Luis Rubio

In one of his famous stories, Sherlock Holmes solves the riddle because of the dog that didn’t bark. That was the abnormality that evidenced the criminal. I am no expert on energy matters, but over the past several months, I have devoted myself to reading and listening to experts who know what they’re talking about and from whom I have learned the rules and basic requisites that must be satisfied for an energy reform to have a reasonable chance to achieve the objective of attracting capital, developing the sector and constructing an additional platform –a powerful one- for the growth of Mexico’s economy. In a way, I have attempted to identify why the dog didn’t bark in the Mexican energy conundrum. What I’ve found won’t delight the country’s politicians.

I start with the analysis of an expert of the Inter-American Development Bank (IDB). His focus is Latin-American and absolutely analytical: to be exact, he doesn’t care about the nationalistic or political criteria involved; his sole interest is to evaluate the results of the strategies that take shape in the law that distinct nations of the continent have adopted to develop their energy resources. He inquires into, on the one hand, the rules of the game that each nation has established and, on the other, observes the work and the results produced by two decades of industry performance, country by country. This expert sums up his conclusion by grouping the Latin-American nations into two tiers: successful and failed. The measure of success or failure is very simple: the growth of the industry and its capacity to contribute to the development of each country’s economy. In the first group, that of the winners, he finds Peru and Colombia. In the group of the losers he finds Venezuela, Ecuador, Argentina, and Mexico. Brazil was one of the winners up to a couple of years ago when it began changing the rules of the game, thus insisting on being a loser.

The big question is: what is the critical difference? In a word, Ramón Espinasa, the IDB expert, says that the difference lies in the nature of the regulations and the strength of the regulator. Where the regulations are designed to promote the development of the industry, it prospers; where the regulations confound or undertake contradictory objectives the result is disastrous. Nothing better illustrates the situation than the case of Brazil: the first wave of reforms, in the nineties, pledged to create a true energy market in which the main actor, Petrobras, the Brazilian energy corporation, was conceived as primus inter pares, that is, as the privileged actor but not as the factotum of the industry. The first legislation granted neither privileges nor perks to the governmental oil company. That fact made it possible for diverse actors, foreign and domestic, to become interested in participating in the industry and to bid for contracts that the Brazilian government put on the market. However, in recent years the government modified the legislation, incorporating into it a series of criteria that clash with the former logic: now it demands that local content be part of the bidding process and that contracts be framed in partnership with Petrobras. That is, the new legislation procures governmental control of the industry. The result has been that none of the relevant actors worldwide –relevant above all because they have the technology and capital that the Brazilians (and Mexico) lack- has been interested in participating. That’s why Brazil has stopped belonging to the group of successful nations. The situation would be even worse for Mexico were it to require new investors to contract with the Pemex union.

If the objective is to attract investment and technology, the legislation must respond to the market characteristics, that is, it has to be competitive with respect to other nations that are also desirous of developing their hydrocarbons. However, Mexico’s focus has been exactly the opposite: the point of departure is that the rest of the world lusts after exploiting its potential oil and gas resources and the only thing the country has to do is roll out the welcome mat.  It is possible that this focus would have been viable ten years ago when the oil world was experiencing a pessimistic time and any opportunity seemed attractive, a moment known as “peak oil”. The situation changed drastically with the discovery of new fields and, above all, with the development of novel technologies that led to the shale oil and gas revolution.

The new world of energy, in which Mexico’s chief client will be self-sufficient, entails a competitive rationale –in fact, a buyers’ market, dissimilar to anything known in recent decades. In the words of one of the best known executives in the oil business, “Today there are numberless projects in the world and what’s in short supply is capital”. That is, the great actors on the planet will evaluate their investments contingent upon two factors: their potential profitability and the legal certainty that each nation offers. Profitability depends on technical (costs and risk) as well as regulatory factors. Certainty depends on the legal regime under which these must operate. Under present-day circumstances, no company of consequence would participate in a project that did not guarantee an attractive return and the certainty of no political interference in the development of its investment. More importantly, the calculation that they will make is not in reference to Mexico but rather to the entire ensemble of options and opportunities in its prospective portfolio. To be precise, when Mexico publishes a new regime on energy matters it will be competing with Vietnam, Cuba, Russia, Indonesia and the US itself: in other words, with the rest of the world. In all of this, the referendum that the left is demanding would entail an additional –enormous- cost and risk, further delaying any potential investment.

All this implies only one thing: Mexico had better create a truly competitive regime that would attract important and relevant players worldwide or stop wasting time. It is obvious that the big players will demand any number of conditions before a new regime is legislated although, at the end of the day, they could probably live with something less ambitious; but there’s no way of knowing until it happens. The evaluation performed by the investors that the government wants to attract will be ex post facto. It is then that the true verdict on the reform will be rendered. Were the legislation to be insufficient, the result would be a disaster.

From my learning I am able to say that, beyond the strictly technical, the crucial difference lies in three factors: a) the (real) independence of the regulator as the ultimate authority; b) the inexistence of absurd requisites such as partnership with Pemex or local content; and c) the development of an energy market that allows the players in the industry to operate by market ̵ as opposed to political- criteria. What’s riding on this is, in a word, EVERYTHING.

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@lrubiof

Luis Rubio

How is the success of a society measured? Is being successful the same as being modern? The difference perhaps was insignificant some decades ago, but today it is possible to differentiate successful from modern countries. Maybe the question for Mexicans now that the government is ending its first year is whether the country is in line to be as successful as it is modern or whether it will proceed in an attempt to be successful and nothing more.

Protagoras, a fifth century B.C. thinker, argued that men by definition require standards of behavior because without this they would be unable to live in community. In the absence of the Bible or its equivalent, tradition played a predominant role in the determination of these standards, the reason why attacks on tradition from radical thinkers like Socrates or Diogenes generated such mistrust. Contrariwise, Aesop’s Fables would serve to reinforce the sense of community. Which would be the relevant standard for a nation at the beginning of the XXI Century?

China is perhaps the best paradigm of a country that has achieved being successful in countless measures but that confronts fundamental dilemmas that it may not be able to resolve without changing its own measure of success. At a conference that I attended recently, a scholar from India stated that his country is not modern because it is very poor, but that if it overcomes its poverty it could be a modern country, while China could be successful but never modern. The distinction that he made was profound: for a nation to be modern it must accept certain basic standards of behavior and certain metrics of development. The fact of growing fast, as has been the case of China in recent years, can contribute to generating conditions for modernity but it is not the equivalent of achieving it.

Success can be measured with comparable statistics: growth, employment, educative levels, productivity, miles of highway, international reserves, and other objective measurements that permit evaluation of the degree of advancement in absolute as well as in relative terms. That is the simplest measurement employed for determining the performance of a government or the satisfaction of its population. A successful nation advances on these fronts and satisfies the most basic needs. If it is extraordinarily successful it attains raising the population’s living standards, improving the distribution of income and maintaining a virtuous circle within these parameters.

What is not evident is whether systematic improvement in all of these measurements would be sustainable without changing other things in the functioning of the society in general. Going back to China, the most frequent debates about the future of this country refer to the viability of its political structure in view of the systematic improvement of the economic levels of a growing portion of the population. Some affirm that the Chinese culture possesses exceptional traits and that these will allow sustaining its political system without changes despite the development of its society. Others espouse the principle that, in the basics, all societies are similar and that, sooner or later, the Chinese will confront fundamental dilemmas concerning the viability of their current politico-economic structure.

Time will tell how China evolves, but what is indisputable when one thinks of the development of Mexico over the past decades, is that there are structural limits that impede transcending the thresholds of the possible under the present structure. For example, it is not coincidental that private investment, domestic and foreign, is found well below its potential. It is also not coincidental that most investments are made with much shorter times of maturation than take place in other latitudes. The same can be said for the investment cycle: it typically follows the six-year calendar because everything depends on the trust that a person -a president or governor- inspires more than the strength of the institutions.

The key to the future is found in the latter. The part of the economy that observes significant investment growth is that which is protected by international treaties, above all NAFTA, which is nothing other than an institution that confers guarantees, thus certainty on the investor.  Where there are institutions that do not depend on persons the country prospers.

The point I am attempting to illustrate here is that success depends on the country becoming modernized and this implies the construction of strong institutions that transform the country and the society. It is not possible to conceive of Mexico as a successful country while we continue not having, for example, a police system that the population respects and perceives as professional. The same is true of the judiciary: without mechanisms to settle disputes and administer justice, no country can claim to be modern.

In other words, modernity is a cultural matter that is the consequence of the integral development of the society. The case of the growth of the middle class is suggestive: the country has achieved consolidating a middle class in terms of its capacity to consume, but it will be middle class and successful not when that population has a little more money to spend but only when it also has the educative and cultural level that permits it to exercise informed judgment in social and political affairs.

A country engrossed in itself, like China is at present, cannot advance toward the adoption of rules and standards that all modern and democratic societies consider essential in ambits ranging from international trade to citizen rights and respect for others. Whether for good or for bad, the Chinese government does not see relevance in these measures for their society.

The government is beginning to confront these dilemmas, implicitly or explicitly, in every decision that it is making, and the way it responds to them in the coming future will be key. The road that has led us to where we are has been tortuous and complex and the natural temptation is to return to what was and that, in a nostalgic look over one’s shoulder, could appear to have worked well. The problem is that what was possible in the past is no longer possible today. Of course numberless errors have been committed throughout the past decades, but the only wager possible is that of building a modern country.

Perhaps what best illustrates our problems is the fact that our great weaknesses are found in the appalling quality of our governmental structures and institutions. The country continues to have a medieval system of government, incapable of heading a project of transformation.  The challenge lies at home, essentially in what the PRI constructed in the past.

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Luis Rubio

There’s nothing more dangerous than a fetish, a superstitious cult venerated as an idol. Like all myths, the reelection of legislators contains a hearty dose of fable, imagination and reality. In an ideal context, reelection can transform political relations, creating new forms of interaction, thus novel logics in making decisions. Well-conceived and structured, the reelection of legislators could constitute the factotum of an effective system of checks and balances for the Mexican political system. The problem is that the opposite is also true: ill conceived, reelection can become a nightmare, a new source of confrontation or even worse, everything would stay the same.

In his book, Orthodoxy, G.K. Chesterton wrote that “When a religious scheme is shattered it is not merely the vices that are let loose. The vices are, indeed, let loose and they wander and do damage. But the virtues are let loose also; and the virtues wander more wildly, and the virtues do more terrible damage”. Reelection of legislators is an instrument, not an end in itself and, as such, can be a virtue or a vice: it depends on how it’s structured. The crux lies in understanding that either of the two scenarios is possible but that not both are benign.

In a perfect world, the reelection of legislators would aid to situating them closer to the voters, obliging them to see to their preferences in a direct manner and with a cost involved in not doing so. The idea behind reelection is that members of the congress or senators who want to remain in their posts permanently (or as long as term limits proposed in the bill allow), will do whatever possible to tend to the needs or claims of their constituents with the aim of gaining their loyalty and, of course, their vote. That is, it establishes a link that doesn’t begin and end, like it does now, during the campaign period, but one that becomes permanent.

In all political systems, as in life, individuals act according to what is in their best interest. In this lies the essence of reelection: it is about a mechanism designed to align the interests of legislators with those of the citizenry, under the supposition that the former will court the latter in their daily comings and goings as if they depend on them to keep their job. Under this logic, in a political system where reelection does not exist, legislators naturally act under a criterion strongly determined by their party’s interest, because on this depends the legislator’s career just as, in former times, in the PRIist era, this depended on the President. Contrariwise, in an electoral system in which reelection does exist, legislators train their artillery on what concerns the citizenry: there’s nothing esoteric in this matter. But who wins and loses is obvious in every case.

The reticence is evident of the parties and of the Presidency in terms of adopting reelection as a mechanism for the construction of checks and balances in the political system. With the rationale of the proprietor, the party leaders as well as the President could wind up losing a fundamental prerogative (a major source of political control) on approving the reelection of legislators. Reelection could open up, at least potentially, a new political era. But the result that its proponents expect is not guaranteed.

There are two main arguments on the part of the detractors   of reelection: first, that it impedes renovation of the political elite, in good measure because it confers enormous advantages on whomever already occupies a seat, diminishing the competitiveness of their potential opponents. And, second, that, given the peculiar hybrid that characterizes our legislative power where legislators elected by district coexist with other legislators elected (in a distinct manner in the Congress and in the Senate) by proportional representation, we could end up, for example, with senators who are the product of a first minority (that is, they lost the election) for up to twelve years, having never won a race. Both concerns have their own merits but their dynamic is nearly opposite.

Among the potential benefits of reelection, the two crucial ones are accessibility of the voter to his/her representative and the professionalization of the legislative function. From my point of view, both surpass the cost of lesser mobility in the legislature, particularly in given the ever growing complexity that body has to deal with.

The real imbroglio resides in the coexistence of the two types of legislators (direct and proportional representation) and that is no minor affair. Simply stated, reelection is incompatible with the existence of that hybrid: for it to function, one of the two election procedures would have to disappear. It would be equally bad –and defeat the purpose- if the political parties reserve themselves the right to vet who can run for reelection. Each person will have their preferences, but on not resolving these matters, reelection would turn out to be a disaster.

There are various angles that should be considered before forging ahead, hit-or-miss, toward a worse result than that already in existence: first, reelection works only when there is one legislator per district; the legislator can be elected directly or proportionally, but if that legislator-district link is not there, the reelection will have no benefit whatsoever. Second, historically, many of our best legislators have been elected by proportional representation and, probably, many of them would not be able to win a direct election. That is to say, in some scenarios, we could end up with a legislative branch that is much worse in quality independently of the potential legislator-citizen proximity. Although it seems impossible, a scenario is conceivable in which legislators enjoy even lower prestige. Finally, on eliminating proportional representation (or its equivalent in the Senate), some parties would diminish in representation. That wouldn’t necessarily be bad (doubtlessly reducing some of the rampant corruption), but it would imply difficult decisions, those that politicians always shy away from. Redistricting the country, perhaps increasing the number of seats of direct representation instead of those by proportional representation could mitigate the cost.

In contrast with the complexity inherent in the legislative system, reelection of municipal presidents would require no more than a political decision: the potential benefits are clear and the risks relatively minor. This said, reelection cannot be seen as an idea: it pertains to a political instrument whose objective it is to fortify the checks and balances in a society, a crucial step for the institutionalization of power. For reelection to have the desired effect, it has be conceived within the context of its risks and complexities, not as a sure bet, one of those so frequent in Mexico and that nearly always end up unsuccessful, if not perilous. Miracles do not exist.

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@lrubiof

Luis Rubio

Some days ago, surfing TV channels in a hotel room, I found myself watching a discussion program on TVE, the official Spanish television network. The matter being debated dealt with a crime that had occurred in Malaga. What was interesting about the debate was the implicit frame of reference that characterized the discussion. The matter in question was the rape of a mentally disabled woman by a group of men who had abducted the woman and taken her to an apartment. Hours later, the police were finally able to locate the woman and take her to a hospital. In the discussion two things caught my attention because of their transcendence for Mexico. First, the taking for granted that the police would be diligent and competent in locating the woman. Second, in the words of one of the program participants, citing from memory, “But what were these men thinking: they are going to be arrested and all would end up in jail”. None of these premises would be possible in Mexico.

Beyond its crisis, transitory or structural, the great difference between a developed country such as Spain and another like Mexico lies in the quality of government. A government has basic responsibilities that constitute the essence of the society’s capacity to function effectively and successfully. While there are many definitions of what these responsibilities are and different positions on which those functions should be, no one would dispute the essential: public security, the rules of the game for economic activity, justice and the physical as well as the institutional infrastructure required for a country to work. Some would limit governmental functions to the basic (“the best government is the one that governs least”), while others would prefer an integral “welfare state”, but all would accept that an effective government is a crucial factor for the functioning of a country. In Mexico we are quite given to entering into ideological discussions on these matters while not even having the basics, those which persons participating in the Spanish panel discussion took for granted.

We Mexicans speak of economic growth, competitiveness, human rights, justice and other desirable objectives but we do not recognize that we lack the essential –a system of government- capable of contributing to the achievement of these. Grandiose legal reforms that establish new citizen rights and, in many of these reforms, new obligations for the government are approved, but the government’s total incapacity –physical, institutional and financial- to achieve these is not recognized. We speak of corruption in a moralistic tone that would make it appear that we never see such an act and, of course, would never be involved in one. The essentials –the structure, functions and capacity for action of the government- do not exist or, when they do, are very inferior to those that are necessary. Worse if we look at other levels of government: states and municipalities.

Mexico confronts two fundamental challenges with regard to the governmental function. One is concerned with the quality of the government and the other with its capacity to process conflicts and to create conditions for permanent prosperity. The former has to do with administration and its objectives; the latter with the strength of its institutions and their checks and balances.

Historically, the Mexican Government was relatively successful when it exercised centralized control and imposed its authority on the population as well as on other factors that wield political and administrative power. The eras of Porfirio Díaz and the PRI in its good years bear factual testimony to this assertion, but that was possible in the era before globalization and the network of world relationships that are the mainstay of the population of today. In the absence of reliable institutions and of a federal structure with individuals compelled to be accountable, the country suffered through diverse ills: revolutions, uprisings, instability and/or poor economic performance. The instinct of the Peña administration toward centralization of power is not by chance: it concerns a logical response to the challenge. The relevant question is whether centralization will be an instrument or an objective: if it is an instrument, it could be employed to construct a new institutional regime that allows for an era of stability and prosperity; if it is an objective, the only thing it will achieve will be the imposition of a temporary order that, as we have seen so many times in the past, tends to be short in duration, if it ends well at all.

With respect to the administrative responsibilities that correspond to the government, some things work and others don’t. For better or worse, for example, practically the totality of the country’s urban zones have potable water, drainage and electricity. The same can be said for education or the presence of police officers and courts –and multiple other services- throughout the territory. One conclusion to which this could lead is that the government “does what it can” and that if one observed diverse indices of service coverage, these have improved over time. Another way of seeing it is that services tend to be poor in quality, waste is enormous and, overall, conditions are not being created for the construction of a modern country, with better opportunities for the entire population. Both views are true and complementary: what we have is a system of government wrapped up in itself, devoted to satisfying the objectives and the interests of its members ahead of the needs of the population.

The case of the police and the administration of justice are particularly noteworthy: with very few exceptions, this is where one of the greatest lacks –and flaws- of governmental function is evidenced. The country requires a radical transformation of the focus of the function of the government: it must be conceived as a guarantor of the freedoms and rights of the population and as promoter of development, thus it must devote itself to creating conditions that make this possible. The new government vowed efficacy, something necessary but not sufficient: it’s not enough for it to “make things happen”; it also needs to see development advance. Now, with the country is stuck, it is ripe time to refocus the strategy.

Institutions are the means and the form through which a society processes conflicts and creates conditions for prosperity. Different from the governmental function, institutions, to be one, have to be permanent, that is to say, not dependent on the will of one person as occurred in the PRI era. An institution is strong when it creates rules of the game with which everyone complies. That’s the key: depersonalization and permanence.

The members of the televised Spanish panel took for granted that a government of institutions exists. That’s what we’re missing:  a government that works and that doesn’t depend on who’s in power.

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Forbes – Luis Rubio

Marie Curie, the Nobel Prize winning scientist, on a certain occasion affirmed that “one never notices what has been done; one can only see what remains to be done”. That is, in a certain way, the curse of politicians: no matter what they do, and less so in this era of exacerbated expectations, what the population demands is what is lacking or what others already have. It’s about a circle that very easily turns vicious; thus, it’s much easier (in fact, inevitable) to act when there is a crisis while what’s typical, when things are going well, is to avoid running risks.

Crises oblige us to act simply because the deterioration is immediate, above all when these are currency exchange crises akin to those we underwent for some decades. Prices shot up within a matter of hours, interest rates soared, businesses fired personnel and consumers rushed to buy whatever possible before prices went up. For a government in this situation there are no two ways about it: act or act. The latter is not to say that its responses are always the most fitting; in the last half century (or more), Argentina has been the perfect example of a country that refuses to act, but its case is somewhat exceptional because it concerns a country whose population does not grow and the country has a food surplus. This combination has sanctioned all sorts of outrages and irresponsibilities.

Mexican governments have not had a similar option. When the crises arose, the government had to act. In a certain way, we Mexicans have been very privileged because of the fact that the governments that faced the financial crises of the 70s to the 90s did so directly and unceremoniously. Clearly, they had no alternative, but the fact is that on each occasion it was the technicians who took hold of the reins of the process, although afterward they had to relinquish them. And the problem lies in the latter: the country resolved its crises and, for nearly twenty years, has steered clear of another, but that does not mean to say that it has been able to erect an auspicious platform for the sustained growth of the economy, and even less so for the construction of a developed, civilized, and modern country.

The problem of Mexico problem is that it has stayed mid-river. It has carried out innumerable political reforms but we are far from achieving the consolidation of a political system in which the key actors –for example the parties- were satisfied and were to confer legitimacy upon the government without disputes and to an even lesser degree one in which the politicians were to respond to the citizen. In the economy there co-exist two contradictory worlds: one as successful and competitive as the orb’s finest, the other that can hardly be differentiated from the most backward third world nations. The judicial power is mired in a reform that is rejected by the greater part of those who are its main actors and apparently no one is willing to bring it to fruition. The country’s police, with few exceptions, are inadequate, to say the least, for the type of challenge that the country is facing in the field of criminality. In the social ambit, the country exhibits an inequality that makes it impossible to pretend that we are approaching the developed world.

My point in all this is not to say that everything is bad or that there hasn’t been progress, but that it is indispensible to recognize not only the size of the challenge, but above all its nature. Today’s nation scarcely resembles that of some decades ago: although we are far from having achieved development, today’s Mexico is not the poor country of yesteryear. Of course reforms are required that make accelerating the growth of the economy possible, but what’s most required is a vision of development that makes it feasible to marry the measures adopted today with the objectives to which we Mexicans aspire to achieve tomorrow. That is, the true challenge is not a reform here and there but of a clarity of vision –and of the leadership that is predisposed to usher in the process of making it a reality.

“One never notices what has been done; one can only see what remains to be done”

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Luis Rubio

In the Christmas movie “It’s a Wonderful Life”, Clarence, a guardian angel, shows leading character George Bailey what would have happened had he not lived. For this Clarence invents the town of Pottersville, bad guy Potter’s city, to illustrate how terrible and inhospitable the place would have been had Bailey not been born. Bailey reconsiders his decision to jump off the bridge and returns triumphant in the Hollywood-style epic. The problem, says Gary Kamiya*, is that many prefer the exciting and perverted life of Pottersville to the boredom and tranquility that Bedford Falls represents. In Bedford Falls everything is an ideal world from the perspective of what’s “correct”; Pottersville is a world of the desirable, of amusement. This metaphor serves to illustrate that the politically correct is not always the best public policy.

Over the past years, the country adopted a series of measures in energy and environmental matters that would be logical and acceptable –politically correct- in an ideal world, but that clash with the best interests and characteristics of the country at present. Specifically, at the beginning of last year legislation was passed on environmental matters (the General Law of Climate Change), adopting a regime nearly as strict as that distinguishing the European Union. The legislation establishes highly restrictive goals, such as those for 2024, when 35% of the energy that the country produces should derive from renewable sources and that by the same date carbon emission should be 50% less than those of 2000. Approval of the law brought with it two reactions: on the one hand, the applause of all of the politically correct who legitimately embrace a less contaminated world, but generally without contemplating the implications of the regime adopted. On the other hand, as usual in Mexico, the law establishes grandiose goals but no specific instruments or sanctions. That is, some due to apathy and others due to responsibility, our legislators opted for applause without generating intolerable costs. An additional step in this direction has been taken with the government’s proposal to launch a carbon tax.

From my perspective, the central criterion that we Mexicans should adopt for the future is that of economic growth. This objective is the only one that brings together the parties, the political forces, the unions, the business community and the citizens: we all want a driving and buoyant economy that permits raising the quality of life, generating more and better jobs and creating more amenable conditions for resolving the country’s problems –the new ones and those we inherited. In this world era, the sole way to achieve growth is raising productivity and being more and more competitive. The question is whether this clashes with the environmental plan being advanced.

In pragmatic terms, it is imperative to recognize two factors: on the one hand, paradoxically, no international treaty or legal regime, such as those proposed at Kyoto, demands that a country like Mexico, in its designation of developing country, would have to assume such a commitment. For better or worse, none of the treaties incorporates developing countries into the regime of commitments. I understand that approval of the law offered an opportunity to shine for the country before the Conference on Climate Change in Cancun. However, it also demonstrated the need to please above recognition of the   country’s realities and necessities.

The other factor that needs to be recognized is that it is absolute madness to assume a regime based on the elimination of carbon-based energy sources in a developing country with ample oil and gas resources. What’s necessary is a competitive regime -a true energy market- that would allow for the development of different types of energy and technologies to produce them, including, of course renewable. It is ludicrous to penalize the use of traditional sources of energy, perhaps the greatest source of comparative advantage that the country possesses, especially in these times that the price of natural gas could become an enormous competitive edge, source of growth, employment and inexpressible wealth. The proposed energy reform aims at liberalizing the domestic energy market and, to the extent that this project leads to a competitive framework, could lead to the flourishing of both traditional and renewable sources of energy. What makes no sense is to commit huge investments to alternative energy when an efficient market would do it at a much lower cost and in a manner that could foster economic growth. It is not by chance that nations such as China, Brazil and India have stayed on the sidelines: better for them to be criticized for not making a commitment than for not complying with them.

According to the Italian Bruno Leoni Institute**, the cost of creating one “green” job is equivalent to creating 6.9 industrial jobs. This rationale was what lead noted German environmentalist Fritz Vahrenholt to affirm that, in an era of austerity and restrictions on all fronts, “we’re destroying the foundations of our prosperity. In the end what we are doing is putting the German automotive sector at risk, the steel, copper and chemical sectors, silicon, you name it.” If one of the heroes of the Green Movement thinks this way, why should we be holier than thou?

The issue of the future is productivity because that is the principal source of competitiveness, a factor that attracts investment and allows for the generation of jobs that add more value, thus that pay better salaries and reduce energy consumption. There is no way of achieving this if we don’t adopt, as a country, a strategy devoted to raising productivity. As everyone knows, productivity implies doing more with less and for this conditions are required that make this possible. In the case of energy, the key lies in creating a competitive market, not massive government investments or paralyzing taxes.

Bjorn Lomborg, the environmentalist who abandoned the movement when he noticed that the cost of assuming the struggle against global warming was enormous in the face of how limited the potential was of achieving the desired objective, says that the greater part of the money invested in combating climate change –above all direct and indirect subsidies to the generation of renewable energy- constitutes a waste because even the most restrictive regimes in these matters have no chance of modifying the trends already in place. Faced with this, we would do well to devote ourselves to eliminating impediments to the growth of productivity, because it is from the latter that the income and the jobs that the country so greatly needs will materialize.

*http://www.salon.com/2001/12/22/pottersville/

**http://online.wsj.com/article/SB10001424052702304203604577398541135969380.html?mod=googlenews_wsj

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Luis Rubio

The story goes that as Mark Twain, the great American author, and novelist William Dean Howells stepped outside for a walk one morning a downpour began, and Howells asked Twain “Do you think it will stop?” Twain answered, “It always has”. Governments come and go but the constant in our country appears to be a poor governmental system that, different from rain, doesn’t end naturally. After many years of insufficient and incompetent governments, we now have one that possesses key attributes for it to govern effectively, thus making this an auspicious moment to ask what the function of the government is in the development of the country.

The query is not especially Mexican in nature. Innumerable nations experience problems that we all can recognize as ours, from bureaucratic abuse to the changing nature of legislation. Some countries have begun to advance attempts to confront the problem and there’s much that Mexico could learn from them.

Although the public debate is excessively long-winded in implicit and explicit answers to the question on the government’s responsibilities, the first thing that’s evident is that the function of the government is, above all, to govern. That might seem redundant, but Mexico is a country that has not been governed for quite a while. Beyond the specific actions that, well or poorly, the government –the current and the past ones- satisfies in normal fashion, such as foreign policy, defense, and tax administration, to cite some obvious ones, the function of governing has been practically non-existent in the country for a long time. Examples of this abound: the lousy performance of the economy, the persistent (illegal) entry and transit of migrants, the public insecurity, the violence, the poor use of public monies at all governmental levels, the system of justice and, in particular, the disposition to change the rules of the game every other minute, the same in commercial as in electoral matters, in the fiscal deficit and in taxes. How can a country be expected to function when the legal and regulatory climate changes time and again and with no better reason than the whims of the politicians of the moment?

Some years ago I was walking down a street with enormous traffic in Seoul, the South Korean capital; a wide street, full of trucks and cars. All of a sudden, on reaching a corner of a side street I saw a child -surely no more than three or four- pedal his tiny bicycle onto the great avenue, cross it and turn to incorporate himself into the traffic without even watching. I was thunderstruck at what I had just witnessed and the more I thought about it the more I was impressed by the fact that neither the child nor his parents had the least doubt that all the cars would respect the stop light, that is, the rules of the game, in this case that of the traffic signal. Green light means go, red light means stop. The implication is obvious: there are clear rules that everyone understands and complies with and a government that enforces them, no questions asked, period. There’s no make-believe.

The issue in Mexico is not philosophical. We could debate on whether there should be more government or less government but the first premise has to be that there be a government in form, capable of enforcing the laws and guaranteeing that the rules of the game are complied with. What the Korean child took for granted and, on leaving him alone on a so immensely complicated thoroughfare, his parents had no doubt in assuming as valid, is something that in Mexico simply does not exist. The systematic violation of traffic rules is nothing more than a symptom of an entire way of being. A good government is one that shows leadership, wins over the confidence of the population, rules above all on bureaucratic instances and, as a result, earns credibility in the eyes of taxpayers not only for its competence, but also for its legitimacy in persecuting those who violate the laws, whether these be tax evaders or groups devoted to obstructing circulation in the streets. A good government earns the trust of the citizenry and, with this legitimacy it, well, governs. As Stein Ringen says in an interesting book entitled Nation of Devils: Democratic Leadership and the Problem of Obedience, the government should concern itself less with big legal changes and more with governing well, thus meriting the obedience of the population.

The problem of incertitude about the rules of the game is not new. Twenty years ago the government at the time found a way to resolve this that came to be prodigious: the North American Free Trade Agreement (NAFTA). More than a commercial treaty, the true purpose of NAFTA was to confer certitude on investors because it created a legal and regulatory framework that can’t be modified every time a bureaucrat gets up on the wrong side of the bed. NAFTA achieved resolving the fundamental problem for big businesses, for Mexican and foreign investors alike, that have the scale and the size to be able to utilize the mechanisms of the treaty to reach this certitude, but not so the overwhelming majority of business concerns and small shops that lie in wait for bureaucrats and inspectors because they have no alternative. In a word, a mechanism for certitude was created but, de facto, only for one part of the economy.

Facing a similar situation, the Chinese Government is experimenting with a new Free Trade Zone in Shanghai whose main purpose is to establish a regulatory framework that the government of the city and of the country is committed not to modify, so that investors and entrepreneurs achieve certitude that there is predictability in the rules of the game. A few days ago a Mexican businessman told me that, had he known that the government would modify the fiscal framework as aggressively as has been proposed, his company would not have embarked on a nearly one-billion-dollar investment. It is this type of uncertainty afflicting large and small enterprises in the country to which the Chinese Government is attempting to respond.

The government has an essential function in the development of the country and this transcends sector-specific policies. Its chief responsibility is that of creating a political and economic framework of certainty that satisfies the population, generating trust and predictability for it. The success of the governments of the era of stabilizing development –from 1940–1970- lies in that they never lost clarity of the nature of their function and responsibility. In a democratic society, says Ringen, the citizens “control the governors and they rule us”. It is evident that reforms are required in diverse ambits, but what is most required is a government with clarity of vision and understanding that its main obligation is to govern. This would seem obvious, but it’s something that hasn’t happened in Mexico for at least forty years.

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@lrubiof

Luis Rubio

All governments end up encountering pockets of resistance. Some are very ambitious and try to change many components of the status quo, while others simply confront groups that, with reason or without, have interests –and on occasion privileges- to protect. The fact is that resistance to change, when not in opposition to the latter, is a constant of human nature. The government attempts to advance its project and those who would see themselves affected by it try to avoid losing out. Nothing more legitimate than these differences in the life of a country. What we have experienced during these months fraught with effecting a series of reforms is that no change is simple, but that opposition to change is always robust and, on occasion, devastating. And worse yet when the proposed change is only just consistent. What I have observed brought to mind an affirmation by Kissinger who, on referring to another theme, once suggested that it was a pity that both sides couldn’t lose. The question is how to exit the labyrinth.

Nothing better illustrates the futility of the confrontation between those attempting to reform and those resisting it than the issue of taxes. Here we have at our disposal an exceptional window to analyze the political dynamics characterizing the country, the seriousness of the governmental proposal and the dimensions of how the diverse groups of the society will potentially be affected.

I start with the principle that the country requires basic reforms because the status quo does not lead to economic development, to prosperity or to the general well-being. Our paradox -not exclusive to Mexico- is that everyone wants something better but no one’s willing to change what there is. From this perspective, the need to carry out reforms is evident.

Nearly all of the reforms that the government has come to advance have been divided into two halves: a constitutional amendment that establishes a new paradigm for the sector or activity and subsequently the implementing legislation to make the new model effective. Unfortunately, in many of the reforms that have been approved as well as those in the process a spirit of restoration more than a spirit of transformation is prominent. The rhetoric says transformation, development and progress but the text of what is legislated says control and centralization of power. It is possible that these are the eminently suitable means by which the institutional scaffolding could be constructed that could possibly break with the accumulated havoc, but an attempt continues to be obvious to reconstruct the old PRI system, as if its results were worthy of tribute or, more importantly, as if a return were possible to a distant past that entertains no similarity with the globalization, nanosecond communication and social participation that is today’s reality.

I return to the case of taxes because it is revealing: the government appears to have analyzed all of the spaces in which a tax payment may lurk that is less than expected or due for payment and has presented a phalanx of modifications that affects (nearly) everyone. Instead of choosing its battles, it has opened fronts on all sides. Some of these fronts -like the VAT on tuitions- were clearly designed to be thrown out by the opposition, while plying them with flags and goodies in exchange for more substantive modifications. It’s not a novel tactic and is one that has always been of service in a system so given to imposition and verbal more than substantive confrontation.

Many of those who resist have reasonable arguments that the government (and the pact-ers) have not taken care to analyze and evaluate. For example, I don’t know whether things like the accelerated depreciation of a certain type of investment or fiscal consolidation are good or bad, but I have no doubt that this is about public policy instruments conceived to induce or advance certain types of projects and objectives, which is why they exist the world over. It may be desirable to eliminate these mechanisms, but there would have to be an understanding in place of what would stop happening as a consequence. Of course this would increase tax collection, but we would have to ask ourselves what would there stop being.

Contrariwise, it seems meritorious to me to eliminate (some) special tax regimes that are nothing other than privileges for the political regime’s pet coteries. But, at the same time, it’s paradoxical that the rhetoric accompanying the fiscal reform proposal advocates driving formalization of the informal economy by making it more complex, thus not as easy, to comply with fiscal obligations. The same can be said, on the spending side, of the discretionary powers that the governors will retain. Paradoxes churned up by life when a bureaucratic perspective of things is adopted.

At heart, perhaps the greatest weakness of the governmental proposal lies less in its wanting to raise taxes than in the choppy logic of its proposition. A level playing field, as the saying goes, would be easy to defend. What is indefensible about the bill presented by the Executive Branch is the number of exceptions that it generates: instead of eliminating these, it exchanges some for others. The value added tax case is emblematic: for a tax with a cascading effect like the VAT to satisfy the objective of obliging all potential taxpayers in a chain of buyers and sellers to render to Caesar, it must be applied across the board. I am not unaware of the social effects of such an action in this sense, but it appears to me that one should think in terms of dealing with these consequences rather than creating or maintaining exceptions. When the regime is applied only partially, it becomes impossible to defend exceptional cases, in those proposing to make the tax happen as well as in those exempt from it. Both are a farce not lacking in political and clientele-ridden overtones.

The government’s reformist spirit is commendable because it is imperative to reform political and economic structures that in the current scenario do not lead to development. But these reforms must effectively make a clean break with the impediments; to date there’s no evidence that the content of the reforms leads to a momentous change but it is clear that it has achieved acquiring oppositional elements from all quarters, as well as emboldening dissident groups who see in the government’s clientele spirit opportunities to make their fortunes and spaces of power (i.e. the CNTE). The government has gotten itself caught in a labyrinth that will oblige it to define itself and modify its priorities. The recent hurricanes will play a key role because, in addition to causing inexpressible harm, they will give rise to political demands that were not anticipated. Once the calm after the storm returns we’ll know what this government is really made of.

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@lrubiof

Luis Rubio

The PAN is conditioning its legislative vote for the energy reform on the approval of an electoral reform. The “quid pro quo” proposal makes business sense in that it is understandable within a context of logrolling or trading favors. Some legislators in the world, notoriously the Americans, are famous (but not in a positive sense) for the practice of exchanging a congressperson’s vote for a budget allocation (otherwise known as pork). That tradition is comprehensible within the context of individual votes (and in the absence of party discipline), but is somewhat difficult to picture it when it concerns legislators or parties acting to a greater or lesser degree en bloc. Even so, the logic of those who advocate for like exchanges is impeccable. What seems to be unfathomable to me is the incapacity of our politicians in general, starting in this case with the PAN, to recognize that another electoral reform is not going to resolve the problems of the country. What’s more, it wouldn’t even make a dent on them.

I haven’t the least doubt that some of the electoral reforms of the last decades opened the gateway to huge democratic opportunities, they favored alternation of parties in state governments and the presidency and impelled politicians to be more responsive to citizen demands. Nor do I look askance at the construction of electoral institutions that have allowed the (near) consolidation of the Federal Electoral Institute (IFE). It appears obvious to me that the opposition parties (today the PAN and the PRD, in past years the PRI and the PRD) see small advantages in specific changes in the existing electoral legislation. What impresses me is their allegiance to small causes and, above all, the absence of greatness of vision.

I believe it would not be an exaggeration to employ the classic metaphor of the Titanic: the country is at a standstill, insecurity mounts, and there is an economic downturn, but the politicians are concentrated on the bill of fare of the next festive gathering in their ship of dreams. I dare say that, from my perspective, the country’s problem is not that of financing campaigns or of the state electoral authorities (although plainly both could be improved), but of basic governance. The country must govern itself –or be governed- and that is not extant in many regions, sectors and specific areas. In some of these there are real –de facto- governments in parallel. That is the true challenge of Mexico and is on what the politicians and the government should be concentrating.

Samuel Huntington, professor at Harvard until his death in 2008, was not universally beloved among his students or colleagues, but he was one of the most influential thinkers owing to his mental acuity. While he devoted himself to many issues, the leitmotiv of his professional work was a very clear and concrete one: what’s important is not the government’s form but its strength. Ignoring the politically correct of his era, he affirmed that the U.S. (as a strong democracy) and the Soviet Union (as a strong dictatorship) held more in common than a strong democracy and a weak democracy. For Huntington ideals such as justice, democracy and freedom had little worth where there was not a minimal degree of order and stability that lent them real substance.

I can imagine what Huntington would have said of today’s Mexico: that the institutions are very weak and that their development and strengthening is much more important than is democracy because the latter has no viability inasmuch as the existing institutions do not enjoy legitimacy, their decisions are not accepted by part of the population or, simply, are ineffective. Were we to put the judiciary in the first slot, the electoral institutions in the second and the police in the third, the professor’s argument would appear impeccable.

According to Huntington, an institution’s relevance lies in two main elements: the first is administrative capacity. The second is trustworthiness and predictability. The second is impossible without the first. His analysis of political development, his seminal book entitled Political Order in Changing Societies, established that the essence of development does not lie in democracy per se but instead in the existence of a system of government that works, that maintains order and that makes economic development possible. In Huntington’s view, a functional system of government is one that constructs and develops institutions capable of administrating and, in its wake, creates confidence and predictability. In this sense, institutions become the means through which the members of a society interact and resolve their disagreements, all this made effective with the coercive capacity of the State.

The PRIist system created an extraordinary capacity for administrating and governing a relatively simple society. It did this not through institutions but rather through a structure of exchanges of loyalty. As Susan Kaufman Purcell termed it, a non-institutionalized transactional system. The system’s failure, and its gradual collapse from 1968 on, was due to its incapacity to construct institutions that would supplant the personal arrangements and the concentration of decisions in the person of the president.

No matter how many electoral institutions have been constructed, a monumental judicial reform approved and honest attempts made to confront our problems, the country does not possess the capacity to settle disputes, maintain order and lay the foundations for the country to develop. Insofar as that loyalty continues to be to persons and not to institutions, there can be no trust in the permanence of decisions or laws. Energy and other types of reforms might be approved and ratified, but the country will not advance if it does not have a reliable system of government that depends not on the ability of one person but on the strength of the institutions that characterize it.

Therein lies the PAN’s dilemma: concentrate on a series of irrelevant electoral reforms that have no chance of moving towards the construction of an institutionalized and democratic society, or recognize the opportunity that the political moment has put before it. The PAN has two possibilities: one, coherent with its history, would entail advancing towards a truly transformative politico-electoral reform that would develop effective mechanisms of representation for the citizenry and protection for its rights, limits to state action, particularly as its ability to modify laws to suit its needs and, in one word, a true revolution in the structure of power of Mexico. To build a modern system of government for the citizenship.

The alternative to a big and visionary political transformation would be to use the enormous power that the constitutional reform on energy confers upon it (after that vote, the government will not need PAN any more) to exchange its vote for a truly integral fiscal reform that would limit the government and its spending, expand the tax basis and lead to the rapid growth of the economy.

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@lrubiof

Luis Rubio

1971 was the year that things slacked off. After two decades of experiencing growth rates of more than 6% on average, that year was considered to be one of recession because the growth rate was only 3%. That’s how much things have changed… The politicians’ response was to “stimulate” the economy through heightened public-sector spending, financed by foreign debt and printing paper money, that is to say, inflation. That’s how the era of the crises, recessions and, but by a hair, hyperinflation was born. 2013 seems like that 1971 and, as the budget illustrates, the government appears to be ready to put the same losing formula into practice.

The rhetorical package that accompanies the fiscal reform bill is grandiose in scope: productivity, growth, attack on inequality and unemployment insurance. Sounds attractive but, as George Orwell said, “Political language is designed to make lies seem truthful and murder respectable, and to give an appearance of solidity to pure wind”.

Comments on my previous article show that there is more doubt than assuredness about the direction proposed for adoption. What follows is a summary of the commentaries that I received, all from experts above reproach.

First, “While the bill is fundamentally for the purpose of achieving universal social security, it is noteworthy that the proposed budget increase between 2013 and 2014 is 520 billion pesos, but that only 20 billion of these are slated for universal social security. One would have thought that, in terms of priority, resources would have been allotted for unifying the financing of the various health services, but this issue –which today shows the most severe distortion— is now presumably firmly on the back burner. Not utilizing new resources to remove the distortion created by the differences in the manner of financing contributory and noncontributory health regimes is an omission difficult to understand.” Unless, that is, that the real objective is merely to increase spending; it wouldn’t be the first time…

Second, “The proposed universal pension is not in reality a universal pension. It is a pension conditioned to being in the world of informality. Formal workers have no right to it… Since the Popular Insurance is a benefit financed by general tax collection for the informal (that he perceives as free), but that he/she forfeit if they obtain formal employment…, another incentive is added to the incentives already in place that preserve informality in existence: a program for retirement pensions (whose is to be legislated and the retirement age lowered from 70 to 65). It is difficult to think that this will not contribute to increasing informal employment. The empirical evidence that we have gleaned from similar programs is that it will and that the labor participation rate might well be reduced. By way of these two routes, productivity will be penalized”. That is, there is a flagrant contradiction between the bill presented and the diagnosis of the government itself with respect to the urgency to raise productivity as a condition for accelerating the rate of growth of the economy.

Third, “Unemployment insurance really isn’t that at all; it seems to be more like severance pay insurance. The key point here is that this insurance program is created without modifying the dispositions of the Federal Labor Law (FLL) in matters of indemnities due to dismissal or seniority premiums. It also does not modify the problematic of justified or unjustified firing from a job. With regard to the proposed law, workers who voluntarily leave their job have the right to receive the benefits of the new insurance. On the other hand, Mexico will now have two parallel mechanisms in place to protect workers against shocks: the FLL dispositions already in force and this new insurance. It is difficult to think that in the future it will be possible to modify the FLL to reduce the contingent liabilities to the formal enterprises deriving from hiring formal workers when the principal mechanism that would have been utilized for changing these FLL dispositions –introducing unemployment insurance— has already been used. On not reducing the contingent business costs, it is also hard to see how this new insurance will contribute to formality”.

Fourth, “the bill proposes a net increase in employer’s contributions (art. 25, 36, 106 and 107 of the Social Security Law), which does not solve the essential problem: to equalize care costs among various providers. It’s right there where the pressure on spending will be greatest in the next few years. Today we do not know how much the medical services cost in the IMSS, ISSSTE and state health systems that are financed by the Popular Insurance. There are no certainties on the health sector budgetary requirements, since all that we know is the expenditures of each institution, not the cost of each service or the estimates related to epidemiological changes. The proposal resolves the short term IMSS financial urgency -which would otherwise exhaust its reserves in 2016 – but does not solve the underlying problem”.

Fifth, in “the proposed unemployment insurance INFONAVIT is left astray, instead of taking it into the health component of the bill or else increase contributory pensions. This creates more labor distortions because it makes more liquid the contributions in the short term”. In this context, it cannot be ignored that there might be another possible motivation for the proposed approach: “those who turn 18 from 2014 will be covered by a trust fund at Banxico, just the group that will be voting in 2018 for the first time …”.

“In sum, the reform is not meant to finance a ‘universal social security’ program, but instead to justify both increased employers’ contributions as well as granting new benefits, whose cost will increase over time and will be added to the growing cost of already existing programs. The fiscal resources of the proposed bill will be used for other expenditures and neither modifying the functioning of the health system nor its financing is proposed. Given the growth that is being observed in the provision of services it will be impossible to return to registering a zero deficit within the time-frame established in the bill (2017). In the current international scenario this sounds too risky”. “And all this without considering the liabilities of health and pensions of the states, PEMEX and CFE”. In other words, there is neither structural reform nor a solution to pending problems, just more public spending.

The proposal is to return to the seventies: mushrooming deficits, without healthy and sustainable financing, which will not contribute to the growth of the economy. Ignoring the cause of the crises of the past decades -an economic strategy anchored on deficits and debt- that today’s younger generation never saw except in indirect fashion- is the best way to provoke one… We don’t learn.

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@lrubiof