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

Luis Rubio

To govern, an authoritarian system requires no more than skill, some institutions and minimal rules because everything revolves around the capacity of the governor to impose his will. Open political systems –consolidated democracies as well as nations in transition- require rules known by all, which are complied with and made to be complied with. The Mexico of a half century ago was authoritarian and, due to its characteristics, relatively easy to govern. The Mexico of today is big, complex and with a broad and diverse population that requires rules and procedures, because without this it is impossible to reconcile natural differences of interests, objectives and modes of thinking in ambits as dissimilar as interests: electoral, economic, political and social. The recent reforms have done nothing other than strengthen the need to advance in that direction because, inevitably, the number of interested actors and parties will multiply (investors, contractors, operators, analysts, bureaucrats, etc.) and, with these, conflicts.

The experience of the last half century does not garner praise as an example of ability and aptitude for constructing State capacity, understanding the latter as instruments and competency for maintaining peace, response to a changing economic environment, regulation of markets and, in a word, construction of a modern State that makes the development of the country possible. The changes undergone in the last half century have been so enormous that they would require the construction of an altogether new political regime: a new system of government to replace the old authoritarian system. Instead of the change that would be required, Mexicans have been witness to the construction of innumerable revampings and patches. Many of those “patch-up jobs” can be valuable institutions (e.g., Human Rights Commissions, regulatory entities) and I do not wish to hold them in disregard, but they are solely substitutes for a true institutional transformation, the only one susceptible to providing viability for a demanding society desperate due to insecurity, absence of opportunities, poor jobs and, no less important, systematically shattered expectations.

Over the past several months we have observed an alluvium of reforms and new legislation, much of it modifying the “sacred cows” of yesteryear. But the laws, in themselves, cannot evoke a change. Change is the product of implementation of the laws. Expressed in other terms, there are now instruments in the hands of the government for carrying out an extraordinary transformation. The question is whether the government will make the opportunity its own, a not trivial matter because of the enormous cost it entails. At its core, implementing the new reforms will require affecting interests, many dear to the government, that at present are the true obstacles for making reality what has taken shape in law.

Unless change results from revolutionary action dedicated to stifling the existing order through non-institutional means, the change inherent in the adopted reforms can only come from the side of the government, that is, from the political class and the bureaucracy, both actors with multiple interests in the process. What, in other words, would be necessary for carrying out the great change that the laws presuppose?

Part of the response depends on the ambition required for the transformation to be carried out. In the nineties we saw an ambitious strategy of change but one limited in reach: massive structural modifications were performed but integral reform of the economy and, in general, of the country was evaded. Those changes were sufficiently large to be transforming, but their limited reach ended up planting the seed of many of the problems we are experiencing today, including exacerbated informality, underemployment, extremely low productivity of a good part of the industrial sector and the rejection of any change on the part of the society.

The recently approved reforms are, potentially at least, infinitely more transcendent. In this sense, a possibility would lie in merely attacking the sectors that the law has modified, a gargantuan task in itself because, on being integrally carried out and if the aspiration is the creation of a competitive market, this would imply modifying the status quo in activities and sectors with tremendous economic and political fallout beginning with the energy monsters, but equally in telecommunications. Substantive modification of the limited reality of these ambits would be valid in itself, but would run the risk of being partial in the end, as in the prior reform era.

The most ambitious alternative would lie in an additional transformation in ambits such as those of justice and legality. Although there have been diverse reforms in matters of justice, this is far from prompt, while it simultaneously continues to be extraordinarily politicized: the attorney generals’ offices continue to act in the name of their political bosses; thus not aiming at procuring justice. The same is true about legality: corruption is flagrant in so many ambits and visible to the entire population -and the concomitant impunity so costly for the government’s legitimacy- that it is doubtful whether reforms involving international bidding contests, supranational courts or analogous others can be successful without a much more ambitious reform in the political regime.

With its reforms, the government has unleashed the immense opportunity of achieving development. Now the most complex part is left, but also the most transcendent.

www.cidac.org

@lrubiof

Luis Rubio

There is rarely a discussion on the cause of the low growth of the economy in which corruption does not arise as an explanatory factor and more so if the discussion take place outside of Mexico. The implicit assumption is that corruption inhibits market functioning and that comprises a disincentive for investment, limiting with that its growth. Although verifiable in some cases, the argument is old and effete. In fact, there are examples, above all in Asia, which clearly belie this: countries that grow rapidly despite the prevalence of corruption. What is, then, the problem?

In his last book, Mancur Olson asks which is worse: a tyrannical and authoritarian government or the infrequent assault by some band or another of guerillas or thieves. Olson ensures us that, throughout history, it has been much better for human societies to live under the yoke of a despotic and authoritarian government than to be subject to the frequent abuses of a pack of thieves. Although some types of government can be predatory and abusive, it’s better for a tyrannical government for the economy to achieve the best possible performance, because from that it extracts a constant flow of taxes and tributes. This is not so with thieves, who gain entry into the scenario, steal all they can, destroy everything in their path and flee. In other words, a despot (a sedentary thief) maintains taxes sufficiently low so as to make the constant growth of the economy possible and can even develop incentives to attract investment and accelerate the growth of productivity, all for the sake of generating income. While the thief or guerilla assaults anyone he pleases, appropriating whatever he comes upon, the despot entertains a vested interest in medium-term economic development. Could it be the same with corruption?

Jagdish Bhagwati advances the argument and offers a simple and more convincing explanation: “A crucial difference between the two countries [India and China] is the type of corruption that they have. India’s is classic “rent-seeking” where people jostle to grab a cut of existing wealth. The Chinese have what I call “profit-sharing” corruption: the Communist party puts a straw into the milkshake so that they have an interest in making the milkshake grow larger”. This refinement of Olson’s argument much better explains what differentiates Mexico from countries with rapid growth: it’s not the corruption itself but the fact that the type of corruption characterizing Mexico is to kill the goose that lays the golden eggs. The problem is rent-seeking, not corruption per se.

The importance of Bhagwati’s argument is that rent-seeking is not exclusive to a single sector, group, or activity. The manner that he defines rent-seeking is such that it’s the same whether it concerns a business which controls a sector of the economy or a bureaucrat who “purchases” goods for Pemex and who never delivers them but both the seller and the bureaucrat divide the profit. Corruption defined as the erosion of the existing wealth entails the explanation of who killed the country’s development: unions that are predatory, entrepreneurs who control, bureaucrats who pillage, politicians who steal, and public servants who buy land where a public work will be constructed. In each and every one of these cases, the interest of the rent-seeker is getting a piece of the existing pie, which makes economic growth impossible.

Of course, not all of the country is corrupt. There are sectors that compete to the death as well as irreproachable public officials. Many companies are impeccable but confront corrupt practices by their competitors and public servants who take the lion’s share. Likewise, there are workers who go out of their way to make productivity grow because on this depends the viability of their jobs.

The problem is that much of the structure of the relationship and “interface” between government and society, as well as off the set of political decisions that were made in the past (ranging from privatizations to inflation, state monopolies and the protection of public and private enterprises) has generated a country of rent-seekers, of sectors and groups that are predatory and that exist to hoard the existing wealth and not to foment the creation of greater wealth. Therein lies the crux of the issue.

Of course, we must end corruption, but that’s much easier said than done. The cynical solution would reside in the government’s advocating the modification of the nature of the corruption so that, without affecting powerful groups, changes the dynamic of corruption: that is, try to imitate China instead of being like India in the spirit of if you can’t beat ‘em, join ‘em.

At the margin of the feasibility (and ethics) of such a proposal, the true solution lies in eliminating the factors and incentives that favor the type of corruption that characterizes Mexico. Some would propose effecting this by means of coercion (that is, creating novel instruments and mechanisms for combating it –more bureaucratic control) but the logical thing would be to incorporate competitive and transparency mechanisms into the government’s purchase programs and contracts, as well as into auctions for spectrum in telecoms and other areas where rent-seeking corruption proliferates.

The dilemma is: more control, or more competition? Perhaps that’s where the future of the country lies.

www.cidac.org

@lrubiof

FORBES – Agosto 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.

www.cidac.org

@lrubiof

Luis Rubio

Ralf Dahrendorf, German-British professor, wrote that “conflict is a necessary factor in all processes of change”. As the reforms that the government has proposed begin to be implemented, the complexity that such a process entails becomes clear.

In its economic dimension, the thrust inherent in all reforms is that the incentives of all of the parties involved require alignment –sectors, social groups, and the government- in order for the country to progress. The sense of this concept is that currently a divergence lives on in the actions and motivations of the political and economic actors in Mexican society and that all that needs to be done is to align them. In conceptual terms, the proposal is impeccable but it suffers from a contradiction from the start: the problem does not lie in the incentives but in the objectives. That is, it’s not that some participants in the society or in the markets are mistaking their chosen path, but that, in effect, they espouse distinct objectives.

From the viewpoint of market functioning, informality –a prototypical example- presents a fundamental challenge due to the difficulty encountered in the carrying out of exchanges between formal and informal actors because the latter cannot emit invoices. For similar reasons, informal enterprises cannot grow because their condition of informality hampers their obtaining credit or attracting personnel with skills that are tradable in the modern marketplace. The question is whether informality is what the economists term a market “failure” (a mere distortion) or whether it is a distinct phenomenon.

A great deal of informality derives from the complexity of the  paperwork and red tape involved in registering new businesses and maintaining the condition of formality, above all in terms of tax-compliance and labor requirements, those of social security and the rest. In addition to the latter, there are circumstances that have made informality attractive and not only because informal businesses evade certain outlays (such as taxes) or costs (such as labor and tax bookkeeping) but that, for example, electricity costs go up when consumption rises or when the user is a company, and the costs of labor registration rises when the number of employees does.

All of these factors make the formalization of companies expensive but, as in the case of inconclusive (or failed) political transitions, they’re not the only explanation. If the entire problem were to reside in the cost of formalization, the fiscal, labor, and Social Security authorities would have an enormous incentive to diminish those costs in order to promote their legalization. However, the problem is more complex than that and has a distinct explanation.

Much of the cost of registering enterprises refers to municipal authorities, which have turned the informal businesspersons into a political base. For those authorities, the incentive does not lie in entrepreneurs becoming formalized, growing, and prospering, but in maintaining their political support base so that the career of the municipal president, representative or party member will flourish. That is, the politician’s incentives are in perfect alignment with informality and there is no reason, from their perspective, to modify the status quo. In addition to this political logic, there is an economic rationality that is inherent to the development of a political clientele: because what is not charged in the form of taxes is levied as informal dues, traditionally by representatives of the formal authority and, more recently, by organized crime.

Something similar is happening in the manufacturing sector that has not modernized, that is not highly productive and that is pummeled by imports, which frequently enter the country as contraband. That non-modern and highly unproductive industrial sector has survived in its present state in good measure due to subsidies and other means of protection, such as import duties. All of these instruments keep a vast sector of the economy alive and without modernization mainly because the authorities fear the unemployment that can be generated by the collapse of these companies.

But, as with informality, protection begins with a logic of serving the public (in this case fear of unemployment). While from an economic perspective it would be better to induce a gradual liberalization that would have the effect of modernizing these enterprises, it wouldn’t take politicians long to identify the benefit of perpetuating their hunting grounds. In this way, what begins as a job preservation strategy rapidly becomes a mechanism for developing political clienteles at the service of a private cause.

Informality and protection, those sources of unproductivity that deduct growth from the Mexican economy, possess a flawless clientele rationale that renders them permanent. Within the context of the political transition that the country is undergoing at present, clientelism has the effect of obstructing the democratic maturation of the country because it ministers to the beneficiaries of the control. That is, political clientelism lies behind informality and both undermine the growth of the economy: they subtract from it.

Thus, it is not that the country is incapable of reforming itself (the reforms that didn’t advance for years or those that were thwarted in the secondary stage), but instead that there are all-powerful interests that profit from the status quo.

www.cidac.org

@lrubiof

FORBES – Luis Rubio

Thomas Piketty’s book on inequality has created an enormous commotion because it touches a sensitive nerve worldwide. The financial excesses, the extraordinary valuations of the technological companies and of the Internet and the appreciation of the value of intellectual over manual work have created a new social reality that is the natural raw material of responsible politicians as well as of opportunists. The very fact of inequality becomes an opportunity that offers infinite possibilities for being exploited although, unfortunately, these rarely lead to diminishing it. Frequently what is done leads to its exacerbation.

Picketty’s argument is very simple and very relevant:  comparing census and fiscal data he explains that income grows much more slowly than wealth, which inexorably leads to its concentration. According to Piketty, the rate of return on financial investments is systematically superior to the growth rate of economy and this is an uncontainable tendency. From his statistical analysis he engages in a series of extrapolations from which he concludes that unless the growth of wealth is controlled (by means of taxes) concentration and polarization will grow without limit. In other words, for Piketty the solution resides in the incorporation of governmental control mechanisms.

There was no wait for objections to the argument of the French scholar to ensue. Some are extraordinarily technical, others merely superficial. Some embrace their arguments without thought. What come next are some arguments and arguments that have emerged, directly or indirectly linked with Piketty:

For Tyler Cowen wealth derives from the assumption of risk and not from the fact that it exists: that is, wealth does not grow in a natural manner but as the result of decisions that often are erroneous, entailing immense losses for their owners. Tyler argues that at the beginning of the XIX Century David Ricardo affirmed something similar to Piketty on ownership of the land but that, however, this source of wealth ceased to be relevant. Ricardo’s conclusion is that the two factors that really have had bearing in the creation of wealth are not financial but rather derive from technological change and globalization. The solution Tyler proposes is that “creating more value in an economy would do more than wealth redistribution to combat the harmful effects of inequality”. 

Donald Boudreaux utilizes a metaphor to dispute Piketty’s argument: “I spend about six hours weekly (and weakly) lifting weights at the gym. The modesty of my effort combines with my age (early 50s) to ensure that I’ll never be as buff as younger guys who spend more time at the gym than I do. The result is muscle inequality! And I’m tempted to feel envious. I want to be bulging-biceped, broad-shouldered, and as chiseled as are my young gym-rat friends. Really, though, how seriously do I want this outcome? I could build more muscle if I spent not six hours weekly at the gym but, rather, six hours daily. But I choose not to do so. Spending more time at the gym means spending less time working (earning income), less time with family and friends, and less time doing other things that I judge to be worthwhile. The fact that I’d be more buff if being more buff were costless is irrelevant. It’s not costless; therefore, the size of my muscles is largely the result of the way I choose to make trade-offs. So I resist the temptation to envy men with bigger muscles, men with muscles (do note, were not built with fiber taken from my muscles). And if muscle distribution by government were possible, I’d oppose it. Not only would the result be less muscle bulk to ‘redistribute’ (Would you pump weight for hours each day knowing that a large chunk of what you build will be stripped away and be given to someone else?) but, more importantly, I’m not entitled to the confiscated fruits of other people’s efforts”.

Paul Krugman, true to his nature, carried out a diligent and interesting analysis of an analytical publication (New York Review of Books, NYRB), while he simultaneously launched a politico-ideological diatribe in his article in the New York Times (NYT). In the former he examines the phenomenon of inequality from the impoverishment of the U.S. middle classes without wholeheartedly embracing the fiscal argument of Piketty. In contrast, in his journalistic article he accuses the “apologists of the oligarchies” of burying their heads in the sand. What Krugman evidences is that, in effect, there is a problem, but that its root cause is never arrived at.

Beyond the U.S. debate, I ask myself whether the circumstances are similar in Mexico. No one could dispute the fact of the inequality in the country, but its dynamic is radically distinct, To start with, there are two “structural” phenomena that distinguish the two countries: in the U.S. both the tax as well as the estate law promote the distribution of great fortunes through foundations. The two wealthiest men in that country –Bill Gates and Warren Buffet- devote themselves body and soul to distributing their money to causes that they consider worthwhile: that is, at the end of their days, a good part of their fortunes will have disappeared or will have been transformed into something else, negating part of the argument of the French author. On the other hand, the U.S. market is vastly more dynamic than the Mexican market and its opening to competition frequently implies that that’s the way great fortunes are made, and others disappear overnight: the losses of thousands of investors during recent years have been huge. Although in Mexico there’s always some of the latter, the former certainly is (almost) non-existent in Mexico.

In Mexico it is much more likely that the government will seek out those who are already wealthy for these to start new businesses that create conditions for the emergence of new entrepreneurs. The success of so many Mexicans in the U.S. should tell us a lot: why there and not here. The same is true concerning the incapacity of Mexican governors to confront the educative problem and to create conditions for true equality of opportunity. Inequality is not exclusive to Mexico, but here we persist in preserving it and rendering it permanent.

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Luis Rubio

In one of our first arithmetic lessons, we all learn that the order of the factors does not alter the product. That which is so clear in keeping accounts is not always valid in politics: there it does indeed matter who does what and when. The democratic euphoria of the last decades and its results obliges us to reflect on the conditions that are necessary for a country to achieve the construction of a functional system of government and one that is simultaneously responsive to citizen demand.

In the last half century a series of transitions toward democracy have come about that have been exceedingly successful (Spain, Korea, Taiwan) but also others that clearly failed. The protests that a quarter of a century ago were violently snuffed out in at Tiananmen Square were nothing other than one of the manifestations of attempted transitions, few of which were as successful. Cases such as Arab Spring, Ukraine, Russia, Iraq, Thailand and Mexico, each with its characteristics and circumstances, illustrate the complexity involved in constructing a regimen at once functional and democratic.

Some of these show the contradiction that frequently lies between the demand for transparency and accountability on the one hand, and the capacity of the government to indeed be transparent and accountable. Beyond the disposition of the governor to respond to the citizenry, perhaps the main obstacle to successful democratic transition has less to do with the persons than with the structures of governance that would need to be modified.

The preponderant characteristic (and common denominator) of transitions to democracy is the authoritarian precedent, a circumstance that explains much about the former capacity to govern and function. Authoritarianism made governing easy; its disappearance makes it very difficult to govern, as is the case of Mexico at present.

For years now it has been evident that the “old” system worked in good measure because of its immense capacity of imposition. The PRI-presidency link-up permitted the swift implementation of presidential decisions in a generally effective manner, while the system of control that the party and diverse instruments of the government made it possible to avoiding or “pacifying” unmanageable dissidents. Time eroded the system of control and the first alternation of parties in the presidency “divorced” the PRI from the government. What followed was not a seamless transition but rather a partial collapse of the functions of the government. It is possible that more skillful hands would have been able to drive a process of change with greater success, but what is clear is that, instead of focusing itself on the construction of a new political and institutional regime, the country entered into a downward spiral of progressive deterioration. In some ambits, the deterioration was partial, in others dramatic (e.g., security). The whole gave rise to a disorderly country that constituted the very invitation that the PRI needed to be able to affirm, in the words of one of its lofty personages, that “we may be corrupt but we know how to govern”.

Recent times have not proven the veracity and validity of the second part of that statement,  and perhaps that’s where part of the explanation of our current difficulties lies: the problem is not one of persons but rather one of structures and although it is persons who shape the institutions and structures of the government, the relevant fact is that in these last decades little has been done to construct government capacity which is, at the end of the day, the key for the country (any country) to be able to function.

In recent decades, multiple governmental or State institutions have been constructed: from electoral and economic regulatory entities to human rights commissions and those devoted to the access to information. Each and every one of these institutions have been advancing within their ambit and creating new political realities, enlarging spaces of citizen participation and obliging the diverse levels of government to respond. What those institutions do not do –were not designed to do- is to improve the capacity of the government, which is the essence of a properly working government in key areas such as security and justice.

The case of transparency and access to information is suggestive: the IFAI was created as an entity dedicated to guaranteeing access to information, a necessary condition for political development in every democratic society. What it didn’t do was create the mechanisms necessary within the governmental entities so that the government could respond. The result was a clash of paradigms: the existing system of government, constructed to control the population and not to inform it, did not possess the instruments (or the internal logic) for responding to the citizenry or the filing systems adequate for doing so effectively. Thus, instead of creating a cooperative system of citizen and institutional development it triggered a collision between bureaucratic logic and that of the political activists.

The case of transparency illustrates the nature of the problem: Mexico urgently needs an integral transformation of its system of government. The present structures derive from the era of the end of the Revolution, a time that is in no way similar to the realities and citizen demand of today. Where cooperation is required we have conflict; where it is urgent to support adaptation (for example, of teachers fearful of not passing an exam) all incentives favor confrontation. The logic of the control of yesteryear is incompatible with the reality of a globalized economy and a country keen on developing itself. A XXI-century system of government is urgent.

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Luis Rubio

What do soccer, the telecom reform and the Supreme Court have in common? At first glance, it would appear to be unconnected issues. However, the thread that weaves these and other themes together is the enormous disorder that characterizes our society, disorder that has many manifestations but one consequence above all: the disowning of responsibility.

The symptoms and examples of disorder are ubiquitous: some Mexicans recently ended up in jail in Brazil for improperly touching a woman and they supposed they’d be unpunished for that like in Mexico, where impunity reigns; a government grants enormous benefits to the television networks as a result of prior campaign-commitments; a union that blocks streets at will and the local government protects them, holding the citizenry as hostage; a government that leaves national finances hung up with “safety pins” (and a major financial collapse follows); a “social activist” is recorded receiving cartloads of cash and nothing happens; a businessman seizes control of some television antennas with an armed commando; the government allocates contracts, skipping the results of duly organized bidding processes; Congress does not make decisions on matters of its concern, thus obliging the Court to rule on themes not falling within its radius of competence; a goal scored against the national team is always the fault of the referee. Wherever one looks, all of Mexico -society, politicians and governors- is characterized by great disorder in which there are no rules that are respected and in which everyone –parents, teachers, governors, legislators, entrepreneurs, etc.- disowns his responsibility.

When Franco died, Spanish society “let its hair down”, as registered in one of the chronicles of the epoch. Young people threw themselves into a world of sexual lasciviousness and adults caught a glimpse of a world of freedom that they hadn’t known for decades. (Nearly) all of Spanish society, each in his or her own way, welcomed a new moment of its history. What’s interesting is that although all of a sudden anything could be written, people could say whatever they wanted and do anything they liked, life in society went on as it had been: automobile drivers respected traffic rules, police sanctioned wrong-doers, civil and commercial processes functioned and taxes were paid. In other words, the end of the dictatorship did not entail the end of order: freedom did not wind up equivalent to disorder.

The question is why in Mexico have we have evolved to such a degree of disorder, impunity and uneasiness (or, as a law teacher of mine correctly said, a “disorder with an accent on the m” -an “unmentionable” here). Some days ago, in an analysis by Robert Kaplan on Saddam Hussein, I read that the latter’s regime was “anarchy masquerading as tyranny” that suffocated the society and that worked thanks to the fear it instilled of the population. While it may have seemed like great order, beneath the appearances it was nothing more than chaos in potential. As soon as the regime disappeared, all vestiges of order vanished and the country collapsed.

Without attempting to equate Mexico with Iraq, there are some evident similarities with the old PRIist regime: as diverse observers have indicated over time, the regime endured due less to its apparent legitimacy than to the (generally) benign authoritarianism that characterized it. The “unwritten” rules worked because of the fear that the regime inspired and not because of its credibility. Illustrative of this reality was that the decomposition process (which began in the late seventies) started to become uncontainable disorder perhaps at the height of its apparent might: it was in 1994, under Salinas, that we observed, for the first time since the twenties, a wave of political assassinations, very-high-profile abductions and the ushering in of the era of insecurity.

What is relevant is that, in contrast with Spain, in Mexico the end of the old regime evidenced the total absence of a functional institutional framework. Up to the seventies, the people were afraid of the police, today they tip them as car watchers. Impunity was perhaps more visible among the powerful of any pedigree, but the reality is that Mexicans continue to act the same, whether in mundane things such as the trash, traffic lights, double parking or lack of responsibility in the affairs of our daily lives. The end of the PRIist era was not accompanied by a society with the potential to achieve development without a degree of anarchy that, although fortunately distant from that occurring in Iraq, is not distinct in concept. In Mexico there has not been an institutional transition.

The matter of disorder is one that now-President Peña-Nieto addressed in his campaign. However, the answer that his government has afforded is inadequate because it does not respond to the origin and cause of the matter. It is not that Mexicans are disorderly by nature or culture: the problem is that, although there are thousands of rules for everything, in practice there are no rules for anything and there is no punishment for those who violate these, except when it is to the advantage of a powerful one.

The problem is not one of control but of rules. Unless the government believes that it’s possible to put the toothpaste back in the tube –or its political equivalent, which consist of submitting the entire population, all of the communications media and all of the politicians- his effort will not bear fruit in terms of order but rather in greater unease. What Mexico requires is effective leadership that advances toward the establishment of a framework of rules that allow for peaceful coexistence, eliminate impunity and lay the foundations of sustainable political development.

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Luis Rubio

Insanity, said Einstein, is doing the same thing over and over again and expecting different results. Thirty years ago, within the context of a severe recession, Mexico opted to undertake the course toward economic liberalization as a means for recovering the growth that, since the end of the sixties, had been in short supply. In that first era of reforms a broad number of enterprises were privatized (telephony, banks, television companies, steel, fertilizers). The result was not to the liking of part of the population: while some of the privatized enterprises prospered uncontrollably, others (mainly the banks) ended up collapsing and generating an enormous cost defrayed by the taxpayers. But more important for the current debate is that many of those that did prosper became oligopolies that hindered the creativity of the population, reducing the potential for growth of the economy. Unfortunately, everything indicates that in the reforms now being discussed the country is advancing in exactly the same direction.

Countries that have been successful in opening their economies –above all in liberalizing protected markets, especially those dominated by state-owned companies- share a common characteristic: they all built competitive schemas for the functioning of the specific market. That’s what happened in England and Chile, two successful cases according to any measure. In Mexico this proceeded in a distinct manner: the property of the old monopolies was transferred to private investors without creating a competitive market in which transparency and competition comprised the determining factors of the result.

I remember a panel at the end of the eighties on which there was a prominent member of the team that was responsible for privatization in the Mexican government, as well as the man who had been in charge of privatizations in the Chilean government some years previously. The Mexican functionary explained the rationale that the Mexican government was pursuing on the process of privatization and what lessons they had learned. With regard to the former the Mexican participant affirmed that the most important criterion was for the highest bidder to win because that guaranteed the transparency of the process. About the latter he explained that experts in the matter had recommended that they begin with small businesses to acquire experience but what they had observed was that they would rather proceed with big ones to send a solid signal to investors. The Chilean functionary had brought with him a long presentation but he stood up and said that he had understood that the process had not yet begun and that thus he would not present what he had prepared because he did not want it to appear to be a criticism of what the Mexican functionary had expressed. He concluded his commentary –which lasted inside of two minutes- by saying that in Chile the criterion had not been money but the structure of the market that would remain after the privatization because the important thing for them had not been the collection of revenue but rather the subsequent development of the industry. His critique was short but devastating. The following years showed that he was right, there and in Mexico.

A quarter of a century after, the current debate in Mexico reveals that nothing has been learned. Instead of deliberating over how the energy market will be left after the opening of the sector, everything of import seems to be to what extent the state monopoly should be preserved; instead of seeking the way to create a vibrant and competitive energy market, the discussion centers on ensuring that the so-called sovereign fund continues being an interminable source of unaccounted-for money for obvious purposes. The same is true for the recent electoral reform, in which the last thing important for the esteemed legislators was competition for power; the only thing relevant was maintaining the control of the process among the three big parties and the monies involved. In the case of telecommunications, the rumor mill –the only market that indeed does work in the country- affirms that all kinds of arrangements are being made under the table, through personal concessions, in some cases not to the companies but to the functionaries on an individual level. That is, Mexicans are continuing with the traditional logic of patronage, influence, control and corruption. Einstein would say there’s no reason for expecting a different result.

The experience of both historic moments suggests that there’s something in the DNA of the Mexican politician (and many activists, whether legislators or not) that impedes him or her from doing things openly and transparently through competitive markets, betting on the creative capacity of the Mexican and, above all, abandoning the tradition of utilizing the public sector as a source of personal enrichment or as a vehicle for purchasing wills as a means for accessing or maintaining power; in other words, slush funds.

We all know that the learning curve is always costly. In this perspective, these mistakes would be explainable had there been no prior experience. The problem is that this isn’t the first experience and, in contrast with the former one, the evidence today is overwhelming. What resulted from the Mexican privatizing process of the eighties and nineties as well as that of other nations is more than convincing that only a competitive and transparent market would permit achieving the objectives set forth by the constitutional reforms. The case of telecommunications –both television as well as telephone- is particularly revealing: there it is, in living color, the most brutal evidence that oligopolies are contrary to growth. Unless, that is, the objective is distinct from the one made public.

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@lrubiof