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.

www.cidac.org

@lrubiof

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.

www.cidac.org

@lrubiof

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.

www.cidac.org

@lrubiof

Luis Rubio

Which comes first, the person or the structure, the leader or the institution? The dilemma is debated in academic ambits and is not distinct from the old riddle of the chicken and the egg. There are times in which a specific individual can make an enormous difference, others in which the circumstances make it practically impossible for this to occur.

At the beginning of the millennium, a singular circumstance arose in Mexico that made possible –perhaps necessary- the emergence of a leader capable of transforming the political structure of the country. Fox held in his hands the opportunity to modify the political regime, construct a new institutional framework and transform Mexican society once and for all. Unfortunately Fox was not a person capable of comprehending the opportunity nor did he have the prowess to assemble a team inclined to seize it. In the end, the opportunity faded into a sea of superficiality and frivolities.

When the political transition arrived in 2000, Mexico had already been engaged for decades in deep and wide-ranging discussion as well as in a great diversity of action proposals ranging from those that argued for submitting the old regime to a judicial process through the establishment of “truth commissions” to those that held out for a great national pact. The point is that there was no lack of ideas at that moment.

In contrast with that time, the end of the Cold War was not anticipated by practically anyone. After decades of tension and fear in the face of a possible nuclear exchange, what impacted at the conclusion of the Cold War was the smoothness and crispness with which it ended. For those of us who lived through the anguish represented by the 1962 Cuba missile crisis, the Cold War seems to be, in retrospect, no more than a mere fleeting accident.

The appearance of the excellent book The Triumph of Improvisation* about that moment in history makes it understood that the success of the end of the Cold War did not lie in its having been a “mere fleeting accident”, which clearly it was not, but that it resided in the extraordinary skill of a clutch of leaders with the capacity to respond when faced with surprising, exceptional circumstances. While in retrospect it might appear evident that there were insurmountable structural problems in the Soviet Union, no one foresaw its sudden collapse.

The circumstances created a moment that figures such as Gorbachev, Shevardnadze, Reagan, Bush, Kohl, Thatcher, Baker and Shultz knew how to turn into an opportunity. Above all, they possessed the capacity of acting deliberately without a preconceived “master” plan but with extraordinary strategic clarity. Perhaps most remarkable about the plot that James Graham Wilson, the author of the book, relates is the skill with which these personages understood the circumstances, constructed alliances and created a climate of trust that, with firmness and determination, guided to fruition a process that could have been chaotic and uncertain. It was an extraordinary exercise of leadership. From it there arose not only a climate of peace, but also massive reductions in the U.S. nuclear arsenal as well as in that of the ex-USSR, to the benefit of all mankind.

In contrast with the moment that Fox was fated to live through, one not created by him, today a circumstance has arisen that no one had anticipated and that, in fact, was created by the extraordinary capacity to run a political operation that the current government has deployed. For two decades the conviction existed in countless political, media, and academic instances that the country would only have a future by carrying out a set of fundamental structural reforms. Those reforms have now come into being thanks to the political strategy that President Peña-Nieto orchestrated.

As we surely will soon see, the reforms are necessary, but they are not all that‘s necessary to get the country moving. In order for the reforms to exert an effect, it will be indispensable, before anything else, to implement them. This is easy to say but their implementation will require an infinitely superior dedication and complexity than that involved in the legislative process. Now come two stages or, in reality, two crucial processes, that will command the entire capacity at the government’s disposal.

On the one hand, while sparks flew many times during the legislative negotiation, implementation will whip up flames. Many have underestimated the complexity of transforming entities that have historically devoted themselves to plunder, such as Pemex and the CFE, but that’s what will have to happen if the potential benefits inherent in the new legislation are to be achieved. Neither of these entities was constructed to serve the consumer, compete, render accounts, produce profits or comply with the law. Their business function (exploiting subsoil resources and generating electricity, respectively) was nearly incidental. Viewed in retrospect, their true function was that of generating wealth for members of the revolutionary family (and allies), and a source of monies for politicians and the government. For the reform to work, those vectors will have to be reversed: the new law comprises the context but the reality depends on what is done in these entities and that will necessitate a titanic political opus.

On the other hand, a reform does not occur in a vacuum. To be successful, the reforms would require the support and trust of the population and that is a task for leadership. To date, the president has disparaged the immense capital that a population that has confidence in its government can embody, and has done nothing to cultivate it. Today’s set of circumstances presses for that leadership and has created the opportunity for it to prosper. Will this be a replay of 2000 or something different?

*James Graham Wilson: The Triumph of Improvisation: Gorbachev’s Adaptability, Reagan’s Engagement, and the End of the Cold War, Cornell.

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@lrubiof

Luis Rubio

To steal the Hesperides’s golden apples, Hercules proposed to Atlas, the Titan holding up the heavens, that he would take up the heavy burden if Atlas obtained the apples protected by a monster with many heads. When Atlas returned, Hercules had to trick him in order for him to be relieved as Titan. Might this be a useful analogy for what follows after the reforms?

The project that animated the strategy of President Peña derived from the supposition that the country had become stuck due to the absence of reforms. In this, the President was not breaking any canon: despite the differences among parties, in recent decades a virtual consensus had taken shape with respect to the need for reforms. The presumption was that the country was not working because it had fallen behind and that certain reforms were urgently required to emerge from the hole.

That, nearly mechanical, connection between reforms and growth enjoyed wide acceptance in the academic and political world. In fact, the promoter for the idea of a pact was the PRD, a party with perhaps greater vision of State than of political pragmatism, because it recognized that only by sharing the costs could a reform agenda be advanced. For the PRD that was one way of breaking through the isolation in which a decade of populism and rejection of any institutional behavior had left it. The sum of the willingness of the PAN and the PRD to share the political costs and the enormous capacity of political operation of President Peña made possible the arrival at the doorway where we are today. Undoubtedly an unprecedented feat.

Now that the legislative process has culminated in the matter of reforms we will be able to see whether the approval of this ambitious package translates into economic growth. In contrast with the conciliatory and optimistic tone with which the Pact for Mexico began in December 2012, today opinions of both politicians and leading commentators are starkly contrasting. Today’s reading fluctuates between recognition of the President’s skill and rejection of the “sale” of the country and its resources as alleged by the most contumacious critics.

The most reasoned analyses and evaluations have focused less on the fact of the reforms and the (pre-electoral, 2015) rhetoric that accompany them than on the reforms themselves. Some applaud their potential for attracting investment, developing the natural resources possessed by the country and solving (almost) ancestral wrongs, such as the educative logjam. Others rather focus on the details and see potential obstacles along the way, incentives at cross-purposes and numerous sources of uncertainty, above all those emanating from the dozens of transitory articles that took shape in the new laws. The latter is not coincidental, because by means of those articles there was the intention to “correct” what was ammended in the Constitution or to protect special interests. Time will tell whether the problems are solved or whether they give rise to stumbling blocks.

The most notable of the reactions is that manifested by the government itself. Above all, there is the legitimate satisfaction of having achieved a historic landmark. Some of the approved reforms changed the vectors of the country’s development in such a way that only a few months ago appeared inconceivable. The general tone emerging from the government reflects the expectation that, from now on, the economy will improve and, with it, the President’s popularity indexes and the PRI’s electoral possibilities.

These upcoming months will be indicative of the degree to which the reforms effectively respond to obstacles to development. A first reaction will be observed in the way that the telecommunications market adjusts and whether, in effect, the law (and the regulatory entity) furnishes effective mechanisms for a transition toward a competitive market, something that, as made clear by several of the main actors in the industry, does not seem evident. The same will be visible in the manner in which the potential investors in the energy industry act. There’s nothing like the concrete reality and its immediate actors to measure the success of the reforms package, at least in the initial stage.

Much more complex is the reaction of the population in general. It is possible that the abysmally low approval and popularity indexes of the President reflect the time-honored skepticism of the Mexican in the face of great proposals of change:  ‘I’ll believe it when I see it’. If this is so, as soon as things improve, the indexes will revert themselves. But it’s also possible that the hypothesis of the reforms-growth tie-in may be erroneous.

Of course, there’s no doubt that a better economic performance would solve many problems, broaden job opportunities and improve living standards. However, it’s not obvious that these reforms solve basic structural problems. The people long time ago adjusted to the pathetic economic performance through the informal economy which is, at the end of the day, a form of survival in a hostile environment.  A general improvement of the economy would aid in but would not resolve the causes of informality.

Then there’s that hostile environment: the population suffers from multiple sources of disorder that the reforms not only do not attend to but do not even recognize as relevant. Therein lie the lack of opportunities, undue influence, corruption, extortion, insecurity, and the disdain in which the bureaucracy holds the citizen. In a word, the great disorder in which the population lives. Even if the economy grows, as long as the sources of disorder remain unsolved, the government will go on as Hercules attempting to hoodwink Atlas so that someone else would saddle himself with its problems.

www.cidac.org

@lrubiof

Luis Rubio

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

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

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

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

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

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

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

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

www.cidac.org

@lrubiof

FORBES – August 21, 2014

Today Mexicans no longer speak of the “unwritten rules” but these remain as valid as ever. The rules are not written because they refer to the preferences of the individual occupying the presidency. It’s his word that counts and, for obvious reasons, cannot be codified in the law or, when that happens, can be changed at will. From the perspective of the president, the short-term benefit to managing according to unwritten rules is obvious: creates loyalty, can reward and punish and, above all, gives vast powers to advance projects of his choice. The social benefit is also great because, as the ease with which the constitutional reforms were carried out in 2013 illustrated, the country can change quickly. The problem is that there is another side of that coin.

In the twentieth century the issue of power was resolved through the imposition of two rules that were “unwritten” but evident: on the one hand, the president is everyone’s undisputed and indisputable lord and master; on the other hand, it is valid to compete for succession as long as the first rule is not violated. It was a simple and effective mechanism that, however, did not emerge out of the blue. Its success was the product of the establishment of the rule and the capacity to make it stick. The latter was not automatic: it was only accomplished when Cárdenas exiled Plutarco Elías-Calles and submitted General Cedillo. Once the capacity to exact compliance with the rules was demonstrated, the system went into effect and functioned until the PRI ceased being representative of the Mexican society and the unrepresented began to dispute the system’s legitimacy.

The “unwritten” rules of Mexican political life were strict. The PRIist political system of the XX Century operated under the principle of having implicit rules and, more importantly, that the whole legal scaffolding of the country –from the  Constitution to the latest regulatory law– was no more than a mere formality that could be violated at will. Evidently, it is impossible to construct and strengthen the legitimacy of a system, including the acceptance of the rules of succession, when the institutional foundation of a political system is sustained on no more than unwritten rules and a legal system that is a mere formality for the actors involved. This problem is aggravated within the context of the expectations that reforms generate, such as that of energy, that require, to be successful, a legal structure that is reliable for potential investors. It will be difficult for a de facto political system sustained on unwritten rules to comply with this requirement.

The worst harm that the country endured as a consequence of the era of unwritten rules is that no one can believe in written rules at present. Instead of seeing a law as a norm that is obligatory in character, the Mexican sees it as a guide, that is, when it is not an aspiration. No one feels obliged to comply with the law, chiefly when he observes that many others do not do so and that, in the worst of circumstances, application of the law can always be “negotiated”, an absolute contradiction to the existence of the rule of law.

Unwritten rules permitted supporting the concentration of power and served as a means of control and discipline for the population as well as for the politicians. Given their “unwritten” nature, the rules were ultimately unknown to the majority of the country’s inhabitants. The citizens, but especially the politicians, had to infer them. Like every normative system, that of the unwritten rules had its limitations.  A system of that nature works as long as the rules are not abused (that is to say, that they do not change frequently and capriciously) and when they achieve consistent and satisfactory results for the population in general.

The crucial theme is that the Mexican has never lived under a scheme of known and predictable rules that include legal recourse to protect the citizen; that is, rights and obligations, both part of an integral concept of the government-citizen relationship.  Explaining why that was is relatively easy. What is complex is imagining ways in which to break the vicious cycle that the political system of yesteryear has left to Mexicans today. That is particularly important in the light of the inherent contradiction regarding the letter of the law and its application, above all because the PRIist narrative continues to comprise a central component of the ideological perspective shared by a great part of the population.

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@lrubiof

Luis Rubio

It’s no news to anyone that the minimum wage (MW) is extremely low. Those who champion an increase decreed by the authority follow a logic that seems impeccable: there’s a wage hike, people consume more, which causes a growth in production that in turn translates into a greater demand for jobs.  That is, a virtuous circle.

The idea is attractive because it allows us to imagine the solution to, in the flourish of a signature, a substantial number of ills. Nearly all of the proposals for raising the minimum wage suggest a relatively modest increase. I ask myself: Why not think big and raise the present 67-peso daily wage to 250? Or, now that we’re on this topic, Why not to raise it to $1000? Were it so easy to solve the problems of the economy this would have been done a long time ago (in fact, some in the 70’s tried and produced nearly catastrophic results).

Let’s start with the numbers: 52 million persons make up the economically active population (EAP).  Of these, 12.5% (6.6 million) receive a minimum wage. A total of 23.2% (11.9 million) receive between 1 and 2 MW. That means that 35.6% of the EAP (18.5 million) receive at most 2 MW (The National Occupation and Employment Survey, ENOE). For its part, the daily average wage of those registered at the Mexican Institute of Social Security (IMSS) is: $282.60 pesos. That implies a salary of $8,478 pesos a month, or four times the minimum wage.

In the primary sector, 26% receive a MW, while only 8% of those working in the industrial sector are found in this condition and 12% in services. In total, 25% of primary-sector employees receive between 1 and 2 MW, 24% in the secondary sector and 24% in the tertiary sector. In the government 13% receive a maximum of two MW. The most important number, because it reflects the basic problem, is that of the relative concentration of employees who earn minimum wages: in micro businesses, 51% earn less than two MW. Given that micro or small businesses represent 66% of all persons employed in the manufacturing sector, it is clear that the salary reflects the productivity of the business. As demonstrated by the study of McKinsey*, Mexico’s problem is one of productivity and the low wages are nothing other than a mere symptom of this.

Low productivity lies at the heart of the economic problem, much of this concentrated –and perpetuated- in the informal economy. The Mexican economy has been divided into two large groups: one that contributes in accelerated fashion to the creation of wealth, is integrally connected to the global economy, pays high salaries and contributes a 6.5% growth of productivity annually; and the other made up of businesses typically small in size that pays low wages, compete precariously with imports and that barely survive, supplying a negative productivity of 5.8%.

The numbers tells us two things: first, persons who earn less than 2 MW are overwhelmingly concentrated in small and medium businesses; and second, productivity tends to be much less (on occasion negative) in small businesses. Expressed in other terms, the intention of those advocating that an increase be decreed by the government is for the main employers of the country –small and micro businesses, that is, those with the least capacity for confronting an increase in their costs -to raise wages.

In order to survive with paying higher wages, those businesses would have to raise the prices of their goods and services, which would reduce their sales, which then would lead to dismissals.  The only way to avoid falling into this vicious circle would be to raise productivity which is, in the final analysis, the cause of problem. Increasing the MW without resolving the causes of the low productivity displayed by the economy would thus lead to higher levels of unemployment, thus curtailing its supposed benefits.

The latter does not deny that wages may be very low. In the last decades many absurdities have been established with regard to MW: these range from converting the MW into an anchor against inflation (the Pact of the eighties) to utilizing them as an index for all sorts of fines, penalties, and the like. It is clear that what is required is to free the MW from this dead-weight and to subject them to a market mechanism that makes it possible to arrive at what economists denominate the “optimal” price.  What would be a disaster is to raise them through by decree with political criteria. Wages, like all prices, ought to be set by supply and demand, a mechanism that would possess the virtue of compensating more and better those with higher education, thus providing an additional incentive to dealing with the problem of education –crucial in the information economy- and its unions.

Pretending that an increase in salaries would solve the problem of the Mexican economy brings to mind the tale of the carbine of Ambrosio, a XIX Century highwayman from Seville whose ill-equipped carbine rifle had no gunpowder. However, in contrast with that legend, decreeing a wage increase indeed entertains momentous consequences, bringing about the previously mentioned perverse cycle of unemployment (and, potentially, inflation).

In the long term, salaries will rise as productivity grows and today this is impeded by red tape, bureaucracy, privileges, regulations, and political interests. The correct response to the challenge of productivity is to create conditions for the proliferation of new enterprises and entrepreneurs, all these within the world of a simplified formality. Worldwide, what produce the growth of productivity are small businesses that grow fast. The discussion on the MW brings home how far we are from coming to grips with the real problems of the country’s development.

*http://www.mckinsey.com/insights/americas/a_tale_of_two_mexicos.

www.cidac.org

@lrubiof

INFOLATAM – Luis Rubio

With the formal announcement of the energy reform, President Enrique Peña-Nieto concluded the first step of his project of government. The series of reforms that were carried out, each with its characteristics and some more transcendent than others, creates a legal platform that is radically distinct from that which existed prior to Peña-Nieto’s initiating his mandate. Perhaps the label that some of his critics on the Left have imposed on him is not exaggerated: that he has overturned the essence of the Constitution of 1917.

Correct or not, this reading has merit at least in that two of the reforms constitute fundamental modifications to the previously existing legal framework and, in the case of the energy reform, the latter entails the end of the most revered sacred cow of the old system: the oil monopoly in the hands of the State.

The first stage over, it’s worthwhile to reflect on the what, the whys and the how of the reforms, to evaluate the transformer potential not of the laws but of what really is of import: the reality. In the last analysis, Mexico has laws and regulations for everything but very few of these apply in the reality. The fact of the law being modified does not imply that daily life, the business practices or the political rules of the game have changed.

First the why. The notion that, in order to achieve high growth rates again, the economy should be reformed, has enjoyed wide acceptance for at least twenty years. Although during that period there was less agreement on the content that those reforms should have than the political and academic rhetoric would suggest, there has been vast consensus on the need for reform. In fact, that consensus was so far-ranging that the vehicle employed to advance the reforms, the so-called Pact for Mexico, was the initiative of the PRD.

Some time before becoming the formally anointed candidate, Enrique Peña-Nieto had made clear his conviction of the need to undertake reforms. Nearly two years after the beginning of his presidential period, I have no doubt about his political conviction regarding the importance of reform, but the same conviction and clarity is less clear to me with respect to the implications of the reforms: about the changes and costs that these entail and that, were they to be fully implemented, they would imply extensive affectation of interests at high places, many of these an integral component of the traditional PRI coalition.

The first stage of the reforms, the constitutional plane, advanced without great dispute. The main parties participated in the majority, in others only two parties, but none of the reforms was a reason for major political confrontation among the political parties. The PRD objected to constitutional reform in energy matters but, judging by the lack of mobilization in the streets, this was possibly a form of avoiding an internal breakup more than a protest sustained on fundamental principles. The sole constitutional reform that was, and continues to be, conflictive was the educative one, in which the Coordinator of the Mexican Teachers Union (CNTE), a dissident caucus, continues to mobilize against it. Meaningful for those attempting to foresee possible future scenarios, the government has done even the unimaginable to neutralize that reform to not stir up greater conflict.

Disputes flourished, as was to be expected, as soon as the abstract, even ethereal process, typical of constitutional language, had been gotten through, to the regulatory laws. There the directly affected interests, those who expect to be benefited and those who intend to scale back the essence of the reforms, participated with singular intensity. In the telecommunications law competition could be observed between the factotums of the sector –Telmex and Televisa- and the way politicians formed alliances for or against these enterprises. In the case of the energy reform there were many relevant vignettes, but two are especially revelatory: on the one hand, the PEMEX union made its weight felt at the end of the process, above all in matters of perquisites and pensions. On the other hand, the PRD, which did not participate in the constitutional reform, concentrated on reverting everything possible of that in the regulatory law. It’s not that its impetus lacked support or sympathizers in the government or in the PRI, but the regulatory law is infinitely less ambitious and attractive for potential foreign investors than what the constitutional reform would appear to promise.

At the end of the day, PEMEX will continue to be the factotum of the oil industry and, with the exception of areas in which the entity does not possess the capacity, experience or technology, it is to be expected that the greater part of the private investment that materializes will be in the form of contracts with the former oil monopoly. I have not the least doubt that, at least in the medium term, the true impact of the energy reform, perhaps the most important of all of the reforms, will be the result of the liberalization of trade in everything related to energy, oil and derivatives, which will permit access to cheap gas from the U.S. and of other goods previously banned from the Mexican private sector. The potential that this change supplies is immense and, no less important, very fast in materializing.

With an eye to the future in terms of what can be anticipated from these reforms, President Peña’s great asset has been his extraordinary capacity of political operation. The evidence is powerful concerning his skill in employing all the resources –from arm twisting to buying votes, passing through exchanges of legislative support- in order to advance his agenda. It is ironic that the PRI was the party that advanced the reforms, many of these very PANist in spirit, but that the PAN was unable to bring forward during its time. On the other hand, it is paradoxical that despite the PAN’s being in office for twelve years, the structure of the old PRIist presidency continued intact, making it possible for a president with greater political adroitness to recreate it into the political control machine that it once was. In contrast to the transition in Spain, where there was an integral change of the political regime, in Mexico the old PRIist system is alive and well and in a frank process of reconstruction.

The future will depend on two factors: on the one hand, the capacity of execution that the government demonstrates, a process much more decentralized than that observed to date. On the other hand, the willingness –and capacity- to affect interests comprising the beneficiaries of the old order. The former implies basically technical processes, reorganizations, modification of regulations, etc. The latter constitutes a political process –potentially very conflictive- of negotiation, imposition, control and the elimination of privileges in ambits as diverse as, case of PEMEX, the union, the mafias of engineers, the contractors, the politicians who live on favors and, no less important, the federal government itself that has become addicted to oil profits. The potential for conflict and even violence is not minute.

The formal reform process is over. Now begins the genuine dispute: that of the interests. That’s what will go down in history.

@lrubiof

a quick-translation of this article can be found at www.cidac.org