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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?”

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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

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@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

Luis Rubio

About 25 years back, Mariano Grondona, perspicacious Argentinean observer, explained his skepticism about the liberalizing reforms of that era. His argument was two-fold: on the one hand, he said, “We are surfacing from some decades during which it came to be thought that the State is the panacea… now we run the risk of believing that the market is that panacea”. On the other hand, he inquired, “Is capitalism a movement that emerges naturally when we remove all of the controls…? Latin America has cultural roots that are not capitalist. Our structure is based on the family, not on the society. Our idea is that the family is the model and that the State is not unlike the paternal custodian of a large family. That is where we come from. And I do not think that can change simply by throwing out the rules and letting the market operate magically”. “What has died is the belief that the State will fix everything”.

Twenty five years and many crises later, Grondona’s words continue to have an impact on me. Not only did he clairvoyantly anticipate the problems of his own country, but also his skepticism has been well justified. Although it cannot be denied that, at least in some countries, beginning with Mexico, there has been great material progress during these decades, it is also evident that we are far from having consolidated a sturdy route to growth and development.

Mexico has achieved the consolidation of a powerful growth engine in exports but has fallen behind drastically in its internal market. Two things illustrate the latter: one is, plain and simple, the differences in the growth of productivity: while corporations that export and those that have transformed themselves exhibit spectacular productivity growth rates, the traditional manufacturing sector experiences negative productivity year after year. Thus, although the average growth of productivity gives every appearance of being dismal, that number conceals more than it reveals, and what it reveals is a political and social problem that successive governments have been unwilling to attack: they have preferred the status quo, regardless of whether this implies systematic impoverishment of those in the low-productivity economy, rather than the risk of the process of change and adjustment that would be necessary to carry out in order to give growth a chance in that lagging economy. Concern about the risk is reasonable, in view of that something like 80% of the population employed in manufacturing is concentrated in the “old” economy, but the consequences of going down that road are not at all promising: it’s enough to observe other cases in the south of the continent.

The other example took place in 2009. When the U.S. crisis began, many economists expected that, because Mexico exports the equivalent of one third of the GDP, the economy’s contraction would be approximately one third that of the U.S.. But the opposite happened: the contraction was three times greater. Instead of the internal economy getting the country back on its feet, its contraction placed in evidence its dependence on the demand generated by the economic demand produced by the exports.

The current government is attempting to construct a new domestic engine of growth in the form of public deficit spending and investment in infrastructure. This is not an innovative mode of promoting growth but, given the evident deficit in infrastructure that the country is undergoing, everything helps. The problem lies elsewhere: as we saw in the period between the seventies and the nineties, that is not an engine that can be sustainable because it entails the risk of exacerbating the growth of imports and, with that, a currency crisis. With this I do not mean to be catastrophic: a moderate deficit might work; but the historical antecedents are not kind in tests of moderation and restraint.

The long-term viability of the economy resides in something that Grondona understood very well: the only way to secure development is through the constitution of a strong market and a strong State, one balancing the other, and each holding in check the excesses of both. A strong market impedes the government from running riot and undertaking extravagant and counterproductive policies. A strong government establishes rules of the game for the market to function efficiently. All successful countries boast a good combination of these two factors.

Simplifying, without the desire to generalize excessively, it seems to me that there are two types of countries: those that have achieved an equilibrium between State and market (an equilibrium that is very distinct in Hong Kong from that of France, but both with strong markets and governments) and those without. Very few countries have been able to transit from precarious economic and governmental structures to a consolidated market. The European crisis of recent years has exposed the absence of equilibrium in some nations (e.g., Greece) as well as how unsustainable the equilibrium was in others (e.g., Spain).

But only a handful of nations have achieved a successful transition: evident examples are Korea and Chile. The strength of these two nations lies in their having devoted themselves to constructing the foundations and scaffolding of a modern State and economy. Each followed its own particular path and neither was free of violence and abuse, but both have something important to teach us. The question is why our inclination is toward imitating lost cases (or, at least, not winners) such as Brazil, rather than heeding those that have taken the great leap ahead. That is our challenge and if the government doesn’t rise to it, it will end up like all its predecessors.

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Luis Rubio

Reality is constructed on the accumulation of actions and inactions, decisions and omissions. What follows are some observations of the current Mexican moment:

1. The capture of “El Chapo” and the death of Nazario Moreno reopened the debate on security and the similarities or differences between the former administration and the present one. Are there differences? The evidence suggests that the only notable difference resides in the strategy of communication, in which President Peña-Nieto’s government excels. The government’s manner of acting suggests efficacy and competency but, at least in this matter, there’s not the least doubt but that luck also is on their side. Those responsible for both facts –the police, the Navy, the Army- have not changed in the past several years and it is clear that the current government does not have a new strategy, in the police-military arena, distinct from the former one. Time will tell whether their political management, through their representative (some say “proconsul”) in Michoacán, yields different results.

2. The dilemma of competition in the economy is more complex than the argument suggests concerning the declaration of “preponderance” emitted by the recently created the Federal Institute of Telecommunications (IFETEL). There is no doubt of the dominance of two companies in television and telecommunications, respectively, but the solutions are not simple, in good part due to the technological change that has been taking place over recent decades. There are various things that seem evident to me, some apparently contradictory: a) today’s great issue in telecommunications is access to mobile networks and to the Internet.  The demand for liberalization, for equality of access for other companies, seems logical and conducive to the creation of a public good –interconnection- that, no ifs, ands, and buts about it, should have been the original criterion for privatization more than two decades ago. Interconnection is the critical issue; b) the issue about television has changed in one sense and remained the same in another: on the one hand, the future of television lies in closed networks, via the Internet and mobile phones, which the experts call “triple play”. This places the viability and economic attractiveness of open television in doubt, at least in the long term. On the other hand, the contempt and disapproval of opinion leaders with respect to the television conglomerates perhaps has less to do with their dominance than to the perception that they are less dedicated, as they affirm, to entertainment than to political manipulation. Within this perspective, Carlos Slim, who is not perceived in the political arena as a political actor but as an encumbered businessman, may well be a solution to the television dilemma: a credible competitor; c) IFETEL’s decision has yet to weigh in with concrete criteria, some of which, I suppose, would derive from the secondary law that remains to be passed in the Congress, but it is paramount for IFETEL’s board to realize that competition is a means, not an objective. By the same token, I wonder whether IFETEL acted autonomously, if it responded to the clamoring from the gallery that demanded “giving their comeuppance the big ones” or whether there is an institution with looming strength, capable of confronting the government and the power moguls even if this would make it unpopular, not a small matter in light of what’s to come on the energy front. No less important is the government’s statement that it will not seek the breakup of other big companies that, given Mexico’s history, are present in many a sector.

3. The celebration of the 85th anniversary of the founding of the PRI constitutes a milestone not so much for the longevity of the party, but for its evident resurrection, and all which that implies. Above all, the PRIists are making haste to recover legislative control in 2015 and all of their actions appear oriented toward achieving that objective. Seen in retrospect, it is evident that the PRI never left and the PANists, in perhaps their greatest turpitude, were never able to dismount the scaffolding that sustained their power networks. But the “return” of a PRI that never faced the need to reform itself says a lot about the political culture of the country and about the PRI’s exceptional characteristic as a disciplined, pragmatic lot, capable of constructing and reorganizing its electoral machinery, of developing novel methods for building up and fattening their clientele and centralizing the power. No one knows what will take place in next year’s elections, but there are three issues on which it’s worthwhile to reflect: first, the President’s popularity isn’t what it once was, possibly forecasting a 2015 not necessarily like 1991 when Salinas won by a landslide; second, the economy is always a crucial factor in electoral matters and the present situation is not exactly buoyant; finally, both the PAN, as well as the Left, finds itself cowering in chaos, each of its own nature. It may be that the most pertinent question is not so much whether the PRI will dominate the next electoral processes and more about whether other parties will be capable of resurging as seasoned, capable checks and counterweights before a party that may no longer be a “state party” but that has proven an amazing ability to impose itself because of the weakness of the opposition, as the Pact for Mexico itself shows.  On the side of the PRI, the question is which of the PRIs would dominate the future, because its historical nature as a party of coteries remains alive and kicking.

4. Perhaps the most interesting thing for 2015 might be the battle for Mexico City, which PRD has held since its inception in 1997. Some, in the Left, will seek to convert it into a state (with all the complexities that that entails, not unlike DC, Moscow or Paris); others, in PRI, would wish to regain it electorally. Surely no one will get its druthers, but in the PRI the Foxist battle cry, paraphrased here, of “get the PRD out of the DF”, no doubt reverberates.

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          Luis Rubio

First they approved the constitutional laws, now all efforts are concentrated on secondary laws, the so-called implementing legislation. Then will come the most important part, the tertiary laws: reality. Says the eminent philosopher James Morris, “One of the nice things about reality is that it is what is, no matter what anybody says it is.” He could have been talking about the Mexican legislative process: in the past months, the Coordinator of Teachers, a union of dissident teachers, CNTE, showed how effective –and transcendent- this third stage is. This perspective should be incorporated into the drafting process of the implementing legislation on energy…

Reality has distinct dimensions. The most obvious, because it’s in the public light, at least in form, is the one that takes place in the legislative process itself: at least in theory, this is where all the positions, vested interests and relevant actors turn up. In a serious country the process would begin and end there. In Mexico’s case, that dynamic is going to be very distinct as compared with last year: for those who count –those who would be affected or benefited by the new legal schema, the constitutional laws can change the context, but what really matters are the specific regulations and it is there, this year, that all the “inside” interests will make their weight felt.

Another dimension of the reality is what takes place after the process: in the streets and in the plants, that is, in the mundane reality. That is the true test of the viability of a law. The bureaucrats, unions, contractors, mafias and other actors in each of the sectors affected can be as obstreperous as the CNTE or as subtle as a bureaucrat finessing the control of a neuralgic asset, but both have the same effect: paralyzing or “adapting” the reform in practice. In a certain manner, the CTNE was an anomaly during this last year due to the “formal” union’s decapitation. Its strength would have been much less under the status quo ante bellum.

Whatever might have been, in 2014 we are witnessing two processes: the legislative and the real one, “the tertiary law”, and the latter tends to be much more relevant and transcendental than the wishes of the keenest and most resolute reformer. Once again, the example of the CNTE is useful simply because of the enormous weakness of the State: if it can’t even guarantee peace, how can it be expected to attain, in the exquisite designation of bureaucratic lingo, to rule over the economy (rectoría del Estado in Spanish).

One need not proceed too far afield to imagine how complex what is coming is and, within it, the vast number of opportunities for paralyzing a reform such as that of energy. Without knowing much about the sector, some obvious key areas are: bidding for public contracts, regulation, credibility of the regulator, interconnection (ducts, cables, electricity grid), competition. In the past there has been an infinity of bidding for diverse-type contracts in PEMEX that, although formally international and transparent, end up being monopolized by two or three engineers because the bidding rules are so skewed that only these personages could satisfy them. Obviously this did not happen by chance.

This year will be crucial for the country. After the constitutional monsoon of last year, what is to come will define what type of economy Mexico will have and, doubtlessly, what kind of country it’ll construct. The transformation that, at least potentially, has been legislated is so enormous that the secondary laws will require great care in handling and, at the same time, will be subject to interminable pressures on the part of all of the actors: from the reformers with no particular interest but who often assume more than they actually know, which leads to many, often serious errors in the law, to the dozens of individuals and groups whose interests are on the line. To top all of this off the ideological actors will appear who, in the pose of safeguarding the Republic, will incorporate all manner of restrictions in the guise of baroque terminology that later will give the lawyers and courts a wide berth.

To complicate the matter, for obvious reasons of the country’s history, in Mexico there is no major experience in energy affairs from the legal perspective because the reality would not require it. This fact is neither good nor bad in itself, but implies that, whatever emerges from the legislative process will thence comprise the platform employed to settle lawsuits when these arise. Given the very abrupt manner in which the constitutional reform was approved, Mexicans’ proclivity for producing unintelligible legislative after pains (and deliberately saturated with confused wording designed to grant discretional powers to the authority), and the arbitrariness with which things are decided upon on a day-to-day basis, the potential for conflict is infinite. If the objective is to attract foreign investment, inevitably long-term in this sector, everyone should know that litigants will be poised one step behind every decision, all ready to pounce.

In a word, the reality will impose itself independently of the preferences of all involved. The tertiary law is always definitive and brutal and, worse yet, as Machiavelli said in his Florentine histories, “winners have no shame, no matter how they win.” To those who can emerge winners or losers, their lives will be spent in whatever surfaces in the reform; thus they will do everything possible to impede the reforms, adjusting their needs to or neutralizing them. The CNTE may be very obvious and crude in its ways and proposals but no one can be blind to their unmistakable win in the terrain that counts, that of reality.

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Luis Rubio

The detention of drug lord “El Chapo” Guzmán is of enormous importance but its transcendence will depend on what’s done here on out. It is still premature to venture a conclusion, but it’s indeed possible to speculate about its potential implications.

The propaganda surrounding the Chapo has brought to mind the characterization that Hannah Arendt made of Adolph Eichmann when she covered his war-crimes trial in Jerusalem. Although it is evident that the Holocaust has nothing to do –in dimension, scale, horror or evil- with the narco, the photograph of the personage from northern Sinaloa state allows us to observe that it concerns a mere link in a long chain in which the individual, isolated from his mafia, is no more than another simple cog –a “functionary” she said- in the wheel. Thus, however much his capture merits, the problem laying siege to the population –extortion and kidnapping- does not end with the detention of a capo but rather demands attention to the entire system that makes it possible. The great question is whether this detention will bestow on the government the courage to confront the true challenge.

The government is correct in congratulating itself and no one can withhold from it the credit for having laid the long arm of the law on the one who, for so many years, had outfoxed the justice system. The government can boast about its efficiency but it will now have to demonstrate that it is really willing to design and to enforce a strategy that transcends the issue of the individual in question, or, even, of the narco industry in its entirety, in order to attend to the underlying theme, which is the safety of the population and the absence of an effective government that makes it real.

The capture is important because of its symbolism: from now on a real struggle against impunity could be constructed, but in this Mexico’s history is not kind. Despite the narrative that was swiftly fashioned concerning the mechanics of the detention, information from the outside suggests nothing exceptional in the actions of the government’s security forces. It was U.S. entities that provided the critical data that made possible the capture of the capo by the Mexican Navy so cleanly and efficiently. Nothing wrong with that, but it made it obvious that a new strategy does not exist.

The matter of the strategy is more relevant than one might think. In the first place, it’s worthwhile asking whether in reality there exists the conviction necessary to reconstitute (or create anew) the institutions responsible for guaranteeing the safety of the population. Although a year ago the President heaped praise on the police reform in the state of Nuevo León, there’s no indication that this, or any other, is being applied to achieve what plainly is key: to develop police and judicial capacity at the state and local level.

In second place, if in effect no new security strategy exists, in the administration continuing to follow the U.S. “cutting heads” strategy? In concept, the search for capos and their “elimination” or incarceration makes all the sense in the world because it advances the cause of justice and attacks impunity head on. However, that strategy would perhaps be viable or suitable for U.S. territory where there are functional police and judicial authorities at the three levels of government: when a capo is detained, the local police act against the rest of the mafia involved and, usually, achieve dismantling the organization as a whole. The experience in Mexico, and it’s not exaggeration to say it, in Iraq, suggests that this strategy is counterproductive where there is no similar structure of authority because capturing the capo does not lead to the dismantling of the organization but instead, to its fragmentation, with the consequent upsurge in levels of violence. I do not wish to suggest with this that the search and capture of these leaders should be abandoned, but it is not sufficient, and it is not what’s most relevant.

That’s the rub: there’s the possibility, not at all remote, that the capo’s detention will become a trophy on the mantelpiece that, as in the case of the teachers’ union leader, entertains no further transcendence than the ephemeral benefit of making the government appear more efficient that it really is. Thus, the ball is in the government’s court for determining how it will use the detention, hopefully in a more effective and lasting manner than in the previous case.

Because, at the end of the day, Mexico’s true problem does not lie in the narco but in the incapacity of the country’s system of government (at all three levels) to maintain the peace, protect the population and create a climate of stability that makes it possible for the economy to progress. No one can ask the government, at only one year of its inauguration, to hand in perfect accounts, but it is clear that there is no strategy that leads to that institutional strengthening (beginning with the police and the judicial power), wherein the sole possibility lies for, eventually, resolving the country’s security problems.

Mark Kleiman, an American academic and former law-enforcement official, affirms that the key lies in utilizing the existing police and judicial capacity to impose upon the narco-trafficking mafias as severe rules and limitations –though inevitably modest at the beginning- as it is capable of enforcing, followed by a systematic strengthening of that capacity until peace is imposed and the action of the narcos is strictly limited to the movement of their merchandise to the North.  The capture of the Chapo permits launching a strategy like this, but it will only work if it’s truly designed and made to work. For this rhetoric is insufficient: acting is de rigueur.

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 Luis Rubio

Mexico has been an independent nation for over 200 years now and we Mexicans have seen everything: periods of light and periods of darkness, eras of growth and stages of crises, times of peace and times of violence: moments of optimism and ill-fated intervals. There have also been innumerable grandiose plans, the majority of which end up supplying nearly always the poorest of results. Mistrust in the government is not recent nor is it the product of chance.

Many are the reasons for such lean results but two are prominent: lack of continuity and lack of realism. The continuity problem is summed up in the fact that every six years, when a new administration is inaugurated, the wheel is reinvented. No plan in Mexico can withstand a change in the presidential office: each government must of necessity imprint a new rationale upon its thrust, generally without there being an objective evaluation of the existing one. What there was before was always bad, inadequate or insufficient, which calls for a change, often radical.

The lack of realism derives from the willfulness that tends to characterize the plans of the government: a new crowd comes into power, full of creative and innovative ideas, with which it expects to transform, change the country at the root. Some of these plans make sense, but the overwhelming majority have been mere bright ideas, sustained on the expectation that the new government, heir-apparent of the world, will accomplish its mission because it is competent whereas the previous one was the opposite. In addition to this, our governments and legislators have been extraordinarily prone to advancing great plans without effecting the changes that would be indispensable for reaching their own objective. Thus, Mexicans end up with a Constitution saturated with good wishes (and often reformed) without the least probability of their translating into the development of the country or the well-being of the population.

The result is that there is not a system of government to which the citizen can refer or in which it can trust. Everything depends on the president in turn and his plan for his six-year term. What matters is not consolidating a system of government that treats all citizens equally and in an impersonal manner, but the great vision and the cronies. Of course none of this cultivates the loyalty of the citizenry: instead, contrariwise, there is always, lurking in the wings –the fear- of what is to come, with all of the uncertainty that this scenario entails.

The reforms of the eighties and nineties, as deep and biting as they were, were not distinct. Although there was a transformer spirit that animated them, the so-called “model” that lent coherence to the governance proposal, the plan was imbued with contradictions that explain a good part of the results. Some sectors remained subject to competition, others did not; the privatizations followed a logic of maximization of fiscal revenue instead of a transformation of the industrial structure; the economy, including imports, were liberalized but without deserting the darlings of the regime; regulations were eliminated but subsidies were upheld. In a word, it was another of the grandiose plans that would transform the universe.

With one exception, which has transformed the country. NAFTA was conceived to give permanence to the reforms that had been carried up to then. Good or bad, and with all of their shortcomings, those reforms brought about the opportunity to effectively transform the reality but only if they were preserved in the long term. In other words, the categorical imperative of NAFTA was procuring the affording of certainty to the key factor of the reforms, the touchstone of the modernizing project of that moment: investment.

Revealing of the nature of the political system, what is crucial about NAFTA resides in the recognition of the incapacity of the existing institutions to confer upon them the type of guarantee that the investor requires. In this regard, notwithstanding its two thousand pages, NAFTA is nothing more than a form of borrowing U.S. institutions for the benefit of Mexico. In this lie its essence and also its limitations.

NAFTA was conceived to preserve what had been achieved, but not to advance what was lacking. In this fashion, in yet another of the myriad contradictions of the reformer project, NAFTA achieved the elemental –according guarantees- but made it possible to abandon the reform process precisely when this was most important. Everything became paralyzed exactly when the whole of the Mexican economy and society needed to experience a transformation in productive structures and in education, in the nature of the government and in the mechanisms of regulation for raising productivity. NAFTA was the end of the reform process rather than the beginning of an era of transformation. What was urgent implied an integral transition to move from a closed and protected economy to an open and competitive one. In this manner, instead of this occurring, it wound up creating and preserving a dual economy in which one part is competitive and the other constitutes an encumbrance for growth.

NAFTA contributed to the transformation of countless industrial sectors, opened up opportunities for the growth of enterprises and activities, heightened the productivity of considerable portions of the economy and fulfilled its main objective with respect to investment.

Whatever the position assumed with respect to NAFTA, no one can doubt its enormous transcendence and its core function in achieving practically everything positive that takes place in the Mexican economy. What NAFTA can’t do is substitute for essential governmental functions. That is the great deficit that the Mexican society lives with and on which depends the realization of its tremendous potential.

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@lrubiof

FORBES – Luis Rubio

“The calm after the storm”, says a popular refrain.  And the calm in this case could be brief: after a year of politico-legislative effervescence, the calm creates an exceptional opportunity, perhaps unique, to advance the governmental agenda no longer in the abstract and on occasion sketchy terrain of politics, but rather in the concrete scenario of quotidian reality, where it really hurts. To date, however contentious the reform process has been, everything has been restricted to the ideological. Now the battle for interests begins.

Undeniable, the success of the government in advancing its legislative platform, in the constitutional dimension. In the process the president displayed solidity, prudence, flexibility and impressive discipline. From its conception, etched into the Pact for Mexico, the strategy has proven to be implacable and the president did not follow it dogmatically but instead, as shown by the contrast between the fiscal reform and that of energy, it adapted itself along the way for the sake of achieving its core objective. The applause that it has garnered in the world press is not for naught.

What’s paradoxical about the point in time is the contrast between that optimistic applause from the outside and the pessimism, or at least skepticism, holding sway in the interior of the country. The explanation is simple: Mexicans know that the letter of the law hasn’t got much to do with the day-to-day reality. Consequently, more than pessimism, what there is in Mexico is incredulity: it must be seen to be believed. And in Mexico seeing means implementing.

In comparison with highly institutionalized societies, in Mexico a good political operation (something unusual in the last decades, which is why last year’s achievements stand out so much), allows great reforms to be carried out. The speed with which the energy reform was ratified would have given a collective heart attack to the entire society of Denmark, where a constitutional reform can dally for up to three years and few are successful. Accordingly, in a weakly institutionalized society such as that of Mexico, good leadership has the opportunity to achieve fundamental transformations, but also to revert them, which feeds the skepticism.

In this context NAFTA is exceptionally brilliant precisely because it’s the only thing that hasn’t changed in recent decades. Opening and liberalization have been “modulated”, many subsidies have been reintroduced and the present government proposes raising –publicly and consciously- deficit spending for the first time since the nineties. These ups and downs generate cynicism and uncertainty among the population because they imply breaking political commitments. But not NAFTA, which because of its international moorings, is exactly the achievement sought. It is crucial not to ignore these factors, above all because of the contentiousness that can ensue on implementing the reforms already approved.

In legislative terms, the next step will be more transcendental. While a constitutional reform is significant in an abstract sense, the one that establishes the rules of the game for investors lies in the secondary laws, a matter that will proceed this year in Congress. For many analysts, that process is a mere formality because it does not require legislative alliances with the PAN and/or the PRD. However, given the historical nature of the PRI,  –a party steeped with deeply rooted private interests- absence of the opposition parties implies carte blanche for those interests to act, directly or indirectly, to adjust the legislation to their advantage. In this regard, the process is infinitely more sensitive and relevant this year. The details that finally appear in the legislation will be those that determine the measure of its success.

It seems probable that the government had calculated that it had to put its legislative agenda forward in the first year to be able to start harvesting in the following ones. Its calendar has an electoral logic (achieve exceptional results at the moment of the mid-term elections), which implies employing all of its resources –such as the expenditure and its infrastructure projects- proactively. Perhaps what they didn’t bargain for was the fireball of Michoacán and, potentially, with how complex the secondary energy law could become. No one should minimize or underestimate how fraught with difficulty political management will be in 2014 above all because, as Mike Tyson said, “A well-aimed blow can thwart the cleverest plan”.

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@lrubiof

Luis Rubio

Not by chance do monopolies predominate in Mexico or, more appropriately, monopolistic practices. Everything in our system, and in the practices deriving thereof, leads to forms of action and response that go against competition, reduction of costs or consumer service. The abuse that citizens perceive on the part of suppliers, whether governmental or private, is the product of an institutional reality that grants privilege, thus making this conduct inevitable. The fledgling reforms do not address this reality.

The key to the functioning of an economy resides in the way that it is governed. If what governs it are perfectly defined rules and practices largely accepted by all of the actors, then the participants in the economic activity -investors, entrepreneurs, savers, consumers- will accept a lengthy time horizon for attaining their objectives. Contrariwise, when there are no established rules, procedures that make complying with them obligatory and an authority that requires adherence to them, and is capable of enforcing them, the time horizon of all of those same economic agents changes radically.

When a potential investor trusts in the permanence of the rules of the game, his expectation of profitability is lower than when that permanence is doubtful. Although it might appear paradoxical, this difference reflects contrasting assumptions and expectations. If the perception is that everything depends on a determined governor, the investor or entrepreneur will expect immediate and very grand results; if his perception is that the governor in turn is irrelevant to that performance, his vision will be long term, thus he will adjust his expectations of net profitability.

The way that they repave the streets never fails to surprise me. Instead of going block by block and cause less bother to motorists, the contractors break up the pavement of the entire trajectory from the first minute, although it will take them months to finish the work. The reason is very simple: once the pavement is broken up, no one will dare to cancel the contract. The behavior of the contractors may seem abusive, but it is absolutely rational: it’s the only way they’re guaranteed the whole job. The problem is trust in the authority and the solidity of contracts.

Now, in the light of the possibility of a new era of bidding for government contracts in the matter of energy, the issue gains exceptional relevance. While many of the typical contractors are in the loop for a-one six-year government and their jobs are nailed down in the backroom, the potential bidders in energy matters are first-world companies disposed to fight to the eleventh hour for what’s theirs.

The matter came to mind a few weeks ago when I read about the conflict between the concessionary of terminal 2 and the Mexico City Airport Authority concerning the concession awarded for its construction and its exploitation for a determined period and under certain profitability conditions. I have no idea who’s right, but the argument is not new. Some years ago something similar occurred with the water concession in Aguascalientes with the change of governor and is now happening with the railroad operators. The theme is one of permanence and trust in (and enforcement of)  the rules.

What’s relevant are not the particular cases but rather the absence of guarantees for the fulfillment of the contracts, a circumstance that inevitably generates distrust but, above all, gives rise to anomalous behaviors. A mobile phone company entertaining doubts about the permanence of its concession is going to charge the maximal fees possible for providing its service in order to achieve its revenue objective in the shortest possible term. Everything after that is frosting on the cake. From this perspective, what a consumer may perceive as abusive behavior is absolutely logical and rational for the service provider.

Of course, the great paradox is that, while the entrepreneurs expect a high and immediate benefit because they do not trust in the permanence of the rules, many times the rules, or the concessions or contracts, do last, which implies not only exorbitant earnings, but also interminable user and client abuse. Nothing is by chance in the country: the penchant for monopolistic practices and abuse are an inherent part of the political reality.

None of this is new, but it acquires particular relevance within the context of the energy opening. In its propaganda, the government promised lower electric tariffs and lower prices at the gas pump.   Independently of the economic viability of these promises, no doubt remains that the government’s veracity, or its possibility of success, depends on the manner that it guarantees the credibility of the contracts that come to be awarded.

In its origins, NAFTA was the way that the then government found to create an investment environment above all for foreign manufacturing. The objective was to discover a mechanism that would confer credibility on the permanence of the rules. What was impacting, then and now, is that no form was found in Mexico that would render this possible. The great challenge of the energy reform lies precisely in that: to find a way for the contracts to be credible in order for the investment to be fruitful. In addition, it is crucial for these guarantees to be sufficiently solid so that expected profits that potential investors will expect would not be superior to international averages.

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@lrubiof