Luis Rubio

Kenneth Waltz, the recently deceased and most prestigious scholar of the realist school of international relations, wrote that “the opposite of anarchy is not stability but hierarchy”. Anarchy is reached when hegemony does not exist or when there are no structures of order and control (or when these are lost) in a society. This occurs when the established order is broken (as when an empire or a dictatorship collapses), when there are no institutions capable of channeling conflict or when anomalous situations –whether endogenous or exogenous- present themselves that generate conditions of disorder, violence and, potentially, chaos. There are many examples of each of these cases, from the Soviet Union to Egypt. Mexico did not attain the level of chaos that has characterized other nations, but tendencies from the onset of the nineties have not been commendable: anyone could find examples of each of the previously described grounds.

An early accomplishment of the Enrique Peña´s government was the return to a sense of order and authority; this, however, has been tarnished due to the renewed chaos that characterizes several regions and states of the country as well as by demonstrations and street violence. Although it is quite obvious that the trends in the country’s power structure have changed, the government has certainly not achieved instituting its hegemony in the sense employed by Waltz. What remains to be seen is which of the two trends advances: chaos or hegemony and, if the latter whether institutional mechanisms will be created for the latter to be permanent.

The return of a sense of order and authority did not modify the growing industry of extortion and kidnapping, nor did it impact the patterns of violence along the drug corridors. It’s sufficient to see the displays of rejection (and, in some cases, of outright rebellion) in Guerrero, Oaxaca or Mexico City, the violence linked with organized crime or the non-institutional dissidence that exists throughout the country (like Michoacán today) to be chary concerning the conclusions at which one arrives. But none of this denies the advance toward reestablishing a sense of authority. It is not obvious, though, that it will endure.

I’d like to open a parenthesis here to dwell on the perspective of “realist” school of power, such as Waltz. For this “tribe” what’s fundamental among nations (but also within them) is to achieve an equilibrium that allows for stability. From this perspective, the worst case scenario is one that leads to instability; thus, for those arguing for a “realist” (as differentiated from “idealist”) view what’s crucial is to void sweeping changes: to procure equilibria and comfort zones. In this respect, there are scholars who have compared the history of Asia with that of Europe and concluded that the reason for fewer wars and more stability in the former is that in Asia there always were hegemonic or dominant powers (like China), while in Europe power relations were more akin to equality. From this, these savants deduce that chaos is the result of equality among nations or among societal groups. When there is a dominant or hegemonic power there tends to be order, ergo, development.

Democracy is a sort of hegemony that, different from that resulting from the capacity of imposition is the result of a vote, thus, of agreement in a society. But, as with other structures of domination, democracy is a hierarchical structure that imposes by means of institutions that enjoy legitimacy deriving from the consent of the population. However, an incomplete or a non-consolidated democracy one like Mexico’s generated an expectation of equality (on the part of the governors, de facto powers, businesspeople and union leaders) that contributed to creating an environment of crisis and instability. That is, on the disappearance of the structure or source of authority the country began to enter into an era of disorder that has threatened to self-destruct in systematic fashion.

The point is not to suggest that what the country requires is a structure of authoritarian control that imposes order but rather the complete opposite: what is required is for the country to consolidate its democracy for there to be strong institutions that not only drive the possibility of the existence of legitimate authority, but also for the latter to be permanent through electoral processes that confer legitimacy upon it every six years. With an eye to the future, this is, in good measure, the challenge that the country faces today.

The previous government attempted to avoid the anarchy to which organized crime was potentially leading through frontal combat. Independently of this strategy’s rationality or viability, one of the basic problems of its conception was the supposition that all sources of stability issued from it. Although organized crime is obviously an enormous source of violence and disorder, a good part of the country’s problems derive from the fact that from the beginning of the nineties there commenced an erosion of the structure of authority. The old presidentialism was wearing thin but institutions were not constructed (or not sufficient and adequate ones) to replace the outmoded powers that were going downhill.

In a democratic system, hegemony stems from a centralized government that controls the structures of power or those of strong institutions. Currently, the government has amassed growing power thanks to the mechanisms of control it has introduced and revitalized, as well as due to the president’s personality. This constitutes the best potential opportunity for advancement toward development in decades, but also entails the seeds of its own risk.

In the nineties Mexicans had a presidency that achieved something similar: it consolidated the power, erected a structure of domination that led to hegemony and drove the aggregate of measures that established a platform for the country’s economic development. In much of what was achieved then lies the potential for present-day development and of what has worked well in recent decades, beginning with the North American Free Trade Agreement (NAFTA). However, it is also imperative to recognize that unipersonal power is not permanent and can in itself be a source of instability and even disorder, as has been the case sins 1994.

The reestablishment of order and of a sense of authority is an extraordinary accomplishment and constitutes an exceptional opportunity for the development of Mexico. But it will only succeed to the extent that it consolidates into institutions and caters to the needs of the citizenry, always ignored.

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 By Maria F. Mata & Luis Rubio  // Thursday, May 1, 2014

Luis Rubio

The contrast between the discourse of the politicians and the reality in the streets  wields a great impact. As if it were about two contradictory worlds, which mutually ignore each other. There’s a lot of that in Mexico and in the provincialism of its politics, but I’m not referring to Mexico or not exclusively to Mexico. The great revelation of the film The Square is that today no one has a monopoly on information. The pertinent question for Mexicans is whether the recent reforms are on the same page with that change in the reality.

The film, a documentary on the student rebellion in Tahrir Plaza, is a profile of six activists from the beginning of the demonstrations until the Army’s retrieval of the power after overthrowing Egypt’s elected President. It is a powerful testimony to a spontaneous social mobilization although perhaps incited by years of contention and political repression. But the most transcendental message of the film does not lie in the demonstrations themselves but rather in the narrative of the mobilization.

When it began and the so-called “Arab Spring” took wing, many observers noted that the electronic media, the social networks and other instruments of the globalization era had made this phenomenon possible. Some historians, less passionate, demonstrated how European XIX-century revolutions had followed a similar pattern: the example had taken longer to spread, but had had the same impact. In other words, technology has precipitated the times but has not changed the dynamic. What technology did achieve was dissolving the monopoly on truth.

As one of the lead characters in the film says, formerly history was written by the winners, now each tells his/her own. The politicians are no longer the possessors of the truth and their affirmations are immediately questioned, frequently with relevant data and relentless information. Now the traditional media compete with bloggers and, in fact, with anybody with a cell phone cum camera in his/her pocket. No longer is there a sole truth or a sole perspective. The political implications of this fact are extraordinary.

To start with, no one controls the events and the capacity to manipulate diminishes drastically. It’s not inconceivable that, having occurred one or two decades previously, the attempt at impeachment of Lopez Obrador (2005) would have been successful, but today it would be impossible because no one controls all the processes, including the government.

As Aníbal Romero says, politics is not defined in the plane of good intentions but in that of results “and events often take a distinct and even contradictory tack with regard to what was intended”. This is dramatically magnified with the multiplicity of contradictory sources of information and the heightening of expectations, all of which fundamentally alters governmental activity.

The world of yesteryear was a paradise of controlling politicians and the population had few resources within their reach. Kings and feudal seigneurs (whatever their title) dominated thanks to their capacity to control basic goods. While there were exceptions, that capacity of control and manipulation remained unaltered until just a few lustra ago. Today, as David Konzevik remarks, expectations swell 5% for each 1% of a rise in income, that is, they grow exponentially and it’s not necessary for any person to more than watch TV to know what she wants and that she wants it now. Governing within this context exacts a very different way of understanding the world and of acting.

In the Mexico of the many reforms, the question is whether these are synchronous with today’s reality. On occasion, it seems to me that instead of attempting to position the country ahead of the curve, what’s really being done is legalizing or codifying the industrial revolution at the emergence of the XIX century.

There are various things that appear very clear: first, it is no longer possible to hoodwink the citizenry or trade gold for shiny beads; second, the population is light years ahead of the politicians with respect to their desires and expectations and there’s no way to satisfy these and certainly not with the instruments available at present; and third, given that the government cannot control information flows or expectations (and it would be ridiculous for it to try to do so), its function should be to concentrate on providing people with the instruments and capacities to be successful in their own right.

The following list does not feign to be exhaustive, but its implications in the terrain of reforms is evident: these must concentrate on unleashing the productive capacity of the population (labor reform); give the people tools for them to be able to avail themselves of these in such a complex and complex world (education, health); furnish them with access to information (telecommunications); and create conditions so that their rights are protected (political-electoral and security). The key is their focus: what are they meant to accomplish?

I’m left with two doubts: first, although the potential energy resources are evidently enormous and merit intense, rational and successful exploitation, why concentrate on that, the XIX century, instead of the XXI? Another doubt: To what degree do the reforms that have been approved, and whose implementing legislation is in process, adhere to the logic of advancing what is crucial for the future?

In one of his films, Cantinflas said that what’s most interesting in life is to be simultaneous and successive, at the same time. That’s how the government should be thinking, but its concentration seems to be on other things.

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FORBES – Luis Rubio

Companies employ diverse macroeconomic or sectorial indicators for decision making about investments, production lines, and business opportunities. Over the last years, the “World Justice Program*” (WJP) has been devoted to formulating indicators for another type of measurement: the degree of the Rule of Law that characterizes a country. Their purpose is to provide for the citizenry, enterprises and governments an analytical gauge that allows for evaluating not only production scenarios of the next few months, but also the general conditions within which the society and the economy function. This is a titanic effort that yields quite interesting results.

The index commences by defining the Rule of Law, something it does in stages. “The rule of law provides the foundation for communities of opportunity and equity – communities that offer sustainable economic development, accountable government, and respect for fundamental rights.” “Effective rule of law helps reduce corruption, improve public health, enhance education, lift people from poverty, and protect them from injustices and dangers large and small.” It is concerned with proposing a set of objectives rather than a precise definition, but it is suggestive of the complexity of the term, so much so that the introduction begins with the affirmation that “the Rule of Law is notoriously difficult to define and measure”.

Instead of attempting a definition, the project proposes a series of conditions that should be present so that the existence of the Rule of Law can be affirmed: 1. The government and its officials and agents as well as individuals and private entities are accountable under the law; 2. The laws are clear, publicized, stable, and just; are applied evenly; and protect fundamental rights, including the security of persons and property; 3. The process by which the laws are enacted, administered, and enforced is accessible, fair, and efficient; 4. Justice is delivered timely by competent, ethical, and independent representatives and neutrals who are of sufficient number, have adequate resources, and reflect the makeup of the communities they serve.

How to measure something so apparently fluid? The way that the WJP resolves the dilemma is with a series of indicators that is later compared at the international level. Its analytical objective is to determine: a) to what degree does the law impose limits on the exercise of power by the government and its agents?, and b) to what extent the state limits the actions of members of society and fulfills its basic duties toward its population so that the public interest is served, people are protected from violence, and members of society have access to mechanisms to settle disputes and redress grievances? As concepts, both are impeccable. However, encoding them so that they can be quantified, thus compared, constitutes a significant challenge.

Despite all the problems that can be found with this, many valid, the index compares 99 countries in terms of eight factors that roughly group one hundred indicators. These factors are: constraints government powers, absence of corruption, open government (transparency), fundamental rights, order and security, regulatory enforcement, civil justice and criminal justice. It will come as no surprise to anyone that the Nordic countries are in dispute for the first places, followed by nations such as New Zealand, the Netherlands, Canada and the majority of Europe. Mexico was in the 79^th place out of 99, behind the majority of Latin American nations and even much worse than several nations of the Middle East and Africa.

This type of measurement always lends itself to controversy because it attempts to measure things that are difficult to evaluate in objective terms. However, beyond the specific number, it is clear that Mexico suffers severely in each of the factors evaluated. In reality, it is not necessary to conduct such a detailed evaluation to be able to conclude that there are problems with control of governmental activity, that administration of justice is poor or that insecurity and corruption are flagrant: it is noteworthy that the sole factor in which Mexico obtains an evaluation significantly superior to the remainder of these is in matters of governmental transparency, a theme to which the country has devoted significant efforts and resources in recent years.

Beyond the details, what this indicator tells us, even confirms for us, is that the country is attempting to get into the big leagues (as illustrated by the pretension of attracting first-world investors to the energy sector) but it lacks the legal and institutional infrastructure required to do so. This reality generates for us a very clear tessitura: Shall we bow out because we don’t have what’s required or shall we take up the challenge and devote ourselves, society and government, to outdistancing and triumphing over it?

*http://worldjusticeproject.org/sites/default/files/files/wjp_rule_of_law_index_2014_report.pdf

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Luis Rubio

For Machiavelli, successful political operators are those who give the appearance of naiveté and cultivate a reputation of benevolence, independently of what they are conniving sub rosa. In contrast, those who assume themselves to be Machiavellian and attempt to develop a reputation as such –crafty rumormongers and other pretentious politicians- are not. This reflection on the virtues of power and its administration came to mind when I read an exceptionally interesting book, owing to the author’s honesty as well as its implications.

Michael Ignatieff, a Canadian, was a successful professor of politics at Harvard when he was invited to enlist in the politics of his country with prospects of the leadership of his party. The book, Fire and Ashes, is an  incisive account of his (pathetic) decision making process, the election that led him to lose the power, the party and even his own seat in the Canadian Parliament.

In reality the book is a great reflection about the contrast that exists between academia and public life, two worlds that evidently interact but that are not the same and that, with few exceptions, are distinguished by skills that are not transferable between them, however much many, like the cunning bruiter who fancies himself/herself the epitome of Machiavellianism, might think the contrary.

In his book Los Presidentes, Julio Scherer cites Octavio Paz affirming that “intellectuals in power stop being intellectuals although they continue to be learned and intelligent… because thinking is very distinct from giving orders…” Ignatieff explains the other side of the coin: the dilemmas, the deficiencies and the incompetence of a serious and successful academic in his transit through the spheres of power. The author’s terminus a quo and, in a certain manner, the sum of this argumentation, is that the skills of a successful politician (in the Machiavellian sense) can be learned but not taught. That is, the liaison between the two worlds is indirect and tenuous.

Ignatieff’s book led me to three reflections. First about something that Michael Barone, an American political analyst, has described for some time now about his country: the ideas stemming from academia are not always applicable to the world of politics, no matter how impeccable the mathematical and conceptual models from which they emanate appear. While the scholar is committed to his own learning and analysis  –and changes his mind as his own observations exact it-, the politician lives in the trenches trying to advance projects, objectives and even ideas, when his instinct tells him the time has come. The intersection is obvious, but so are the differences: the politician knows that he cannot control all of the variables and that time –timing- is key. For the academic it is easy to isolate the variables and suppose that the world will act the way his model suggests.

The second reflection is about power. Ignatieff relates his conversations and encounters with professional politicians whose motivation and conduct is that of constant competition for a seat in parliament and, by that means, to advance his/her plans and projects, personal as well as those for society. The academician inside the author is capable of analyzing the phenomenon and understanding its dynamic but does not know how to deal with it.  In an interesting passage in his book, Ignatieff detects circumstances typical of politics, above all of the way an idea or approach gathers strength because someone “important” voices it and it, albeit false, spreads like wildfire, repeated by one and all. A politician grapples with forces that are obvious and many that are not, a distinct atmosphere from that of academia where speculative discussion is not only valid, but also rewarded.

Finally, my third reflection on reading this failed politician concerns the daily activity of politicians, accented in countries where reelection is for real and that entails positioning oneself close to the electorate on an ongoing basis. On the one hand there’s the real satisfaction of needs and petitions of those represented, a circumstance requiring attention, management and action. On the other hand there is the imperious need for the politician to be a permanent actor, to convince the voters that he/she is working for them and to never lose his composure. Politics 24/7, unknown in the Mexican arena where (many of) the posts, including the electoral ones, are parceled out, not won.

Perhaps the characteristic of open polities, directed by the citizen and subject to constant reelection, is that politicians are in the catbird seat while they’re there but afterward they have to earn a living again some other way. In some countries they retire, in other they start a business and yet others find ways of occupying their time whether by giving classes again (Ignatieff), as being consultants or lobbyists.  They accept that their cycle has come to an end. That doesn’t happen in Mexico, the country of the Ferris wheel.

Ignatieff, recognized expert on Machiavelli, devoted himself to teach the book that changed the knowledge and perspective of politics. Notwithstanding this, when the time came to perform in politics he lacked the capacity to do so and ended up a failure as candidate, leader and politician. In a recent article, after the publication of the book, he asks whether the President (Obama) is sufficiently Machiavellian. That’s the question that the author himself, and any academic or intellectual with a yen to get into the world of politics, should ask himself/herself before taking the leap.

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Luis Rubio

Mexico has two economies that almost don’t communicate with each other (at least in terms of what they produce), a circumstance that does not predict a happy ending. The dual economy does nothing but wreak havoc and, the longer their integration is postponed, the worse the impact will be on employment and the well-being of millions of families. The dilemma is evident, but the risks of not acting are growing, above all in that the digital economy flattens everything in its path that existed previously.

The dilemma is not simple: on the one hand, diverse mechanisms of protection and subsidy have allowed the old manufacturing plant, the one installed from the forties on, to continue to plod on. Same is true for the informal economy, that keeps on expanding, mostly the result of a policy of protection, more social than economic, that has the effect of hindering adaptation and thus growth. On the other hand, the export industry competes successfully with the best in the world. The former produces, a rough estimate, 20% of the industrial GDP, but employs 80% of the sector’s workforce. The opposite occurs with the export industry. Although there doubtlessly is corruption in the assignment of subsidies and the determination of duties that (at least partially) isolate the old industry from competition via imports, the reason why this schema is preserved has to do with the perceived risk that would derive from the potential loss of jobs and, needless to add, to the relationships of dependency that this creates and politicians of all breeds happily exploit.

The dilemma is not the exception in today’s world. The digital revolution entails a radical transformation of the labor market: in developing countries there are entire professions that have been wiped off the map, only to be replaced by computers. According to two Oxford professors*, 47% of existing jobs could eventually become automated in the next two decades. Although in the short term Mexico could “snap up” some of these jobs as it has already been doing, sooner or later, inexorably, automation will affect us.

If one reads the history of the Industrial Revolution at the beginning of the XIX Century, what’s striking is how violent, in terms of economic dislocation, transition of agriculture and manual activities was to the automation inherent in the introduction of steam engines**. Two centuries later, it is easy to minimize the depth of the change that took place at that time but everything indicates that what happened then was nothing compared with what’s to come. While I have no doubt that in the long run (nearly) everyone will come out a winner, there’s no way to ignore two evident facts: the disappearance of a multiplicity of fields of work and the snail’s pace at which new opportunities will begin to be engendered. That contrast is the one that is giving rise to enormous apprehension in governments worldwide, but this doesn’t change the fact that, sometime or other, everything will end up adjusting.

It appears to me that there are two key questions: on the one hand, whether it’s possible to fend off the blow that is drawing near and, on the other, whether the types of measures that have been employed in Mexico (subsidies and duties) are the adequate ones.

The first thing that appears evident is that the torrent of change that is approaching will be brutal. Beyond the scenarios that distinct scholars discern, what has already begun to occur in diverse professional activities (accountants, lawyers, some branches of medicine, cashiers, etc.) suggests that the dislocation that will take place in all productive activities will be massive. The true choice eventually becomes attempting to contain the torrential waters that will come or preparing the country and the population to navigate these the best way possible.

There seem to be three phases, at least in the conceptual plan, that have to be sorted out: the first is the automation of activities and processes; second, the growing complexity of the processes and the     consequent demand for personnel, at all levels, with exceptional degrees of preparation and skill; and third, the disappearance of whole segments of activities and professions in which there will be no more sources of employment. Each of these phases entails its own consequences, but what is evident is that this requires a clear-minded public policy in place, very focused on giving all Mexicans the opportunity to “make it” in this new global stage.

According to the literature, it is clear that  thinking is required with regard to a radical change of strategy, all of this oriented toward achieving quantum leaps in the growth of productivity. For that it will be imperative to see to the productive chains, the market structure, the infrastructure (that of security the well as the patrimonial and physical) and education, above all technical: skills based. The point is to arrive at a generalization of the growth of productivity and not, as it is today, where there are areas that experience huge growth of this with others that subtract from it. Today, as in the first decades of the Industrial Revolution, the benefits of the growth of productivity are consolidated in a few enterprises and regions of the country.

The risk of mass unemployment is evidently the greatest concern. Although history demonstrates that technological change, disruptive as it may be, always generates new opportunities, I have no doubt that there can be moments (on occasion lengthy ones) of dislocation. In the end, the dilemma for the government lies between persisting in, ostrich-like, hiding its head in the sand or beginning to articulate a strategy that makes the next era of growth possible. Reforms are important, but execution is everything. The latter includes the need to anticipate and to foresee, not the most sterling of our qualities.

*http://www.oxfordmartin.ox.ac.uk/downloads/academic/The_Future_of_Employment.pdf

**A great book on this is  The Second Machine Age.

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Luis Rubio

In his book Foucault’s Pendulum, Umberto Eco affirms that “any fact becomes important when it connects with another”. There’s nothing like having hard numbers to able to understand the tessitura in which the Mexican economy finds itself. While discussion inside and outside the government is concentrated on taxes, expenditures and legislation oriented toward imposing ever more controls, a new study* reveals that the underlying problem of the Mexican economy does not reside in those issues but in that in reality it is about two distinct economies that clash and have the effect of diminishing the growth rate. The study shows why averages say nothing and that an accurate diagnosis would allow focusing the government’s policy with better aim.

In a word, the Mexican economy works at two speeds: one feeds the growth of productivity while the other one subtracts from it. According to the statistics, growth of productivity in recent decades has been scraping the bottom of the barrel: 0.8% on average. However, the modern sector of the economy has experienced an average annual growth of productivity of 5.8%, while that of the traditional and informal economy has diminished at a rhythm of 6.5% per annum. The average does nothing but confuse the issue and justify counterproductive public policies.

Productivity isn’t everything, but in the long run it is almost everything, writes Paul Krugman in The Age of Diminished Expectations (1994): “A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker”. Productivity is the result of everything that occurs in the economy, thus constituting a crucial measurement of the performance of it. What happens when the average tells us absolutely nothing significant?

The McKinsey report begins with a series of contrapositions: “What is Mexico? Is it a dynamic industrial power that builds more cars than Canada and that has become a global automobile exporter? Or is it a land of traditional slow-growing businesses and informality? Has it found the right combination of reforms to restore rapid GDP growth and raise living standards? Or is it stuck in a perpetual cycle of economic advances and retreats? Is it a modern, urbanized state that has adopted market reforms and built well-functioning institutions, or is it a place where corruption and crime are tolerated?” This is only the beginning and there’s no flab in the questions…

Let’s see some suggestive numbers. The report states that there are two economies: one that grows rapidly and another that tends to contract. Traditional and informal enterprises achieved 28% of the productivity of the modern ones in 1999, but only 8% in 2009: that is, not only is there a large gap between the two sectors, but also this is widening. Old-style bakeries exhibit one fiftieth the productivity of modern bread-making producers; 53% of small and medium-sized business have no access to financial services; at the current growth of productivity, the growth rate of the overall economy will decrease to 2% annually at the outside. Taken together, the Mexican productive plant has a productivity of 24% of that of the U.S., even though many Mexican companies are more productive than those of the U.S. In a word, to reach a sustained GNP growth of 3.5%, not by any means the most ambitious goal, the average rhythm of the growth of productivity would have to triple. The big question is whether something of that magnitude can be achieved.

Whoever has observed or experienced the way the country functions would immediately recognize the contrasts and contradictions. As the report says, there are two economies: one that runs at high speed, and another that lags behind. But it’s not only that: the country is characterized by situations that are unintelligible for a foreign observer or investor. Perhaps Mexicans –accustomed as we are to the surrealism of daily life- are not surprised by cases such as those of Line 12 of the Metro (a misfit between the contractor who built the line and the supplier of the wagons that do not match the rails) or by Oceanografía (a case of outright fraud involving politicians from all parties) which, although not inconceivable in other latitudes, over there would be treated, and dealt with, as aberrations. For Mexicans these are frequent occurrences, not aberrations: excesses, frauds, unscrupulous authorities, the absence of a government that adheres to the rules, manipulation of facts and times for political or individual gain, supposedly independent regulators (and now with “constitutional autonomy”) with mandates that are contradictory and potentially detrimental to the success of their function.

In a world that advances at the speed of light, the snapshot that this report presents to us is moreover worrisome because it reveals a country that refuses to deal with its underlying deficiencies, or that has been incapable of doing so, and that is experiencing a growing gap in its economy. The modern part accelerates the growth of its productivity and becomes a global exporter. The traditional part –that defends itself tooth and nail from any change- drags its feet and impoverishes the country. And the latter is winning over the legislative battles.

Many studies similar to this one conclude with a list of great reforms that would be indispensable for  reverting the diagnosis, which renders their proposal only marginally useful. The immense value of this report resides in the wisdom of its recommendations: reduce the consumption of electricity, improve the productivity of investments in infrastructure, emphasize the development of skills. Evidently many changes are required, but the key lies in the details that make the difference and that would make a much more successful country possible.

* McKinsey Global Institute, A tale of two Mexicos: Growth and prosperity in a two-speed economy.  http://www.mckinsey.com/Insights/Americas/A_tale_of_two_Mexicos?cid=other-eml-alt-mgi-mck-oth-1403

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PROJECT SINDICATE – The world’s opinion page

Jaana Remes – Luis Rubio

  MEXICO CITY – Mexico is making headlines of late. For a change, they are mostly positive. January marked the 20th anniversary of the North American Free Trade Agreement, the treaty that created a single market with the United States and Canada, and helped to propel Mexico into the top ranks of manufacturing exporters. The reform agenda of President Enrique Peña Nieto has received global attention. And, in recent months, global leaders in auto and food manufacturing have announced multi-billion-dollar investments in new facilities.

Indeed, in a world that has grown nervous about emerging economies, Mexico stands out as an island of opportunity, with a stable fiscal position and the prospect of rising demand for its goods as the US recovery gathers momentum. Yet there is another side to the Mexico story. For all of its successes under NAFTA and other market-opening devices, the country has recorded relatively slow GDP growth. For the past 20 years, annual GDP growth in Mexico has averaged about 2.7%, which is low by emerging-economy standards and not enough to raise living standards substantially across a growing population.

The main factor behind Mexico’s anemic growth is chronically weak productivity increases. If Mexico cannot find ways to spur higher productivity soon, it could be headed to 2% growth, rather than the 3.5% that is widely expected. That is because population aging and a falling birth rate will slow the flow of new workers into the labor force, the source of more than two-thirds of GDP growth in recent decades.

The solution to the productivity problem is easy to state but difficult to accomplish: the country must bridge the widening gap between the “two Mexicos” – the agile, dynamic, post-NAFTA modern economy (the “Aztec tiger”)and the traditional economy of slow-growing, unproductive traditional businesses. These two Mexicos are pulling in opposite directions, which explains why three decades of reforms to open markets, privatize industries, embrace free trade, and welcome foreign investment have failed to raise growth rates. This is the central finding of our recent research.

Modern, highly productive, and globally competitive Mexico has flourished under NAFTA and other rounds of market liberalization. Today, Mexican multinationals such as FEMSA, Grupo Alfa, Grupo Bimbo, Grupo Lala, Mabe, and Walmex have become leaders in some of the most competitive markets in the world.

But policy changes have barely touched the other Mexico, where traditional enterprises operate in the same old ways and are experiencing falling labor productivity. While the largest modern companies have been ratcheting up productivity by 5.8% annually, productivity at traditional Mexican enterprises – tiny stores, bakeries, low-skill manufacturers – has been declining by 6.5%. Worse, employment is growing faster in the traditional economy, in effect shifting labor from high-productivity to low-productivity work – the opposite of what any economy wants.

The question looming over Mexico today is whether Peña Nieto’s reform agenda can fuel economic growth in both Mexicos. Two broad priorities need to be addressed:

Mexico must work to transform the traditional sector from a low-productivity, low-wage trap for workers into a dynamic source of growth, innovation, and employment. The share of workers employed by medium-size Mexican companies – a potential engine of job growth – dropped from 41% in 1999 to 38% in 2009.

Mexico needs to create a level playing field on which all companies can blossom; today regulatory preferences, tax policies, and other structural obstacles limit the growth of the modern sector and perpetuate the traditional and informal sector.

Of course, no magic wand can turn small business owners with limited capital and skills into entrepreneurs. But conditions encouraging more small companies to join the formal, modern economy can be created.

For starters, incentives that reward companies for remaining small, inefficient, and informal should be removed. To take one example, small business owners subscribe to electric service as individual consumers and can even qualify for subsidies of up to 80%. Likewise, traditional markets and street stalls pay no sales taxes. Despite recent labor-market reforms, limitations on layoffs and temporary workers continue to encourage even large companies to hire full-time workers through third-party agencies (and thereby avoid burdensome restrictions).

Access to capital is another barrier. Mexico lags far behind its emerging-market peers in outstanding bank loans. We estimate that Mexico’s annual credit gap – the difference between what companies would be expected to borrow and what is actually loaned – is $60 billion a year. Three-quarters of that gap is under-lending to small and medium-size enterprises, which in other economies create new products and services and deliver the most employment growth.

To achieve the second goal – making Mexico a place where modern companies thrive – Mexico needs not only to remove obstacles such as restrictive zoning, which limit the growth of modern stores; it also must improve the overall business environment and ensure that contracts can be enforced. Despite Mexico’s energy riches, for example, the cost of electricity for commercial customers is 73% higher than for US businesses.

Moreover, Mexico would need to invest $71 billion annually to bring infrastructure to the level needed to support 3.5% growth. Mexico also needs to continue to raise educational attainment to prepare the labor force for modern-sector employment.

The private sector has a critical role to play in bridging the two Mexicos. Even in auto manufacturing, where top global competitors are maximizing plant productivity, 80% of companies are small, traditional shops, with fewer than ten employees. These subcontractors provide low-cost labor to global parts makers and assemblers and have one-tenth the productivity of producers in the top 10%.

Some global companies are already working with their small suppliers, providing technical know-how and even access to capital for new equipment and technology. Mexico needs more of this kind of development. Most important, Mexico needs to become a place where those who do not play by the rules are penalized and where law-abiding companies grow and prosper – and inspire others to emulate their success.

Jaana Remes

Jaana Remes is a partner at the McKinsey Global Institute, based in San Francisco.

Luis Rubio

Luis Rubio is chairman of Mexico’s Center of Research for Development (CIDAC – Centro de Investigación Para el Desarrollo AC).

Read more from “Submerging Markets?”

http://www.project-syndicate.org/commentary/jaana-remes-and-luis-rubio-take-issue-with-flattering-headlines-heralding-a-new-emerging-market-success-story

Luis Rubio

The reforms that began last year place Mexico, potentially, in the world’s big leagues, there where the players are professionals and the game rules transparent. The mere opportunity of our being able to play in that scenario constitutes an authentic milestone. At the same time, it is necessary to take note of the conditions that remain for the country to satisfy in order to put in at a good port, thus the fragility of the instruments with which it is arriving at the table.

The generic matter is that of the Rule of Law and the institutions that lend it form and make it possible, a theme of frequent concern for me. While a company of contractors can be administered by a middling and even parochial government, the awarding of contracts and concessions to the world’s leading oil conglomerates implies a quantum leap in these matters. These enterprises are at home all the countries of the world, work in the most amenable regions of the globe as well as in the most corrupt and mafia-ridden. Their experience is garnered by hundreds of attorneys and an instantaneous, sometimes irreflexive, disposition to litigate any significant issue before the courts. The question is whether Mexico is really capable of, and prepared to, play in those leagues.

While a discussion on the Rule of Law tends to be abstract and ethereal, the administration of complex processes based on first-world contracts is not abstract and theoretical but concrete and real. With respect to the coming into fruition of the reforms approved last year, above all that of energy, the country will find itself confronting the reality that the big leagues entail in this matter and, I have no doubt, it will become evident very fast that this is not a lesser challenge.

As in sports, being in the big leagues implies submitting to a regime of higher-level scrutiny, professional referees and arbitral tribunals, over which the government has no control. That is, it implies assuming the responsibility for professional conduct that is very distinct from the provincial practices typifying us. I ask myself how we will make the leap. The evidence available for assessing this contingency up to today is mixed.

In economic matters, one part of the country has clearly taken that step. The tourism industry has transformed itself into one that caters to and competes for the world’s most demanding tourism. The same is true for the exporters who have superseded Japan in the U.S. automotive market. That is, there’s nothing in Mexicans’ DNA holding them back from achieving a transformation or from competing successfully. However, the great difference between exporters or hoteliers with regard to the challenge of the big leagues is that, in the first case this is about individual actors who possess the flexibility to adapt with celerity and who are focused on very concrete affairs. The same is not true for the energy sector.

In the case of energy and, in general, of an investment regime and modern as well as in competitive trade markets, what will be required is legislation that is defendable in international tribunals. When a lawsuit comes about, prosecutors and investigators will have to be capable of supplying reliable and genuine evidence, regulator entities will have to be able to confront the government and impose themselves, judges will have to hand down rulings susceptible to the scrutiny of non-traditional arbiter bodies and so forth. To date, none of the country’s legislative, judicial or regulatory institutions could boast of such a benchmark. For the country to be successful in the big leagues it will be necessary to change everything about the way the Mexican State functions. This is a major summons and it will demand not only human capability but also exceptional leadership that, in addition, will have to be able to confront all of the injustices of our political and judicial system. I doubt that the government today comprehends the nature of the challenge.

One comparative index* that evaluates the degree of the Rule of Law that characterizes the countries of the world employs eight indicators: limits to governmental authority, absence of corruption, governmental transparency, fundamental citizen rights, order and security, the capacity to make regulations complied with, civil justice and criminal justice. Each of these indicators carries with it a trail of analytical elements, but I doubt whether any Mexican would be surprised that the index ranks us in 79th place of 99. Taken together, the indicators attempt to measure only one thing: does the government (including the legislative and the judicial branches) work to protect the rights of individuals (including investors) or not? Unfortunately, the verdict furnished by the indicator does not lie outside of the reality.

The great question, perhaps key for making the success of reforms like that of energy possible, is whether the country, beginning with its government, is willing to undertake institutional reforms that would make possible the installation of a system of government capable of imparting continuity to the citizenry in terms of living in a safe environment, protected by laws and with ease of access to justice. If the response to this obvious question is no, the country is in big trouble; if Mexicans are not capable of making life simpler for the ordinary citizen, what makes one think that we’d be capable of attracting investors who have their own means of defense. The challenge moving forward is monumental.

*http://worldjusticeproject.org/sites/default/files/files/wjp_rule_of_law_index_2014_report.pdf

www.cidac.org

@lrubiof

                                                                                                                                 Luis Rubio

Interesting to observe Mexico from the standpoint of the debate taking place in Washington. The financial crisis that overtook the U.S. in recent years has been as political as it has been economic and that political component made it particularly distinct from our experiences at similar moments. To view Mexico from Washington allows understanding the resemblances, but also the differences.

Two themes have been slated for debate in Washington from the moment the 2008 crisis began: one, the type of response that the government was required to give and two, the cause of the crisis itself. The response stemmed from the newly inaugurated Obama in the form of an ambitious program that, however, left the then Congressional Leader the responsibility of deciding on the allocation of monies. In contrast with the President about to take office, the-then Speaker of the House was saddled with vast political debt, which translated into a poorly focused stimulus, ill calibrated, thus one accompanied by an inevitably poor result. The successive debate, over the past five years, has been devoted to determining whether the stimulus should have been greater or whether there should have been an additional one. Few took it upon themselves to note, or were willing to accept, the fact that the stimulus was inadequate and that its impact on the extraordinary growth of the public debt was enormous.

The debate on the causes of the crisis is much more interesting because it casts light on a way of conducting politics that is radically distinct from Mexico’s. There’s virtual consensus that the crisis began in the financial sector and that in its management lie the instruments that agglutinated or “packaged” home mortgage loans: in general terms, the economists coincide in that it was the pressure exerted by diverse members of Congress to oblige the banks to grant loans to persons of scarce resources that unleashed the crisis. The reason for this resides in that the financiers, ever creative (and steeped in perverse incentives), devised mechanisms to provide mortgage credit to resource-poor individuals (who never should have assumed it) through an instrument that permitted very low mortgage payments during the first years but that later increased abruptly. The result was that millions of persons took out this credit and, when the cost rose, abandoned their properties, precipitating the crisis. The fact is that the crisis transformed the U.S. financial system as well as U.S. politics.

Contrary to what politicians sought and expected, the crisis wound up allowing a small ensemble of mega-banks to sprout up and strengthen, which further concentrated the risk. On the political side, the crisis generated an abysmal cleft that has divided U.S. politics, impeded approval of the budget over the past five years and created frequent crises over debt ceiling. Although at specific junctures one party has won and the other has lost, surveys show that it’s the politicians in general, independently of the party to which they belong, who have forfeited legitimacy.

All of this has created an extremely polarized climate, where the Democratic Left has advanced its high expenditure agenda, higher taxes and programs to attack poverty, while the Republican Party has been divided into those who would rather wheel and deal with their Democratic colleagues and those who, from the “Tea Party” tribune, propose paralyzing the government on behalf of decreasing its expenditure and returning to financial stability.

The first great contrast with Mexican politics lies in the government’s capacity to act. Although we Mexicans complained a lot, during the epoch of financial crises as well as in successive years, the prime characteristic of the Mexican political system has been for the President to retain massive latitude to act and respond. When Zedillo confronted the crisis of 95, Congress voted for the entire package that he proposed. In some cases, such as Fobaproa, debate and controversy ensued but, in the end, the President got its way. In contrast, Obama has not been able to advance his budgetary initiatives and his singular program in health insurance matters continues to experience one setback after another. The difference between the two political systems is laser-sharp.

One way of interpreting the differences is to observe the mechanisms of checks and balances that exist in both societies. While in Mexico the government has the capacity to twist arms, buy votes or impose its will, the U.S government survives at the mercy of its Congress and enjoys relatively moderate powers. In Mexico the government emits decrees that, although criticized, become public policy, while in the U.S. the government finds itself up against the Supreme Court every time steps over the line. Democracy has its costs, but also its virtues.

Perhaps the greatest of the differences resides elsewhere: in Mexico the darlings of the regime, in each government, entertain a disproportionate capacity for influencing the future, modifying the Constitution and advancing their preferences. There are dozens of constitutional reforms that are were inadequate, counterproductive and vice-ridden from the very beginning, which are due to individuals within the government who, on meeting no counterbalance whatsoever, eventually have their druthers.

The U.S. has problems but a political system that protects the citizen from the most egregious excesses. In Mexico that protection is overall open to question. Democracy takes its toll, but the absence of checks and balances is conceivably the most unmistakable measure of underdevelopment encountered in daily life.

www.cidac.org

@lrubiof