Luis Rubio

At the heart of criminality, says Mark Kleiman, lies impunity. When crime is not punished, it recurs. On the other hand, if the punishment is disproportionate or, simply, not credible, its dissuasive power is irrelevant, if not negative. What’s required, says this specialist with a long career in law enforcement prior to devoting himself to studying the phenomenon, is an intelligent strategy based on the existence of very clear rules for social behavior, but rules with which the State has the capacity of enforcing. In the latter resides the key.

Although focused on the criminal phenomenon in the U.S.*, Kleiman´s conceptual proposals are as valid there as elsewhere, in addition to his previously having trained his crosshairs on Mexico’s case**. In essence, the proposal is the following: it must be accepted that crime is a real problem, that there are too many myths and prejudices about the way the political world focuses on it and that the solutions, which I would sum up as “tough-fisted”, are not liable to resolving it. What is required is an integral strategy. What follow are core elements of Kleiman’s argument:

• The Left must abandon the view “that crime is mostly an imaginary problem, vastly overstated by the Right to put racial fears in socially acceptable code; that the root of criminal activity is inequality and injustice, and that only basic social reform can control it; that the criminal-justice system functions primarily as an engine of racial and social-class oppression, as evidenced by the huge disproportion between the racial makeup of the prison population and the racial makeup of the country as a whole; and that enforcement should focus on white-collar crime”, the corruption of the politicians, the all-powerful or the wealthy.
• On its part, the Right must stop “regarding “victims” and “perpetrators” as distinct groups—as if most criminals hadn’t first been victims—and punishment as good, and more punishment as better, conditional only on actual guilt and some sort of due process”. In other words, that the context within which crime flourishes and develops produces much of the criminality.
• What’s required is a strategy against criminality that utilizes punishment in an intelligent manner, which means using it as sparingly as possible but also as much as necessary.
• A better police system and one designed for the pursuit of justice should be the heart of a strategy against crime.
• “By asserting lawless power over the victim, the perpetrator not only puts the victim in fear of the event happening again (with or without a change of victimizer) but also acts out the message that the victim is not someone whose person or property others need to respect”. That is, impunity should be fought against not only as the cause of the crime but also as a strategy to combat it.
• Punishment –the fact and its form- is important because it is the main dissuasive principle of crime, but also because it avoids that victims respond with a lawsuit to punish whomever, independently of whether he is the real criminal, at whatever price. “This helps make sense of the demand of victims and their families that someone—even, sometimes, the wrong person—be punished, to give the victims ‘closure’.” (case in point, Cassez).
• The absence of a response on the part of the authority –impunity- generates its own dynamic. People lock themselves in, abandon public spaces and avoid frequenting zones with high criminality rates. While explainable, all of these attitudes and actions have consequences: they consolidate crime zones “Living in chaos makes people more present-oriented and less averse to risk, two characteristics that make crime, with its immediate and certain gains and its deferred and uncertain losses, appear more attractive” (essentially because the person in this situation has nothing to lose) and creates or sharpens social divisions that later are nearly impossible to moderate. “Converting imprisonment from a shocking disgrace to a routine incident of early manhood greatly reduces the stigma that carries much of its deterrent power when it is sparingly used”.  Spending time in jail, with punishment thus becoming a rite of initiation, is precisely the opposite of what should be sought.
• The economic conception of crime (that the potential delinquent formulates a rational calculation of the risk of committing a crime) resides in the construction of incentives that dissuade them. However, the evidence suggests that criminals are not rational actors in this economic sense. The bedrock cause of criminality is poor calculation by the criminal and the solution to it must be a combination of strategies that improve his decision-making process while developing a credible threat that in effect serves as a dissuasive factor. This is not achieved with the current system of severe sentences or impunity.
• To comply with its pledge, punishment must be swift and certain. What’s fundamental is not its being severe but it’s being effective. What’s crucial is that the potential criminal is sure that he’s going to receive immediate and merciless punishment, that the authority will take action and not hesitate.
• The key for the authority to be successful is for there to be an effective police corps and a judiciary that complies with its function. There are numberless experiments in diverse cities (referring to the U.S.) that illustrate distinct forms of police effectiveness and, in the majority of cases, success does not lie in aggressiveness but rather in the intelligent use of force and of technology, in addition to achieving a certain propinquity with the population.
• The most effective way to decrease crime is to establish a tidy set of rules that everyone knows: that they understand what is acceptable behavior and which is not, and that all know what will happen if the rules are broken. The rules should be accompanied by an effective surveillance system and the sanctions for whatever transgression should be swift and certain.

Kleiman’s concept is clear: criminality and violence cannot be permitted to prosper, but to attack them it is necessary to construct an intelligent strategy that departs from the elemental principle that people respond when they are clear about the cost of breaking the law.

My reading of the proposal in terms of the concept’s potential application to Mexico is the following:

• The key factor lies in the construction of State capacity, that is, the development of police and judicial systems that are competent and capable of controlling criminality and maintaining order. That should be the goal.
• While this capacity is being constructed, action must be taken with the resources in existence at the moment.
• The first step would consist of establishing rules: what’s acceptable and what’s not and which punishment will be imposed in the face of a transgression. The rules and the punishments must match the existing State capacity at that moment; that is, a rule cannot be announced if its compliance cannot be enforced. As State capacity is strengthened, the rules are made more stringent and specific until, eventually, the objective is achieved: maintaining the peace by means of a believable threat.
• To develop modern police systems that get closer to the population and in which the relationship with it constitutes a dissuasive factor.

There’s no, pardon the catchphrase, magic bullet, but the condition sine qua non is starting to act. The problem doesn’t go away because it’s not a buzzword any more.

*Smart on Crime, http://www.democracyjournal.org/28/smart-on-crime.php?page=all y

**Smarter Policies for Both Sides of the Border, Foreign Affairs, September/October 2011

www.cidac.org

@lrubiof

Luis Rubio

In 1904, Stanley, an Anglo-American journalist, went to Africa in search of a Scottish scientist and missionary about whom nothing had been known for some time. The legend goes that Stanley, on finding the Scotsman and without even asking first, affirmed “Dr. Livingstone, I presume”, after which there followed tea at five, so characteristic of the English culture. The interesting part is the latter: it doesn’t matter where two Englishmen are found, at five they having afternoon tea. The culture runs in their veins and, more importantly, everything that this conveys with it: customs, practices, behaviors. It is within that context that the matter of the legalization of drugs in Mexico should be analyzed.

Legalization as a mechanism to eradicate violence is elegant, attractive and analytically sustainable.  As the liberal that I am, I reject the notion that the government should assume the role of nanny and deciding what a person can eat, smoke or consume: each person is the one responsible for his or her actions and decisions and there is no reason for the government to meddle in these matters, all of this whensoever third parties are not affected. And that’s the problem of legalization in our context: if we don’t want to end up with another of the many disillusions and unfulfilled promises that has characterized the country for so long, we first have to understand well the factors that would make the legislation viable because nothing’s more powerful than an idea but there’s also nothing riskier than an idea that is not upheld or one without the platform necessary for it to be successful.

Beyond ideological preferences, the notion of legalization makes all the sense in the world as a means of reducing the profitability of the mafias, eliminating with that the prime incentive prompting the business. If the drug is legal (and if the practical problems of how to produce it, distribute it and regulate it have been worked out), the mafias that proliferate due to its being an illicit market would cease to exist. The economic reasoning is robust and impeccable.

However, for there to exist a legalization strategy in our context (and here yes, geography makes us distinct from remote climes such as Uruguay or Portugal), at least three key matters would have to be settled. First, that legalization would involve the relevant market. Second, that it would include all of the significant items, in this case the various drugs. And, third, that a perfectly established, real and effective, capacity of regulation of the respective markets for the entire loop ranging from production to consumption be in place; that is to say, so that no leaks and children would not have access to the substance. If one observes the cases existing in the world, typically it is in these latter issues that things get sticky.

According to the National Addictions Survey, drug consumption in Mexico is exceedingly small, concentrated in certain sufficiently specific localities and, although growing rapidly, the base is so small that, with the exception of some neighborhoods or social groups, there is not so to speak a severe drug addiction problem. This being the case, it is obvious that the violence in the country cannot be explained by the consumption of drugs. The violence occurs due to two circumstances: one, the main one, Mexico’s geography that positions it as the means of access to the market of the U.S., the world’s greatest consumer. The remaining factor, and not the lesser of the two, is that Mexico is the locus-of-choice for the transit of much of this drug because there are no real and effective barriers to its production or transport, that is, because we don’t have police and judicial institutions devoted to enforcing the law maintaining order (the essence and minimal responsibility of any State). Drugs pass through Mexico because nothing stops them from passing or, in any case, regulates their passing through.

In this sense, the first key matter that would have to be resolved for legalization to be effective would of necessity be that it encompasses the relevant market. That market is not the Mexican one but rather the U.S. one. To rephrase this: nothing would change if drug consumption were legalized in Mexico if this were not to occur in the U.S., from whence the profits derive that make them relevant. For legalization to exert the desired effect in Mexico, the country would have to move to the Atlantic, that is separate itself from the border, or convince the Americans to legalize it also so that Mexico would cease to be the conduit of access to its market. If Mexico liberalizes consumption but the Americans stay the same everything would stay the same.

The second key matter is for legalization to embrace all of the relevant drugs. Supposing that the U.S., by some miracle, were to abandon its prohibitionist strategy, the question becomes: are all the drugs in play or only some of them. In terms of profitability and impact, the really significant drug is not marijuana (which is produced in Mexico), but cocaine and methamphetamines. If these are not included in the legalization package, the effort would remain incomplete and would be, to a good degree, to no avail. I don’t know of a sole proposal to legalize these other drugs. In this a smidgen of an advance implies no advance at all.

Finally, the idea of legalizing stands on the assumption that a legal market can be regulated and that this isn’t going to negatively affect the population, above all that which chooses not to consume drugs or to participate in the market. This is the crucial point and the one that from some time ago leads me to be reluctant with respect to legalization. Given that Mexico’s problem is not one of consumption but of the absence of State or, i.e., of “law and order”, what Stanley and Livingstone took for granted, legalizing drugs without strong institutions would not reduce the violence: the criminal activities would increase of unemployed narcos who would go on to other criminal businesses. Also, eliminating the illegality of the drug would increase availability and its social acceptance, raising health costs. As in Guatemala, the government could ignore the narco, but its situation would not improve because the problem is not one of drugs but of the weakness of its own system of government. The reality of extortion, kidnapping and narcotrafficking would have changed not one iota.

All things considered, the relevant market for legalization to be fruitful is the American one. If they liberalize their market, things could change fast. However, whether they legalize or not, criminality, abuse, extortion and kidnapping in Mexico would continue exactly the same with legalization or without it because that’s not the problem. What Mexico urgently requires is a government that acts the part and honors its mission.

www.cidac.org

@lrubiof

FORBES – Luis Rubio

A survey taken by the UNAM several years in a row in the 80s and 90s concluded that Mexicans abhorred the government, saw few alternatives and had a great fear of violence. The history of recent decades appears to justify the three conclusions: we have not been able to upgrade the quality of government, the opposition has not been particularly good at governing and violence has taken possession of vast regions of the country. Were there a social consensus, perhaps it would be possible to attack the causes of these phenomena; however, the persistence of political conflict stymies even beginning to define the problem.

There are at least three sources of political conflict. One derives from the combination of political decentralization (and the budget) together with the centralization of power of organized crime: “formal, legal” power was decentralized but the governors did not construct police, public prosecutors, and, in general, State capacity that would substitute for the vertical control previously exercised by the federal government and that, for a long time, allowed maintaining a semblance of order. This happened precisely when the Americans had sealed off Caribbean drug access routes, the Colombians had recovered control of their country and, after 2001, the Americans had beefed up the border. All this concocted a lethal mix: a brutal fortification of the criminal mafias vs. a weak system of government. The challenge is thus phenomenal and is not solved merely with a federal government that is forceful, although without one it would be impossible to achieve this.

The second source of conflict has its origin in community conflicts (land, regional control, local bosses or caciques) that have always existed but that for lengthy periods were controlled from above and whose hands were tied by a weighty political system that never dealt with resolving the sources of conflict but merely kept these from flaring up. The capacity for control disappears and the conflicts escape to the surface. In many cases, this is concerned with deeply ingrained social movements that cannot be resolved by repression, but that, rather, demand new forms of political participation. Inevitably, above all when this has a bearing on drug routes, community-engendered movements are not infrequently found enmeshed in organized crime, sowing the seeds that could eventually lead to the collapse of any vestige of order and functional government. Michoacan is a good case in point.

Finally, the third source of conflict is the result of the disagreements that are the product of a political system well past its prime that refuses to transform itself: a pre-modern political system, a medieval judiciary and non-democratic canons of political action. The legislators protest because of what they see in the Pact for Mexico as the usurpation of their functions and responsibilities. The governors exercise the budget with no accountability. The three branches of government have ill-defined self-limits and no checks and balances. In a word, institutions and old ways survive that are incompatible with a transformed reality.

The country’s structural problems have not barred its economy from progressing, but have unavoidably become an encumbrance that impedes productivity from growing, new sources of wealth from taking root and development from being less inequitable. That is to say, conflict and the peculiar approach to dealing with it –not confronting it but steering clear of it- do nothing other than postpone the solutions, tap into the Mexican’s traditional cynicism and, most importantly, constitute an impediment to exploiting the opportunities that come about.

How to break the vicious circle? Theories and proposals in this respect abound: my observations along three decades tell me that ideas and proposals are indispensible, but that the crucial factor is a leadership well-disposed to head a great transformation. Cases in point: Felipe González, Nelson Mandela, Ricardo Lagos, Margaret Thatcher. Eminently distinct, but with a common denominator: the desire to construct and the clarity that their mandate was finite. That simple.

www.cidac.org

@lrubiof

Luis Rubio

The problem with the political-electoral reform proposals that, from the one in 1977, swarm about the scenario after each election is that their motivation is not constructive but rather arises from a spirit of revenge and impotence. Revenge for not having won, impotence for being unable to win. From there, the contents of the initiatives that emerge and that are being discussed at present have little to do with the problems facing the country, those that require solutions and actions to advance in both the political arena as well in the economy, and that respond exclusively to the relative positions of the actors at this moment in time. Consequently, it’s no accident that every reform that there has been in the last decades has tended to make the governing of the country more difficult instead of easier.

The 1977 reform proposed broadening the legal and legitimate space of the political contest (or, at least, the representation thereof). From then on, the reforms, all of them, have been oriented toward skewing the results, weakening the presidency or making the electoral and legislative process more complex, respectively. None focuses on the sole undertaking that is important: to construct a functional political system with accountability to the citizen and one that makes a beeline toward prosperity. As simple as that.

Mexico’s problem is one of essence: how is it going to govern itself. That’s the issue that should be tended to and that should transcend the prescriptions being floated around. In their most minimal expression, the necessary actions would have to deal with the structure of the presidency and its instruments, the capacity to construct legislative majorities and the equilibrium between the two branches of government. However, the existing reform proposals deal with the immediate point in time: how to weaken the adversary and strengthen oneself. When the PAN was in the presidency, the PRI proposed fortifying the legislative; today it’s the PAN that’s driving this very proposal. Everything is short term and dedicated. There is no long term vision.

Implicitly, all of the parties recognize that the essential problem is one of governance. Were this not the case, none of them would have endorsed the Pact for Mexico. The Pact is a proxy that makes up for the inexistence of a mechanism that facilitates the construction of legislative majorities, a condition necessary for the approval of relevant reforms as well as for imparting stability and viability to the government of the day. There are societies that, for historic or cultural reasons, expedite this path, but ours not only rejects it, but also stigmatizes it: that’s how the neologism concertacesión (i.e. conceding rather than compromising) came into being. To negotiate, to forge a pact, to reach agreement among different political groupings is not something exceedingly Mexican: any agreement is viewed as capitulation, hence out of the question. Thus, paradoxically, instead of advancing reforms susceptible of changing reality for the better, everyone prefers an absurd consensus whose only benefit is that the costs are shared. But, deep down, there is also a lesson here: lacking a functional institutional structure, the need for consensus is a form of recognizing that what exists is not adequate and that other mechanisms are required to govern effectively.

In this context, the Pact is a new breed of consensus: while not perfect nor resolving the internal conflicts within each of the political forces, it empowers a partial functionality. Not surprisingly, the decision has been made to process prickly matters, such as those of energy, outside of the Pact, another indication that the problem is one of governance and of the lack of institutions to achieve it.

Mexican politics confronts two challenges: governance and accountability. Neither can be fixed with a second electoral round nor, by itself, with reelection. Governance requires a strong government as well as a limited government, thus the reform must respond to these issues or it will become another of the many that are approved once they have been duly “tropicalized”, watered down and submitted to a consensus. This to not affect any special interest or to exert any impact on the reality other than that of extolling the proponents’ vanity (while, of course, complicating political life even more so). The alternative would be for the reform, a true reform, to be advanced from the power that everyone else wants to dilute, that is, from the presidency.

At the heart of the question of governance lies the system of government that was constructed for an era that in no way resembles the current one. At the end of the Revolution, Calles structured a system that consolidated all of the power in one person who, within the context of a population that was relatively small, very controlled and isolated from the rest of the world, permitted some decades of peace and prosperity. Today, the Mexican population is a diverse and disperse society, very large in size and totally integrated into the commercial, technological, productive and criminal circuits of the world: from the modest Chiapanecan Indian who lives in Chicago to the Querétaro-based supplier of auto parts for the most modern car that is about to come off the assembly line at a factory in Yokohama, but also including the businessman hounded by extortion who lives in Torreón. The country requires a system of government that is appropriate for these new realities, distinct as they are from those of long ago.

The problem with proposals like those of the PAN-PRD is that they do not pay heed to the central matter. They limit themselves to their own interests without recognizing the essential. Contrary to the heart of their proposal, Mexico calls for a strong presidency, but this must be limited by effective mechanisms of accountability. One of these mechanisms, the most important one, has to be the legislative power, which also must be reformed to facilitate the construction of majorities (which would render the Pact unnecessary), not by artificial means such as modifying the “governability clause” of the current electoral law (that confers an automatic legislative majority to the party that wins more than 42.8% of the vote), but rather through incentives that satisfy another of the requisites of a functional political system: that politicians render accounts to the citizen and not to their political party bosses. Reelection could be a way to achieve this.

A true reform will only be effective the day that the country lives under the rule of law, which implies one very simple thing: in the words of Fukuyama, “that the individual holding political power feels bound by the law”, that is, that he cannot do “whatever he so desires”, but that his power is limited, which doesn’t mean that he doesn’t have it or that he cannot employ it to govern effectively in order to generate prosperity. A reform with a spirit of revenge or impotence at its source will never achieve this.

The opposition parties appear to be decided on conditioning their legislative support to the approval of another electoral reform. It would be much more transcendent if the president himself were the one to propose a real, transformative political reform, one that would give the country viability for decades and not only until the next revenge, I mean election.

www.cidac.org

@lrubiof

Luis Rubio

What happens when an irresistible force meets an immovable object? When the economic reforms began and the North American Free Trade Agreement (NAFTA) was negotiated at the end of the eighties, the irresistible force was the urgency to achieve a high rate of economic growth. The immoveable object was the imperious need not to alter the status quo.

Quite infrequently appreciated is NAFTA’s political dimension or the context within which the first series of economic reforms were undertaken nearly three decades ago. That context was key for defining the nature and content of the reforms but also their limitations. The reforms were launched when the economy experienced unprecedented turbulence. The old economic model (“Stabilizing Development”) had collapsed; the government had extended its tentacles throughout the economy, paralyzing many sectors and thwarting entrepreneurship and investment; the huge debt made it impossible any movement; and much of the private sector faced bankruptcy. The reforms and privatizations were meant to revive the economy but without threatening the PRI’s monopoly of power. This condition led to contradictory decisions; an insufficient, but above all incoherent economic liberalization; notorious favoritism; and, on the whole, an unwillingness to create conditions for the reforms themselves to be successful.

Now, in a radically distinct political context, the country is facing novel challenges, some old and pending, and fundamental decisions, each of which entails definitions. Negotiation of the Trans-Pacific Partnership (TPP) agreement and the possibility of the U.S. negotiating a trade agreement with the European Union oblige us to define whether Mexico is amenable to advancing its development and confronting the challenges implicit in both projects.

The contradictions inherent in the reforms of the eighties and nineties explain in good measure their limited results: liberalizing without liberalizing, institutionalizing but without institutions, growing but at no cost. In contrast with Canada, which saw NAFTA as the beginning –as an instrument- of its internal transformation, in Mexico it was seen as the end of a process of reform. While Canadians dedicated themselves to constructing infrastructure, supporting the adjustment of their economy and affording facilities to their citizens for achieving a successful transition, the Mexican Government slept on its laurels. Not losing power was enough.

The cost of this truncated vision is patent in many ways: there was no recognition of the urgency of adapting the economy and the perceptions of the population, starting with the business community; the manner of organizing economic activity did not change nor did the relationship between the government and productive activity. Success ended up depending on each individual company. Despite the fact that the economy changed radically, a strategy never came about that was designed to take advantage of the North American market or for companies to adjust to the new source competition. In any case, the contrary was true: as quickly as possible, diverse subsidy and protection mechanisms were reestablished that have not exerted a greater effect than impoverishing the country and avoiding the adjustment that is bound to take shape sooner or later.

A quarter century later the country again is facing the urgency of defining itself. There are three reasons for this. The first is that the economy’s growth rate continues to be pathetic. It might be much better than other countries at this moment, but that’s no consolation. The second resides in the transformation of the North American region’s energy horizon. Finally, the US is and will continue to be Mexico’s economic factotum, and it has to find a way to increase (as well as avoid the risk of losing or seeing diluted) the NAFTA advantages. These are, at the end of the day, the factor that explains practically the totality of the growth of the economy over the past decades, to a great extent because it comprises the sole credible institution for entrepreneurs and investors.

Growth is much lower than it could be because, outside NAFTA, there is no certainty for investment; because there are key sectors of the Mexican economy –above all energy- that are not part of the investment market; and because Mexico is still bound -and limited- by the six-year political cycle, which means that everything depends on the decision and mood of the current head-of-state. The irony of the latter is that the success achieved by President Peña in just a few months reinforces the notion that everything depends on the decisions of one person, thus there are no lasting certainties, those that can only be guaranteed by the existence of permanent and solid institutions, not subject to political comings and goings.

The energy revolution that our northern neighbors are currently experiencing is changing the history of the world. The U.S. is on the brink of becoming the greatest oil producer worldwide and could reach energy independence in the upcoming years. Canada, another world giant, is undergoing a radical transformation. The fall in natural-gas prices is revitalizing the U.S. manufacturing industry and in a short time could remove all advantages afforded to us by the vicinity. If we don’t transform the Mexican energy industry, we could be saddled with a great deal of petroleum that nobody wants and without the industry on which the general population’s well-being –and its income and employment- depends. This is not chicken feed. Continuing to bestow privilege on interests that prey upon the two energy monsters could lead us straight to the gallows.

When Mexico proposed the NAFTA negotiations to the U.S., Canada found itself between a rock and a hard place. It was just emerging from a very difficult adjustment process to its own FTA with the U.S. and the instrument was decidedly unpopular. On the other hand, staying outside of such an important negotiation in its own region was a luxury that could not be indulged in. With its incorporation into the negotiations, Canada ensured the advance of its own interests. Mexico today is found in the same tessitura: we must be part of these negotiations.

The problem, the true challenge, is not that they accept Mexico in the process (although this is not obvious either), but that in order for us to participate we would find ourselves obliged to do everything that was not done twenty five years ago. Mexico possesses institutions that are not institutions: they are not permanent, they are not independent of the political ebb and flow and, in the case of regulatory institutions, these are not focused on productivity growth. If we want to be in the big leagues, we have to devote ourselves constructing the scaffolding that is the sine qua non for doing it. In this no shortcut is worth its salt.

www.cidac.org

@lrubiof

WILSON CENTER – Mexico Institute – By Luis Rubio and Luis de la Calle

 While Mexico’s society is evolving fast, it surely has not become a fully transformed, democratic, wealthy Western country, but it is clearly moving in that direction. In our book, Mexico: A middle class society, Poor No More, Developed Not Yet, we argued that the country is no longer fundamentally poor. The numbers published by CONEVAL recently, together with other data previously produced by INEGI do not contradict our basic thesis. If one agrees that companies such as Cinemex, Cinepolis and Walmart are not in the business of losing money, then there is no way to explain their extraordinary pace of growth throughout the country. Mexicans are becoming better off even if not wealthy in any sense, the subtitle of our book.

The reasons why Mexicans are better off, or less bad, are critical to understanding what has changed and why. First and foremost, financial stability has drastically lowered the cost of money and an ever larger number of Mexicans have gained access to credit in the past two decades, particularly to mortgages, thus creating a solid foundation for family stability and economic improvement. Second, trade liberalization has radically lowered the cost of basic goods and staples: from clothing and shoes to foodstuffs. Mexicans are spending less money on basic goods, have a more solid family foundation and are spending some money on goods and services they could never have fathomed before. Third, as Mexico begins to enjoy a strong demographic shift parents are able to invest their scant resources in fewer children. This provides the foundations for accelerated growth if necessary reforms are implemented and stability is preserved.  Finally, household income has improved as families’ pool their earnings from all sorts of sources: steady jobs and the informal economy, scholarships and remittances. Each of these sources is important and the diversity has transformed the lives of a significant number of Mexicans.

The extraordinary fact is that a majority of Mexicans are no longer poor, which goes counter to perceptions in both Mexico and abroad. This may not change many things but, as Macario Schettino argues, to be wealthy one has to first imagine it. An ever larger number of Mexicans now have a chance to imagine it. And that changes everything.

Mexico: Still a Middle Class Society? – The Expert Take

Luis Rubio

In his book From Beirut to Jerusalem Thomas Friedman describes his experiences as a correspondent in the Lebanese capital at the middle of the civil war that characterized that country some decades ago. In an especially vivid scene, while mortar explosions and shots were heard through the window, the hostess at a dinner party asked without the least hesitation, “would you like to eat now or wait for the cease-fire?” Unfortunately for millions of businesses and unpretentious Mom and Pop-type grocery/variety stores, the ceasefire of municipal presidents never seems to make an appearance.

Businesses, above all small ones, live amid a war of annihilation and extortion and not only from criminals; given the circumstances, it would be a relief if the author of the attack was only organized crime. As such it could be expected that, some day, when the umpteenth governmental strategy was at last successful, the abuse would come to a halt. Regrettably, the great mafia encountered by shops, restaurants, companies and variety stores throughout the country stems from the municipalities and delegations in the case of Mexico City. It is there that a true war is being waged against business.

Businesses, shops and variety stores are the favorite target of municipal presidents and delegates, because from these flows an apparently inexhaustible source of income and bribes. As sovereign entities established under Article 115 of the Mexican Constitution, municipalities levy ever more creative taxes, dispatch inspectors to strong-arm owners and to exact legal and illegal contributions in systematic fashion. The harassment is permanent and nonstop. Paraphrasing Winston Churchill, “some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow to be milked. Not enough people see it as a healthy horse, pulling a sturdy wagon”.

The war being waged against small and medium businesses (SMBs) in Mexico (PYMES, their antonym in Spanish) is pathetic not only because it reduces, if not extinguishes the economy of the families that create employment and wealth in each locality, but also because it impedes the remaining half of what Churchill said in his previous phrase: that these authorities do not recognize that it’s about the horse that pulls the cart of development. The system is designed to prey upon, not be advantageous to the growth of the economy.

According to INEGI calculations and to those of UN entities committed to small and medium businesses, small companies represent the overwhelming majority of employers (more than 90%) and more than 50% of jobs created in the country, in addition to having created more than 65% of all new jobs in recent decades. While many large companies systematically raise their production levels and lay off employees, small companies –formal and informal- tend to be the main source of new jobs.

With this I do not pretend to argue that the low productivity characterizing a great part of small businesses is good or that constant expansion of the informal sector is desirable. However, if one sticks to the facts, what is indisputable is that without this economic sector, half of the country’s population would be unemployed. In this sense, it is impossible to ignore its social and political transcendence. Thus, the war unleashed by delegates and municipal presidents against these businesses is that much more disturbing.

The war takes on distinct forms. It begins with the famous “permit-ology”, the interminable number of red-tape bureaucratic procedures with which a person is required to comply to open a workshop, restaurant or company. Each procedure is accompanied by its respective snares, all tailored to grease palms. Many establishments forsake the process along the way and many others don’t even bother to attempt it. Informality ends up being an option but only temporarily for, from the perspective of the delegate or the municipal president, the existence or not of the permit ends up being the same thing. Both are legitimate quarry.

Extortion has many guises but all entertain the same objective: to exploit the entrepreneur or the variety store owner. The instrument the so-called authorities make use of is the threat of closure. As if they were appraisers, the governmental inspectors know that a variety store cannot survive more than a minimal number of days after closing, so they tighten the screws sufficiently for the extortion to work, but not enough to kill the goose that lays the golden eggs.

The war is real and proceeds to wipe out the main means of survival of the vast majority of the population. In this context, it’s not coincidental that, when one talks with Mexican migrants in the U.S., the first thing they say is that they feel free of the abuse of the authorities. Those able to launch their own business take pride in the fact that there everything is destined for them to be successful. The municipal authorities help, first, by not getting in the way; later, by facilitating the procedure so that whatever the permit required, the rules are clear and easily complied with. When one observes the contrast in the performance of the small businesses of Mexicans outside the country with that of those in Mexico, most noteworthy is the difference in the system of government. In both cases the person –the Mexican- is one and the same; what changes is the government, the quality of the government. Here it is designed to pillage, there to help. The difference is not minor.

Now that a new fiscal structure is being forged for the country –regarding tax collection as well as the relation between the federal government and the states and municipalities- it would behoove us to mull over the costs of the way our system of government operates. If in the last analysis, as they say in the detective films it’s all about money, the federal government has a very powerful weapon in its hands for forcing local governments to deregulate, transform themselves and become wellsprings of opportunity for the development of the country. While any state or municipality would be delighted to attract the new investment of a large automotive company, to cite the prototypical example, to its locality, the majority of jobs would continue to become available from SMBs. Killing them off bit by bit as our diligent authorities do is not a good way to ensure neither the locality’s development nor that of the country.

When the causes are discussed of the economy’s poor performance the great problems of infrastructure, competition for foreign investment or the confidence of foreign businesses in the country tend to be found at fault. However, often the problem lies, uncomfortably, much closer to home. As Hemingway wrote in For Whom the Bells Toll, “Was there ever a people whose leaders were as truly their enemies as this one”?

www.cidac.org

@lrubiof

FORBES – Luis Rubio

The visit of President Xi Jinping to Mexico constitutes a milestone not only in the bilateral relationship of the two nations but also in the broadest geopolitical dimension that, due to the growth of the Asian giant, changes day to day. For the Chinese government, the oriental culture of Sun Tzu with the millennial vision, there’s no such thing as a free lunch, the President’s tour represents a high-powered game that I greatly doubt would be obvious in Mexico. I fear we are just another pawn in the great chess game, something we have yet to understand.

The visit brought to mind the famous phrase of comic Groucho Marx, who wrote that “I could never understand why, when they run the 100-yard dash, they are so eager to get to the finish line. If they would remain at the starting line they wouldn’t end up sweaty and fatigued at the other end. But then, so many things in life are like the 100-yard dash”. While the Chinese play their game with great clairvoyance and sense of purpose, we play marbles, where each shot is independent of the previous one. The risk of these games lies in ending up “going bye-bye” without the shooter’s having even the least understanding of what happened.

I observed the visit, I listened to or read the speeches and I followed the entire tour of the Chinese President from his arrival in Trinidad & Tobago, his touching down in Costa Rica, his visit to Mexico and his summit with Obama in California. If one looks at it as a whole, it appears evident that the tour was really slated for the U.S. and that the president utilized the previous stopovers as a clear-cut message to the U.S. government. These two nations have been playing cat and mouse and the visit to the U.S. was conceived as an opportunity to clarify sources of tension and to establish a platform of long-term understanding between the two. If this conjecture is correct, the visits prior to the U.S. one, although possessing relevant content, were no more than a means to send the message that China can also play at being the opposition just like, from the Chinese perspective, the U.S. has been doing with Pacific-region pivot, the trade negotiation (TPP), their military exercises with Japan and other recent bunglings.

China is a great nation, the greatest and most powerful in the world until two hundred years ago, which is characterized by its great clarity of course. Independently of its very low per capita GDP (half of Mexico’s), if it maintains its current economic growth rate, in some years it will come to be the largest economy in the world. It is a big and powerful nation that projects an image that is on occasion aggressive. However, despite its strengths and qualities, it is a country with enormous internal frailties, severe political and social challenges and an imperious need to create jobs annually in staggering numbers that are almost incomprehensible. In addition, it is a nation whose population is aging rapidly. Some scholars affirm that these weaknesses lead its government to make decisions that are aggressive to the foreign eye as a vehicle of internal unity.

In our commercial relationship, Mexico sustains a high deficit, partly because of the protectionist practices that characterize it and partly because we import raw materials that we use in industrial processes for export. Even if our exports were to grow, everything suggests that the deficit will continue to be high. On the visit, the Mexican government achieved facilitating the export of pork and tequila, both important exports, but just a drop in the prodigious bucket that the trade deficit represents. It seems to me that it is necessary to persevere in these matters but I doubt that the picture will change significantly in the future.

If change was not procured in the only measurable looming issue of the relationship, then why such goings-on? I have no answer, but I do have a hypothesis. Behind all the endearments and embraces, the Chinese government sees Mexico as a pawn in its relationship with the U.S. We gave them Taiwan and we’ll export a little of our leftover oil to them. I’m left with the doubt of what we’re to gain or, if nothing, why such excitement?

www.cidac.org

@lrubiof

Luis Rubio

How many jobs, and growth points, are the Mexican society –and its government- willing to lose because of the itch to preserve entelechies like Pemex and the CFE? The government has announced that it will guide itself by productivity criteria and that it will devote itself to creating conditions for accelerating its growth. The concept is correct: there is an absolute correlation between the growth of productivity and that of the economy. However, beyond other factors (some not so minor) the two monsters that subtract the most productivity from the Mexican economy are the government-owned energy companies. If these enterprises are not transformed, the argument for productivity ends up being, in the youthful vernacular, unadulterated spin.

At the heart of the Mexican economy lies an enormous contradiction: one part is extremely competitive and productive, while the other lives by a miracle, the miracle of governmental protection. The latter is true for the manufacturing sector that survives thanks to subsidies and import tariffs as well as for the government-owned enterprises that subsist thanks to their not encountering any competition whatsoever. The enormous productivity that the first group generates is in the last analysis eliminated–wiped out- by the negative productivity yielded by the rest of these. The result is many fewer jobs and less growth than could be possible. That is, on perpetuating these corrupt and bureaucratic monsters, the country is sacrificing its future and its prosperity. There’s no other reading possible.

There are two ways to analyze the governmental and political obduracy. One is referring back to history, to the interests that prey on and off these companies and the narrative that the revolutionary regime constructed throughout the years in order to preserve (and milk) these niches of power, corruption and seemingly interminable wealth. There are certainly historical precedents that explain the petroleum regime, but they are also cause of its poor performance and lack of productivity, for those are the incentives that a monopoly creates. History has been exploited –and abused- for all its worth. On the other hand, it is evident that, in the absence of effective checks and balances, privatizing the resource would be unimaginable. Plain and simple, if other economic and political actors, all much smaller, bypass all the regulatory roadblocks and poke fun at the authorities without nary a blush, what would be necessary in institutional terms to ensure that this would not take place in electric and oil matters under a new regimen?

The other way of understanding the perseverance of the State monopolistic regime in this matter would consist of assessing the cost that the existence of these monopolies entertains for the domestic economy. Different from the first perspective, this one allows determining the price that the Mexican society has paid for the urge to make the union and its bureaucracy rich, in addition to the public servants who, inside and out, prey upon the monopolies. Pemex has 6.6 times more employees than Statoil, the Norwegian State enterprise and 1.8 times more than Petrobras, the Brazilian one; thus, its sales per worker amount to a fraction of those enterprises. While Statoil produces 78 barrels per worker, Pemex hardly reaches 25. In some cases the untold squandering of resources is unutterable (e.g., Chicontepec), where perhaps the problem was technological, but in others, such as in refining, a business of margin, endemic inefficiency explains 100% of the problem. Something similar occurs in the case of the CFE: the rates it charges were 41% more than those of the OECD in 2011 and that’s not counting the power outages, the brownouts, etc. The cost of the monopolies is monumental*.  And that does not include what economists call “opportunity cost”: what could be done with those resources in other areas.

The numbers suggest the obvious, what we all know: far from contributing to development, the government-owned monsters subtract productivity from the country’s economy. From this perspective, it would be reasonable to analyze what would happen if the monopolies were dismantled and if investment in energy as well as in other sectors were freed up to create a real energy market in the Mexican economy.

Though from a merely speculative level, it would appear evident that the results of action in this direction would allow catching a glimpse of waves of investment in energy and infrastructure. What are today old behemoths plying obsolete technologies, little investment in resource development, deplorable distribution infrastructure (the urban hardwiring network guaranteeing poor electrical service comes to mind) and insufficient and poorly maintained gas ducts and oil ducts (ergo, dangerous) would lead to an explosion of new investments in networks, ports, gas ducts and distribution.  There is also the issue of the opportunity cost of what Pemex does not do, for example tending to the old oil wells (mostly small) that require capital investment and management that the entity cannot provide. More to the point, these investments would drive the growth of productivity in key sectors of the domestic economy, thus the modernization of the country. The jobs lost in the present monopolies would be compensated for by new jobs created by new businesses and investments that are at present inconceivable because its current structure makes the development and capitalization of the industry, as well as access to the most modern the industry impossible.

A former director of Pemex once argued that the entity’s problem does not reside in the corruption or the number of employees but in the permanent dismemberment that its structure of governance entails because everything is organized to extract resources from the enterprise instead of permitting its development. He illustrated his comment with the Ministry of Finance’s interest in skimming off resources, the Energy Ministry’s interest in undermining the director of the enterprise and that of the President to reward his cronies with posts and “opportunities” in the entity. His comments concluded with the following: when the barrel of oil costs 18 dollars and sells for 100, it really doesn’t matter whether the net cost is 22 or 23 in view of the fact of inefficiencies as well as all those taking their cut along the way. This is not a foolish argument, but a profoundly realistic one in the political context in which Mexico operates. However, the real implication of leaving the monster untouched or, as the comment of this ex-director suggested, to create a better structure of internal governance but without changing its essence, would be to produce more oil for the satisfaction of the insatiable Finance Ministry without failing to subtract productivity from the economy in its entirety.

The energy monopolies are not as benign as many believe: in addition to pillaging, their functionaries busy themselves with thwarting other initiatives from prospering, such as Oaxaca’s wind farm, at a standstill these two years. For Mexico to prosper, it needs to develop its energy resources, to create a true revolution of energy, not a mere and irrelevant change of façade. Of those we’ve had plenty.

*based on figures submitted by CFE and Pemex to the SEC.

www.cidac.org

@lrubiof

Luis Rubio

The obsession with raising tax revenues reminds me of the film Brewster’s Millions, with Richard Pryor in the lead role. Brewster would receive an enormous inheritance but only if he spent 30 million dollars in one month or he’d lose it. The objective of the one bequeathing the funds was to show Pryor’s character the value of money. It looks easy but is tremendously difficult to find ways to spend so much money in so little time. Well, for someone normal. For governments and politicians there’s never a limit to what they can imagine being able to spend. So it’s much easier to look for ways of raising taxes than to justifying the rationality of expenses that they take so naturally.

There’s nothing natural about spending so much money. Of course a government has innumerable responsibilities and functions that require the defrayment of costs and that’s what taxes are for. Therein lies the basic elements, such as the physical safety of the population, justice, health and education, in addition to matters such as the representation of the country in foreign nations and the creation of material conditions under which the population is able to prosper, such as infrastructure, traffic regulations and the like.

This said, the first question that one should pose is, under which of these headings do we Mexicans possess anything that remotely reflects competence, if not excellence. There is not a sole heading under which our government is guided by the criteria of efficiency, the achievement of objectives or quality, let alone productivity, the new fad. The notion of the more spent the better the result is, as is said of second marriages, the triumph of hope over experience.

But in our case this is barely the take-off point. The frittering away of resources is legendary in the Federal Government, but exemplary when compared with the way resources are squandered by state governors and municipal presidents. Still worse is the permanent obsession to “depetrolize” the public finances. I ask myself why.

First, we all know the type of Ali Baba’s cave that PEMEX is. The entity that could be one of our greatest growth engines is no more than a space of interminable corruption, inefficiency, the property of its bureaucracy and union, and the source of slush funds for obscure political objectives. In a word, PEMEX is a bottomless pit that will never be accountable or contribute to the national economy more than what it does today: pay for the exploitation of the resource that, according to our Constitution, belong to all Mexicans and not only to the entity’s internal interests.

Despite this, the notion is not only ubiquitous but also, I would dare say, universal, that instead of the funds that the Federal Government currently receives for the exploitation of the natural resource, these funds should remain within the entity and that the government would collect the difference by other means, that is to say, throwing more money at the corrupt monster so that there would be fewer opportunities yet for promoting the development of the country.

Behind all this lies the concept that David Mamet years ago summed up with clarity in his book The Secret Knowledge: “Our politicians, left and right, are, to belabor the metaphor, the wastrel son: they are free to spend, to chase fantasies, and to squander resources, for the resources are not theirs, and there is no penalty for their misuse or loss”.

Now that we are entering into a new round of fiscal reform, it would be worthwhile to remember that there is a surplus of reasons for the government to collect more and spend on the country’s development. The problem is that these things should be connected. It would be worthless to collect more if all that we are going to achieve is withdrawing resources from the population that could be better employed by the citizenry, generating growth via private investment or consumption. Nor would it be of service for the government to have more resources if all of these will end up disappearing due to their ill use or because they were subtracted or detoured by corruption.

At the heart of the fiscal matter there’s another of the mismatches that the country has experienced in recent decades. Although for many Mexicans, beginning with the politicians, it may not be obvious, the opening of the economy changed the entire logic of the functioning of the country. From the moment that the government stopped controlling everything –imports as well as freedom of expression- the country began to revolve around the functioning of the economy. In this context, it is not by chance that Mexico’s Department of the Interior (Gobernación) is no longer the pivot around which national affairs revolve: the key stopped being repressive control. From that moment, the key to the functioning of the country passed to the axis formed by the Ministries of the Treasury and of the Economy. But this has not really sunk in among politicians and the media.

The country’s great problem is that the system of government has not changed: it continues operating under premises that were valid in the fifties but that left off being so and that today are totally irrelevant. During that epoch, through centralized expenditure and iron-fisted control of foreign trade, the government was the heart of the economy’s functioning. In the same fashion, it exercised total control over the governors, media, political parties, businesses and unions. In addition to this, everything was organized to benefit the political bureaucracy in terms of job posts and personal enrichment. What that political class never lost sight of is that the key to their permanence resided in there being economic progress. The latter disappeared from the map in the 1970s.

Economic liberalization altered all of those relations but did not create a new structure nor did it reform the existing one. Worse, the changes were abrupt and lacked strategy in both the economic and political realms. The controls disappeared, the governors appropriated the budget, businesses responded as best they could (some winning like sharks, others languishing, some becoming impacting successes), the unions became independent and the country ceased being an organized entity. The bureaucratic disorder, the public insecurity and the violence are not the product of chance.

Going back to the fiscal reform: what the country requires is a reform of the government as a whole, from the “federal pact” (the relationship of the federal government with the states) to proper and formal accountability on the use of public funds. The fiscal reform is an unavoidable component of a radical reorganization of the government, but it is not a substitute for this. Collecting more taxes is not what Mexico needs. Mexico needs a government that functions and not only because it now has competent politicians, but because it has structures that oblige it to do so.

www.cidac.org

@lrubiof