liberalization itself was limited to avoid affecting the interests of the system’s cronies. The poor performance of the economy over the last decades is not the product of chance: it responds to an inadequate plan for liberalization, skewed and unfinished.

China has opted for ignoring the dilemma and its government has devoted itself to organizing the opening, maintaining iron-fisted political control and nourishing its legitimacy with economic growth. The wager of its elite is on that due to its size and millenary culture distinct from the West, it will be able to maintain power in the long term. The literature in this respect is so diverse and contradictory in possible scenarios that only time will tell. But there’s no doubt about one thing: its circumstances are not repeatable in Western nations, thus only a handful of exceptional cases –North Korea, Vietnam, Cuba- have tried it. The coin is in the air.

Spain, Chile and Korea, each under its own circumstances, are nations that opted for breaking with the past and to facing the future. Instead of protecting interests here and there or pretending that what existed could support the transformation that its populations called for from their governors, they decided to change with foresightedness. Each of these countries confronted its own crisis, challenges and conditions but, in the end, the three moved forward. Even with all of their difficulties, none pretends that the past was better.

The present government returns to the old dilemma, but now its focus is equally contradictory. It intends, on the one hand, to correct the errors perceived in the functioning of the markets and, on the other, procures recentralizing the power. Instead of taking the leap ahead to the future by resolving the problems that the past attempt left in its wake, the project is to recreate the old system, although under new parameters. The contradiction is multiple and obvious: compete for investment in international markets but control the private sector at home; declare autonomous entities but attempt to employ them as control instruments; open formerly protected sectors but safeguard the great hunting preserves for prevailing interests. In a word: be modern on the outside but continue being parochial on the inside.

That didn’t work the last time and it will not work now. The country is inserted into the global market but the entirety of the nation has not made the world market its own because innumerable mechanisms persist that impede the markets from functioning, all of which translates into a dual economy that yields dramatically distinct productivities. Some of the obstacles were the product of specific decisions (e.g., the privatizations), but the majority  have to do with the unwillingness of allowing the markets to function, which now adds up to the stubbornness of recreating the old-style presidency. What the country requires is a strong government that preserves security and peace, constructs an effective Rule of Law and makes possible, by means of these instruments, the general functioning of the country. Halfway measures won’t be successful now, the same as they weren’t before here or in other countries. The future must be assumed or Mexico will remain behind.

The question is how and where Mexico will end up. Borrowing from Tolstoy his famous axiom that all happy families resemble each other and every unhappy family is unhappy in its own way, the choice lies in confronting the future to construct a modern nation and undertake the costs and requirements of being part of the world’s big leagues (the happy family) or continue to look for excuses for maintaining (and renovating) the old centralized system that thwarts the growth of the economy, the prosperity of the population and the development of the citizenry.

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Luis Rubio

Thomas Piketty’s book, Capital, has caused a sensation for the simple reason that it touches on a worrisome theme: inequality. His central argument is that capital grows much more rapidly than the product of work, that is: money reproduces itself with celerity and those who have it multiply it without cease. What Piketty does not distinguish between is the creation of capital and its accumulation. Therein lies the key lesson for us.

In conceptual terms, Piketty’s argument is impeccable because it depicts how, throughout history, money tends to reproduce itself. His analysis encompasses such a long period, three hundred years, that it allows for differentiation between exceptions and long-term trends. However, his argument refers to, at its core, the independently wealthy: persons who inherit capital accumulated by others and who are rich by virtue of inheritance and not by work.

At the heart of the debate that has triggered the publication of this book lies a crucial question: whether capital -past accumulation of savings- gets to devour the future of whether the future is created afresh by each generation. This argument is a struggle between those who think riches are created from riches, and those who think riches are created from rags. Are big profits best viewed as a generous return on capital, in the way that worries Piketty? Or as coming from innovation that ultimately benefits us all? Piketty does not make this distinction and focuses, setting out from the principle that the rich are all the product of inheritance, the reason why he proposes a tax to attenuate the resulting inequality. How one understands and defines these matters and –above all inheritance or creation- determines whether a corrective action is necessary.

For Piketty, “The return on capital often inextricably combines elements of true entrepreneurial labour, pure luck and outright theft”. At a conference he affirmed that Liliane Bettencourt, who “never worked a day in her life”, saw her fortune grow as fast as that of Bill Gates.

It is on this point that Deidre McCloskey, economic historian and the author of three volumes on the origin of wealth in the Western world, furnishes an invaluable perspective. For McCloskey the great rise in income in Europe in the last centuries originated not so much from savings than from the legitimacy –the word she employs (and the title of one of her books) is “dignity”- of the bourgeoisie: to the extent that the bourgeoisie (today’s entrepreneurs) and their function acquired public recognition, the values of capitalist accumulation and innovation began to proliferate. Her central argument is that the creation of wealth is the product of innovation and that the latter depends on the predominant values in a society that favors and rewards innovators.

Applied to our era, what McCloskey says is that innovators such as Steve Jobs and Bill Gates did not make their fortunes thanks to the investment of capital or to the compound interest that produces its accumulation but to their intellectual property. That is, they invented something new that hadn’t existed before. In this sense, McCloskey represents an alternative vision to that of Piketty. What’s interesting is that, in reality, they are not saying very distinct things: the contrast lies in that Piketty is absolutely dogmatic with respect to wealth (it’s all the same, it’s all bad), while McCloskey categorically differentiates between what is the product of innovation and what is the result of inheritance. For her the distinction between inherited money and created money is obvious.

For McCloskey entrepreneurial creation of wealth is the only thing that is relevant and comprises what she considers the core challenge of governments that propose driving the development of their countries. Although she recognizes that inherited fortunes and created fortunes, the product of innovation, always coexist, her historic observation is that what increases general wealth in a society are not taxes and the redistributive labor of the government but the context within which entrepreneurs act.

An environment that legitimatizes the creation of wealth and “dignifies” the work of entrepreneurs tends to lay the foundations of a platform on which a society can prosper. Contrariwise, the absence of social recognition of entrepreneurial activity brings about little innovation, thus a paucity of economic growth.

Applying these contrasting arguments to Mexico, we find two illustrative circumstances: on the one hand, examples abound of accumulated wealth, a condition that has led many to justify Piketty’s prescription for taxing capital. The other circumstance, much more transcendent, is that not only does the sociopolitical environment not legitimatize wealth but it penalizes it. In some fashion, both circumstances feed back upon each another, creating inequality as well as sparse economic growth.

For Piketty the solution would be obvious: tax the capital and redistribute it in the form of public expenditure. McCloskey affirms the contrary: imposing taxes on a potential Steve Jobs or Bill Gates would do nothing other than impede the constitution of successful enterprises like Apple and Microsoft. Consequently, for her it is preferable to let the heirs who don’t work continue accumulating than to block new wealth from being created.

The question for us is how to create a propitious environment for the creation of wealth that is the product of innovation. Clearly, that has not been the tenor of the historical strategy of development in Mexico and from that arises, from my perspective, a good part of the lags that characterize the country. Perhaps much innovation and great leadership are also compulsory.

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FORBES – September 2014

Luis Rubio

Who will win the mid-term elections of 2015? Will the PRI hold an absolute majority that could bring about a return to the old political system? It’s impossible to predict the result, but it certainly is possible to speculate about the elements that could produce diverse scenarios.

The dynamic of the mid-term elections has followed a changing logic. For Salinas, the 1991 election was a radical success: what he hadn’t achieved in 1988 election was obtained in the midterms. Salinas’ victory was a sweeping one because his party came in first in the 300 majority districts, as in the old times. The analysts’ reading at the time was that the result constituted an approval of the president’s leadership. This was considered the norm when Zedillo’s intermediate election, in 1997, led to the PRI’s losing the majority for the first time in history: the crisis of 95 had undermined the president. It appeared to be an immutable rule.

The situation changed during the PANist governments:  Fox as well as Calderón lost the intermediate election but it is not evident that it was for same reason. In the former logic, the PAN defeat in 2003 and 2009 would reflect disenchantment with those governments. However, from the defeat of the PRI in 2000 an important change materialized -the weakening of the presidency and the concomitant strengthening of the state governors- introducing another element into the electoral dynamic. From 2000 great budgetary transfers came into play and the state governors appropriated extensive autonomy and capacity of political and electoral manipulation. President Peña was perhaps the most successful of the State governors of that era.

In contrast with the prior PRIist era, budgets began to be negotiated in Congress and that conferred enormous incentive on governors to construct grand and robust Congressional delegations that would guarantee benefits to their states; thus they became electoral activists and had the money to be successful. That has changed again.

President Peña has recentralized the power and reinforced the presidential institution, practically eliminating the budgetary function of Congress. Consequently, the governors have lost relative power and discretionary budgets, diminishing their capacity and incentive for acting on their own. Within this context, will the recent logic continue to function? Will Mexico return to the PRI era? A novel dynamic?

There is no doubt that, with the return of presidential centralism, the electoral dynamic will respond to a greater extent to the perception of the President’s leadership and, above all, to his economic performance. That would suggest that the dynamic of the intermediate election would return to that of PRIist times. That is, 2015 will be a referendum of President Peña, where economic performance will become key.

But there is another factor that is imperative to incorporate into the analysis: the maturation of the society. The first presidential election in which there was professionally managed public polling was that of Zedillo in 1994. In his election as well as in that of Fox, a peculiar phenomenon transpired: while the winner obtained a certain percentage of the vote, in successive surveys –after six months or more- a much larger number of persons affirmed having voted for the winning candidate. The interpretation that the pollsters supplied for that phenomenon was that it represented a politically immature society and that implied that people tended to associate themselves with the winner: i.e., the weight of presidentialism. That phenomenon has virtually disappeared with new generations: Calderon’s as well as Peña’s popularity has “stubbornly” lingered very close to the number they obtained in the election itself. Concerning the question of whom to vote for, the discrepancy between the real vote and what people say is trifling: that is, the society has matured.

Another relevant ingredient is the situation of the opposition parties.  The PAN as well as the PRD are undergoing intense internal divisions. To that is added the fact that both parties participated in the Pact for Mexico, which means that, if things turn out well, the PRI will benefit; if they turn out poorly, all three lose. Unless a disastrous situation ensues in the upcoming months, that would perhaps not impact the 2015 result, but could impact the next presidential race. In addition, and very important, many electoral contests will presumably revolve around local candidates and not national parties.

Of course, there’s no way to predict what will happen next year, but it’s not impossible for the two key factors to be the following: that each district’s candidates (that is, a more local and less national dynamic), and the economic situation, particularly the perception and expectations about how things are going, end up deciding the outcome. If the current economic situation continues, the PRI will have much less to offer in spite of the President’s recent political successes.

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Luis Rubio

The world appears to be going into convulsions with decapitations of journalists, civil wars, the overtaking of sovereign territories and referenda that could alter long-standing national realities. The geopolitical changes in Crimea and Ukraine, the territorial reconfiguration that the ISIS is currently generating in Syria and Iraq (countries already immerse in bloody civil wars not very distinct, in concept, from those of Sudan and Libya), have modified the international panorama. Venezuela threatens another convulsion, now that accounts that are the product of years of atrocious economic management have finally come knocking at the door. Catalonia and, recently, Scotland, vote on whether to remain in their respective countries or go off on their own. The U.S. government, the heart of the international system over the last decades, has lost direction, is clearly devoid of a strategy or the apparent capacity to comprehend the nature of the phenomena confronting the world. Conflicts are proliferating wherever one turns and, however, the financial markets seem impassive.

The normality that characterizes the financial markets is intriguing. While the great statesmen of our era evince enormous concern and issue alerts on the risks that the planet faces in view of the collapse of the old political arrangements (derived from the 1648 Peace of Westphalia), which recognized national borders and the right to the self-determination of nations, the financial markets have displayed nearly irrepressible surges in recent months. The specialized media affirms that the markets have achieved such maturity that they can ignore these events. That is, what happens in the world will not affect the viability of enterprises or the capacity of countries to comply with their payment schedules. Is there any sense in this explanation?

At a conference in which I participated recently, the present moment was discussed in terms of its economic as well as its political dimension. A highly recognized British economist offered an interesting explanation for the economic situation: first, the Chinese continue to put half of their GDP into savings, a factor that was irrelevant when China’s economy represented 1% of that of the world, but that entails severe recessive consequences now that it is equivalent to 12% of the world’s GDP. The economist’s specific asseveration was that “you can save an infinite amount but you cannot borrow an infinite amount”. Second, the U.S. economy has brought down its deficit and adjusted rapidly, “maybe too rapidly”, creating a new geopolitical situation: the collapse of its spending on defense has resolved its fiscal deficit, but has given cause for the movements of Putin. Third, after years of waiting, the information economy has begun to yield spectacular growth rates in productivity, providing hitherto unsuspected sources of economic growth: “It is no longer only computers helping in offices, but new sources of investment, ideas and developments”.

An old statesman proposed that the world faces a challenge similar to the one at the beginning of the XIX century which requires, in the best Kissingeresque style, a new international arrangement. The old schemes no longer work, the notion of a “new international order”, spoken of at the end of the Cold War has passed to a better life and the huge disorder that exists in the world threatens to collapse all semblance of stability. At the end of his address, he supplied his reading on what is happening in the financial markets: these are turning a blind eye to political events not because the latter are irrelevant but because the financial analysts don’t know how to price that risk. In consequence, “they overreact because they fear the unknown”. That is, there’s nothing that would not be affected if things take a turn for the worse.

The stability of the financial markets is a matter of primary importance for Mexico on two planes: first because every abrupt movement is susceptible to raising the cost of the Mexican debt and could affect exchange stability, increasing our costs and diminishing capital available for investment. Second because the country entertains grandiose plans that require financing, above all in the energy, which could be placed on hold if the financial markets enter a stage of turbulence. That is, what transpires in those markets affects Mexico directly and inexorably.

The question is whether there is something that we could do to mitigate the risk of this occurring. There are two evident things that Mexico could and should do to lower the inherent risk of what is taking place in the world, and neither of these is unknown or exceptional: the first would be consolidate the fiscal accounts, lower the governmental deficit to virtually zero and improve conditions for the rise of productivity and to attract foreign investment in massive form. The former goes against what the government is doing, while the latter leaves much to be desired, even with the reforms in energy and telecommunications: there’s a serious deficit in institutional matters, property rights and the Rule of Law that transcend these reforms.

On the other hand, nothing would be lost by procuring the growth of domestic private investment, which would require gaining the trust of the private sector and, in general, that of the population. No novelty there, but something indeed novel at the present time.

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Luis Rubio

Mexico’s political and cultural tradition tends to hold in contempt one of the pillars of Western development. Property, that anchor of development first addressed, in philosophical terms, by John Locke, is much more transcendental than what we usually recognize. Certainty regarding the property that a person possesses determines his or her willingness to save and invest, on which depends, in the last analysis, the rate of growth of the economy as well as of incomes: that is, property comprises an essential element of the human condition.

Two anecdotes assimilated over the years have compelled me to reflect upon this a great deal. The first of these is somewhat pedestrian but highly revelatory: a businessman was tired of the repairs that he frequently had to make on his business’s two delivery vans, which included new tires every so often, brakes, bumps and the rest. Desperate about the rising costs, he decided to change his way of relating to his delivery personnel. The entrepreneur repaired the vans, leaving them impeccable, changing motors, tires and everything relevant. He sold them to his delivery persons and negotiated a service contract with them by means of which the new couriers committed to delivering his products on a timely basis and under the conditions required. The corollary to this story is that the vans, now under the care of their new owners, no longer required frequent servicing and the former employees became entrepreneurs themselves, now couriers of products for various companies. As the saying goes, the eye of the master fattens the horse.

Once theirs, the vans stopped being another’s problem and became an opportunity for the new entrepreneurs. That’s the magic of property. It’s also the reason that houses inhabited by their owners are likely to be in much better condition than rented ones or because the automobile owner washes and takes care of the car, while it would not occur to anyone take a rented vehicle to a carwash. This principle, evident at the individual level, is equally valid for the most ambitious projects. It’s also the factor that might eventually be decisive in the success or failure of the energy reform, at least in its direct investment facet, in contrast to contracts or associations with Pemex. If we really want investors disposed to risking billions of dollars, we will require a property regime that doesn’t admit the least doubt.

The other anecdote is found at the conclusion of an article by Hernando de Soto, the Peruvian economist-philosopher, which he wrote in the nineties: “When I was growing up in Peru, I was told that the farms I visited were owned by farming communities and not the individual farmers. Yet as I walked from field to field, a different dog would bark. The dogs were ignorant of the prevailing law: all they know was which land their master controlled. In the next 150 years those nations whose laws recognize what the dogs already know will be ones who enjoy the benefits of a modern market economy”. With the constitutional changes that took place in the nineties part of what de Soto says was solved, but they did not attack the heart of the problem, which transcends common lands (the ejido) and rural property in general.

The contradiction prevailing in our culture and legal framework is much more profound than it seems. In contrast to rural property, urban property has never laid claim to being communal. However, the legal protections that exist for that property are not much more solid. In Mexico it is much easier to have property expropriated than in other latitudes, conflicts occur frequently regarding who is the proprietor of what, and there is a cultural element that tends to disparage existing property. That is, there is no popular or political recognition of the transcendence (and cost) that those misgivings entail: insofar as there is no assuredness, what happened with the vans comes into play: no one commits because everyone knows that, sooner or later, there can be a de jure or de facto expropriation. The problem proliferates with the phenomenon of extortion and abduction that, in a “technical sense” is no more that crime against the property and security of persons and their belongings.

Of course, property rights are not a panacea and, in a society with such great differences of poverty and wealth, it is explainable that many think that one thing accounts for the other: that if there weren’t property and its concentration, there wouldn’t be poverty. The paradox is that those who suffer most from weak property rights are precisely those who are most in need of them. The informal economy illustrates this better than anything else: it can be a prosperous business and one with growth potential (food-stand franchises come to mind), but that necessitates credit and that’s impossible to obtain as long as the property of the business is not recognized. In reality, informality is evidence of the problem: poor protection of property rights makes it easy to move into informality because it’s the same thing, because there’s nothing to lose.

As Richard Stroup writes: “Very simply, property rights hold people responsible. When people treat property negligently or carelessly, its value decreases. When they treat it with care, its value increases”. Nothing the new van owners don’t now know: all those who acquire property suddenly recognize its transcendence. Mexico needs to generalize that opportunity.

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@lrubiof