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

INFOLATAM – Luis Rubio

Eleições México

 Ao final, todos ganharam algo que permitirá que a vida política siga adiante. O que se sofreu foram as excessivas expectativas de alguns dos concorrentes, estivessem nas cédulas eleitorais ou não. Ou seja, o México continua vivendo a normalidade.

Este primeiro grupo de eleições locais nos seis anos de Enrique Peña Nieto era binário: sua importância seria dramática ou irrelevante. Não teria meio termo. A relevância das eleições de domingo passado nada tinha a ver com as eleições mesmo, as localidades específicas ou os candidatos envolvidos. Sua transcendência derivava-se do mecanismo criado pelo presidente Peña Nieto para coordenar os três principais partidos políticos e avançar uma agenda de reformas: o chamado “Pacto pelo México”. O instrumento converteu-se em um mecanismo que permitiu romper o impasse legislativo e político dos últimos quinze anos, mas que não goza de consenso entre as forças políticas, onde jaz sua debilidade. Daí que este conjunto de votos tenha se convertido em uma prova de fogo para todos os envolvidos.

Uma “carroça completa”, a forma na qual os priistas historicamente descreviam seus resultados abrumadores, teria dado um golpe mortal ao Pacto. Como era de se esperar, o resultado não foi tão dramático e cada um dos partidos pode afirmar que conseguiu vitórias suficientes para sair mais ou menos bem. Estas eleições acabaram sendo não tão importantes, mas mostram a fragilidade institucional que caracteriza o México.

Na ausência de poderes públicos devidamente institucionalizados e separados, sobretudo o poder legislativo e o executivo, o pacto resultou ser um instrumento que provou ser formidável para seu propósito específico, ainda que igualmente gerador de controvérsias, ódios e conflitos no interior dos partidos políticos. A forma em que o pacto operou diz tudo: seus integrantes -representantes dos três partidos grandes (PAN, PRI e PRD) e do governo- negociam os termos de cada uma das reformas, o passam ao congresso, onde seus acólitos o processaram em matéria de horas, transferindo-o depois ao senado, onde se tem atolado cada vez. A razão deste último pouco tem a ver com o conteúdo das iniciativas propostas (ainda que seja necessário reconhecer que tanto a reforma educativa como a de telecomunicações saíram enriquecidas do senado), mas com a contraposição -crise seria melhor termo- interna que experimentam tanto o PAN como o PRD. Mas o ponto de fundo não pode ser perdido de vista: por mais útil que seja, o pacto pretende suplantar as funções do poder legislativo, fator que inexoravelmente gera conflito.

Os três partidos enfrentam problemas internos. Ainda que o PRI governe e tenha conseguido encobrir suas fissuras, as circunstâncias dos últimos períodos permitiram-lhe recobrar o poder sem reformar-se e é de se antecipar que as divisões vão aflorar na medida em que o governo tente afetar interesses, precondição para qualquer reforma. As eleições de ontem sugerem que, ainda que alguns priistas tenham ganho, nem todos os triunfos são bons para o poder presidencial e para seu projeto de concentração do poder.

O caso do PRD é diferente: produto da fusão de duas histórias, a esquerda histórica e a esquerda do PRI, agora experimenta o desafio de construir uma social democracia moderna e, ao mesmo tempo, recuperar essa base de eleitores que apoiaram um projeto estatista e reacionário liderado por López Obrador, que já não cabe no PRI e que é incompatível com uma esquerda moderna e cosmopolita. Para o PRD, era crucial conseguir vitórias suficientes que justificassem a aposta pelo pacto, circunstância que conseguiu com acréscimos.

O PAN enfrenta uma divisão e uma crise de legitimidade. A divisão reflete uma luta profunda entre as forças do calderonismo, que não soube empregar o poder para construir o partido, e os panistas mais tradicionais, que são produto da cidadania. Sua crise de legitimidade tem a ver com sua pouca destreza política como governo e, sobretudo, com a corrupção da qual foram presa estando no poder. O (aparente) triunfo do PAN na Baixa Califórnia fortalece Gustavo Madero, presidente do PAN, e diminui o poder dos calderonistas no senado.

O resultado final reflete três coisas: uma democracia ativa mas imatura e sem fontes institucionais de apoio; governadores convencidos de que sua vida e seu futuro estavam em jogo nas urnas e, portanto, dispostos a qualquer arbitrariedade; e um eleitorado impossível de se classificar em categorias analíticas ou ideológicas pré-estabelecidas. Isto é, as eleições refletiram um país que se move, ao mesmo tempo em ocasiões de protesto, apesar da debilidade de suas instituições.

Caso se confirmem os primeiros resultados, todos os partidos ganharam suficiente para não perder a cara. O PAN reteve a Baixa Califórnia, recuperou a cidade de Aguascalientes, Oaxaca, Puebla e municípios importantes em Tamaulipas e Veracruz. O PRI ganhou Tijuana, a cidade de Veracruz, Chihuahua, Hidalgo e Quintana Roo. O PRD, que foi em aliança com o PAN em vários lugares, ganhou porque sua estratégia funcionou e porque não retrocedeu. Quem sabe a mensagem principal do eleitorado é a de que as coisas retornaram à normalidade com o PRI como primeira força, o PAN como segunda e o PRD como terceira. Nada novo sob o sol.

O grande paradoxo é que as pessoas votam, sobretudo em eleições locais, em função de suas circunstâncias particulares e não com a perspectiva que os políticos e os analistas antecipavam e à qual atribuíam um significado cósmico. Não resta dúvida que muito estava em jogo nestas eleições pelas brigas internas que vivem os partidos, mas não pelos processos eleitorais propriamente ditos. A grande derrotada foi a violência que muitos supunham que seria a nota do dia. O grande triunfo é para quem propõem-se a avançar uma agenda de reforma fora dos canais tradicionais. Paradoxos de ida e volta.

Traduzido por Infolatam

http://www.infolatam.com.br/2013/07/09/paradoxos-eleitorais/

INFOLATAM – Luis Rubio

In the end, all won something that will let political life to carry on. What did suffer were the excessive expectations of some of the contenders, whether on the electoral ballot or not. That is, Mexico continues living its normality.

This first group of local elections in Enrique Peña-Nieto’s six-year term was binary. Its importance could be dramatic or irrelevant. There could be no happy medium. The relevance of last Sunday’s elections had nothing to do with the elections themselves, the specific localities or the candidates involved. Their transcendence derives from the mechanism envisaged by President Peña-Nieto to coordinate the three main political parties and to advance an agenda of reforms: the so-called “Pact for Mexico”. The instrument has become a mechanism that has permitted shattering a political and legislative impasse of the last fifteen years but one that does not enjoy consensus among the political forces, wherein lies its weakness. Hence this set of votes would become a litmus test for all involved.

The whole ball of wax (the “carro completo”, as the PRI has historically described their overwhelming results), could have delivered a mortal blow to the Pact. As expected, the result was not as dramatic as that and each of the parties can affirm that it culled enough triumphs to get off more or less free. These elections ended up being not so important, but they did illustrate once more the institutional fragility that characterizes Mexico.

In the absence of duly separated and institutionalized public powers, above all the executive and legislative branches, the pact turned out to be an instrument that has proved formidable for its specific purpose, although equally a generator of conflicts, ill-will, and controversy at the interior of the political parties. The manner in which the pact has operated says it all: its members –representatives of the three big parties (PAN, PRI and PRD) and of the government- negotiate the terms of each reform, turn it over to Congress, where their acolytes have it processed in a matter of hours and subsequently transfer it to the Senate, where it has been blocked every time. The reason for the latter has little to do with the very content of the proposed bills (although it is necessary to recognize that the educative reform as well as that of telecommunications emerged enriched from the Senate), but rather with the internal conflict -crisis would be a better term- that the PAN as well as the PRD are undergoing at present. But the fundamental point must not be lost from sight: as useful as it might be, the pact intends to supplant the functions of the legislature, a factor that would inexorably generate conflict.

All three parties are encountering internal problems. Although the PRI governs and has achieved concealing its fissures, the circumstances of recent lustra have allowed it to regain power without reforming itself and it is to be expected that divisions will crop up to the extent that the government attempts to affect interests, a precondition for any reform. Yesterday’s elections suggest that, although some PRIists won, not all of these victories endorse presidential power and its project to concentrate power.

The case of the PRD is distinct: a product of the fusion of two histories, the historic Left and the PRI Left, now experiencing the challenge of constructing a modern social democracy and, at the same time, winning back that voter base that has supported a reactionary and Statist project headed by López-Obrador that no longer fits in the PRI and that is incompatible with a cosmopolitan and modern social-democratic Left. For the PRD it was crucial to achieve sufficient wins that would justify wagering on the pact, a circumstance achieved in full.

The PAN is encountering a division and a legitimacy crisis. The division reflects a deep struggle between the Calderonist forces that didn’t know how to employ their time in the presidency to construct a party and the more traditional PANists who are the product of the citizenry. Its legitimacy crisis has to do with the PAN’s poor political adeptness as a government and, above all, the corruption to which it fell prey on being in power. The (apparent) PAN win in Baja California strengthens Gustavo Madero, the PAN president and diminishes the power of Calderonists in the Senate.

Party leaders required credible wins to defeat their internal opposition, while the federal government had the peremptory need to remain on the periphery in order not to cause a new crisis inside the opposition parties. The final result reflects three things: an active but immature democracy and one without institutional sources of support; governors convinced that their life, and their future, was at play at the voting booths, thus their willingness to commit to any outrage; and an electorate impossible to insert into pre-established ideologies or analytical categories. That is, the elections reflect a country that moves, if on occasion begrudgingly, despite the weakness of its institutions.

On confirmation of the first results, the parties won enough to not lose face. The PAN retained Baja California and reclaimed Aguascalientes, Oaxaca, Puebla, and important municipalities in Tamaulipas and Veracruz. The PRI won the cities of Tijuana and Veracruz and the states of Chihuahua, Hidalgo, and Quintana Roo. The PRD, which had formed alliances with the PAN in many places, won because of its strategy and because it didn’t lose ground. Perhaps the main message of the electorate is that things returned to normality with the PRI as the prime force, the PAN as second and the PRD as third. Nothing new under the sun.

The great paradox is that people vote, especially in local elections, in terms of their particular circumstances and not with the perspective that national politicians and analysts anticipated and to which they assigned cosmic significance. There’s no doubt that much was at stake in these elections due to the internal struggles that the parties are going through but not because of the electoral processes per se. The great defeat was the violence that many supposed would be the news of the day. The great victory is for those who propose advancing a reform agenda outside of the traditional channels. Round trip paradoxes.

www.cidac.org

@lrubiof

Luis Rubio

“In a riot, as in a novel”, wrote Alexis de Tocqueville, “the most difficult thing is to invent the ending.” In this same book, Recollections, the astute French observer noted that “I am firmly convinced that chance can do nothing (without considering) antecedent facts, the nature of institutions, turns of mind, the state of mores are the materials from which chance composes those impromptu events that surprise and terrify us”. In the same fashion, the future of Mexican politics, and of the country, will be generated little by little as the result of the existing ingredients and of those added into the mix.

The first ingredient is without doubt the complex history that precedes us and that establishes inescapable frames of reference. For example, one peculiarity of the sort of authoritarianism that existed in the country is that practically no one in the political world recognizes or accepts it. The PRIists always believed the myth that Mexico was a democracy, which makes many of them inert to many of the changes that have occurred. Authoritarianism has not been discredited in many political sectors and many who exercised it (and who, in many instances, continue to be the instrument of its vices) do not assume it. The flip side of the coin is that democracy has become another myth to which bowing and scraping exists simultaneously with attempts to undermine it. The mechanisms for this objective vary, but the essence does not change: the attempt to recentralize the power, the multiple and renovated mechanisms of control, the manipulation exercised by the television networks, the unwillingness to overcome the de facto powers, the attack against the supposedly autonomous entities.

The second ingredient is the way that the processes of transition in the economy as well as in politics were carried out. The country passed from an era of controls to one of fragmentation but without an agreed-upon blueprint, above all in the political ambit. The electoral reforms were reactive; with few exceptions, there was no construction of institutions that are inherent, and necessary, in an open society; liberalization favored the consolidation of de facto powers that systematically defy society and the government; and all this transpired without agreement on the port of arrival. That is what has led to an important part of the people considering that Mexican society is not yet a democratic society while the other thinks that it always was. The contrast with Spain or Chile is extraordinary: in those countries there was a clear project, consensus about the process and a pledge to construct a distinct future. This continues to be the challenge of Mexico.

The previously mentioned fragility of the country’s institutions is the third ingredient: not only have institutions fitting in a democratic schema for making possible the consolidation of a modern society not been constructed, but also the existing ones keep being undermined. Many of the efforts that have taken shape in the civil society have ended up thwarted by these very de facto powers that threaten and nip them in the bud. The government has acted in this dimension but, revealingly, has procured strengthening itself, not creating checks and balances.

The pact, as the fourth ingredient, is a great idea above all because it lends an ear to the enormous frustration characterizing the citizenry in the face of the politicians’ paralysis and immobility, but its nature entails risks for the parties participating in it and on which, in good measure, they have staked their future. On becoming a straightjacket, the pact could end up impeding the opposition parties from serving as representatives of the citizenry, thus turning them into silent accomplices, the old-fashioned PRI way. On the other hand, if the pact becomes an instance of negotiation in which other agendas advance, the country could emerge hugely strengthened: with new institutions and improved performance.

Fifth, no one can doubt that the entire party system is in crisis. Although the PRI is governing and has been able to conceal its fissures, the circumstances of recent times allowed it to regain the power without reforming itself and it is to be anticipated that divisions will surface to the extent that the government attempts to affect interests, a precondition of any reform. The case of the PRD is distinct: product of the fusion of two histories, the historical Left and the PRI Left, the party now encounters the summons to construct a modern social democracy and, concurrently, to recover the voter base that has supported a statist and reactionary project that no longer tallies with the PRI and that is incompatible with a modern and cosmopolitan Left. The PAN finds itself confronting a division and a legitimacy crisis. The division reflects a deep struggle between the Calderon-led forces that were ignorant of how to employ power to construct a party and the more traditional PANists who are the product of the citizenry. The PAN legitimacy crisis pertains to their poor political skill while in government and, above all, the corruption to which they fell prey on being in power.

For different reasons, none of the three great parties has it easy and none has reasons to jump for joy. Not by chance has the president of the PRI himself been the most ardent critic regarding what is necessary for staying in power.

These ingredients constitute the backdrop. What takes place in the upcoming years will depend on the way each of its components acts. In conceptual terms, there are two possible scenarios: one, the product of adjustment or resignation, would lead to waiving the profound changes that the country requires to be successful. The other would imply converting the pact (and other mechanisms) into instruments of institutional transformation. Inevitably, in a presidential system, the government will call the shots. The opposition parties, and the society in general, can cooperate (for better or worse) or can construct alternatives, but the opportunity lies in the hands of the government.

The future will be the result of the actions and incentives constructed to create a new platform of development. One possibility would doubtlessly be abdication and there are many elements that suggest attempts to recreate the past. The alternative would be for the PRI to take itself on as the reform project and champion a whole new era. The irony is that a scenario like this would render the PRI’s permanence much more probable than that of the beaten path of mediocrity bequeathed to us by its de facto powers or its reluctance to have done with them.

The issue is not new. In Carlos Salinas’ presidential campaign, a woman remarked to the candidate: “It’s better to seal off the ravine than to haul out the ox every six years”. The challenge remains the same.

www.cidac.org

@lrubiof

Luis Rubio

In the book “The Power of Productivity”, William Lewis compares the construction industry in Brazil, the U.S., and Mexico. His conclusion is very simple: the Mexican worker without much education or many skills can be as productive as the most qualified German worker. What differentiates countries like Mexico and Brazil from the U.S. and other wealthy countries, says Lewis, is the within context in which enterprises operate and that create conditions for the economy to prosper a little or a great deal. The key to growth lies in productivity and everything that contributes to increasing it favors growth and, vice versa, everything that impedes it reduces it.

This is the reason that the government’s decision to convert productivity into the axis of its economic strategy is so transcendental. “Productivity”, says Krugman, isn’t everything, but in the long term it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker”. Productivity is that which results from everything that takes place in the economy, thus constituting a crucial means for the performance of the former. When the government adopts this indicator as the axis, it is declaring to us with full clarity that it is disposed to attack the causes of the very poor levels of the growth of productivity that the country has evidenced in recent decades.

If one observes the Mexican economy, the first thing that will be obvious is that there are enormous differences among the productivity levels of the millions of enterprises that constitute it. While there are companies that successfully compete with the world’s best, there are others that would be unable to compete with even the most unproductive in their vicinity. These differences in performance illustrate the complexity of the challenge facing the government and the country. Why the differences? Lewis’s argument is quite simple: part of the challenge of productivity lies in the enterprises themselves, but one huge component is found in the environment in which these operate.

The previously cited example, in reference to the housing industry, reveals that a company with good production techniques, intelligent use of the technology and a strategy of project administration can attain a worker with the least qualifications who ends up as productive as the most experienced and qualified. What the company does in terms of quality and production techniques constitutes the essence of the increase in productivity. In this the government affects it relatively little.

Where the government’s intervention is crucial is in the environment in which the enterprises operate and this incidence, states Lewis, is nearly always negative. A very cumbersome and poorly efficient government implies additional costs for the companies (more taxes) without the benefit of better services. Worse yet, the more productive the enterprise the more taxes it pays, a factor that distorts the economy. Protection of particular interests –unions, governmental monopolies, enterprises and favorite entrepreneurs, private monopolistic practices, insecurity, the lack of functionality of the judiciary, high tariff rates, subsidies- implies the discrimination against the rest of these but, in particular, the permanent distortion of the markets in which the enterprises operate. In a word, governmental actions directly impact productivity.  As a result, the government’s challenge is monumental and, fundamentally, internal: all of these interests that benefit from the distortions that the government causes are found in its bosom, within its party or in close proximity to these.

The dilemma is not difficult to visualize. Let’s imagine that a productive company competes successfully in its market niche. It receives raw materials and other goods in the morning and issues finished products in the afternoon. For purposes of this example, what is under its responsibility works well. Its headaches (usually) are not in this area but rather in all of the others: the inconstancy and price of electricity, gas and other sources of energy; the infrastructure (the streets, the traffic, the drainage, the water supply); communications costs; the assaults on their delivery trucks; the years it takes to resolve contract non-compliance; the complexity and costs of obtaining credit; and the monopolistic prices that innumerable suppliers –large and small- impose upon it. All of these factors are the responsibility of the government. There’s no way around it.

The government is facing two enormous challenges. On the one hand we find the quintessential challenge, which consists of attacking the sources and the causes of all of these distortions. Some of these have a bearing on the priorities that, historically, Mexican governments have thrown to the winds and that now have become monumental challenges: among these the most obvious are the entire justice system (from the office of the prosecutors to the courts), public (in)security, and the tolerance of abuse that the energy monopolies impose on the society and the economy. Others are the product of incomplete reforms, of new realities and of problems unattended to. From whichever angle that one contemplates it, the challenge is titanic.

The other challenge is perhaps simpler in concept, but similarly burdensome in practice. The country’s industrial sector is divided into two groups: one that is hypercompetitive and the other that depends on governmental protection. In round numbers, the former represents 80% of the production and employs up to 20% of the manpower; the latter represents 80% of the enterprises and the same proportion of jobs, but produces less than 20% of the total. The problem is not the proportions but, returning to the core problem, that these non-competitive companies (equally large and small) subtract productivity from the economy, thus they penalize growth. Instead of contributing to the development of the country, they limit it. No one in the government is ignorant of this and their dilemma is obvious: eliminating protection would contribute to accelerating growth but would generate a problem of bankruptcy and unemployment. The contradiction is crystal-clear: the very government that makes productivity its own has just raised the protection and subsidies of this very industrial sector.

The only possible solution resides in resolving the problems caused by the government -security, infrastructure, contracts, competence, effectiveness in expenditure and more rational taxes as well as the energy monsters- with the purpose of enticing many more enterprises to want to invest in the country that would allow absorbing the manpower that would result in eliminating the protection. It doesn’t get better than that and there’s no solution without risk: either the government takes the plunge or we remain mired in the bog.

www.cidac.org

@lrubiof

Luis Rubio

“When there is peace under the heavens”, says a Chinese proverb, “the big problems seem small”. When things work well, in normal mode, the defects or deficiencies slip into second place and no one by and large worries about them. Paradoxically, the status quo balks at remediating problems while making it nearly impossible to capitalize on opportunities. Mexico has become familiar with many examples of both situations.

In terms of problems, on many occasions, these come to be resolved over time, rendering irrelevant the complaints or criticisms of us Cassandra-like disbelieved alarmists perennially found in all societies: those of us who fret about the problems or situations that, if not taken care of, would entail colossal risks ahead. The thing changes when a crisis presents itself.

Crises demand response and leadership. These are moments at which the variables that previously functioned in a known manner stop being predictable and the problem-solving capacity depends in good measure on the quality of the leadership with which a society is endowed. A leader must be clear on the objective that he or she pursues to face the crisis, but must also have the capacity to understand the deep-seated causes of the latter, as well as the maturity in the making of decisions –many of these terribly costly- that defeating a crisis requires.

On looking back in time, to the seventies through the nineties during which financial crises proliferated, although not all were managed with the same dexterity, we the citizens entertained the advantage of having the governmental capacity and competency to deal with them. Of course not everyone liked the budget cuts or the decisions vis-à-vis the debt, the banks or the handling of the exchange rate, but this affirmation becomes considerably more relevant when compared with the capacity and disposition that was present then to respond in the face of the crises ensuing in the country, with what has occurred with similar crises that have taken place recently in other societies -from Argentina to Greece and including the U.S.

It is evident that each country’s circumstances condition and determine the latitude that a government retains to respond and that establishes the margin for maneuvering within which to act. In this manner, a country like Argentina, which enjoys an immense food production capacity, can afford to run risks that nearly no other country in the world could manage. On its part, Greece found itself with the decided support of the rest of Europe not because these nations were content with Greece’s performance or with its government’s response capacity, but because all saw their own common currency at risk. The U.S. has secured the privilege of being able to postpone its inevitable fiscal adjustment -above all in relation to social, health and pension programs, the so-called entitlements- to a great extent because it has a reserve currency.

Robert Samuelson, an economic analyst for the Washington Post, has much criticized President Obama for not assuming the leadership that the crisis calls for. According to Samuelson, “only the occupant of the bully pulpit can yank public opinion back to reality” because his executive function grants him the possibility of doing so, and in fact converts him into the sole political actor who can. Only the president, insists the analyst, has the capacity of exercising what the situation demands. The result of not doing this, and one that severely affects the Mexican economy, is that the U.S. is confronting a crisis of confidence that is reflected in low investment levels, hence prolongation of the crisis.

Beyond the critical situation, another way to squander time and resources is not to exploit opportunities. Perhaps the main difference between the success of a good part of the Southeast Asian countries and the relatively poor performance of Mexico’s economy in the past decades lies less in what was done than in what wasn’t. For example, with import liberalization, in the eighties a radical turnabout in the direction of the Mexican economy occurred. However, it took twenty years for that decision to begin to exert a notable impact on the economy’s growth rate. As Andrés Velasco, an ex-Secretary of the Treasury of Chile says, a critical mass of exporters had to be reached for the benefit to be perceivable. However, he states, as in Chile a decade earlier, once companies adjust to the new circumstances, the economy becomes much more flexible and its capacity for adapting to a changing world grows.

Although the delay in adaptation can be explained, not so the total absence of public policies designed to accelerate it. Perhaps the best positive example in this respect is the impressive aeronautical industry that was born, practically from nothing, in Queretaro. While less visible than its Brazilian counterpart (which has its own brand of planes) according to some studies, that industry today adds more value in Mexico than in Brazil. Mexico may not have its own airplanes, but its aeronautical industry pays better salaries and produces more wealth than its southern counterpart. What’s interesting is that its genesis is directly related to the State of Queretaro’s decision to create a university major in aeronautical engineering, generating with this the personnel who have made the rise of the industry possible. Of course, there is no guarantee that the establishment of a university career major (or something similar) will translate into the development of such an important industry, but the question of how many opportunities have been lost due to lack of vision, foresight and governmental conscience at all levels is not unwarranted.

What’s impacting about the Queretaro example is that the cost incurred in the development of the industry was not extraordinary: an existing vehicle was taken advantage of (the university) and a university career major was constructed that, if not having jelled in the locality, would have provided qualified manpower for other latitudes. In other words, it entailed a moderate wager that has had an extraordinary benefit. Unfortunately the commonplace –about which there are lamentably many examples – concerns enormous wagers with no benefit at all.

The country does not lack good decisions, but it has indeed suffered from trifling clarity in its leadership in the area of opportunities that would expedite its transformation. Just as the crises necessitated fiscal prudence, the gradual reconfiguration of the national economy and that of the North American region lays bare opportunities that we should not pass up, one more time. The key is not more spending but intelligent prodding, if only from the pulpit.

www.cidac.org

@lrubiof

Luis Rubio

Two things are vital for a surgical procedure to be successful, my father used to say: the surgeon knowing what to do and how to do it. As the dedicated and meticulous surgeon that my father was, he never would “go into”, as he used to say, a patient if both conditions were not present, nor would he permit any of his team in the operating room to act without knowledge and skill. The same is true for the development of the country. Governing and lifting the country out of the rut it’s in also requires two things: political capacity to get things done and utter clarity in what needs to be done. These two conditions have not been present since 1994.

It’s important to call this story briefly to mind because it explains much of the present dilemma. With the 1968 Student Movement, the so-called “stabilizing development” economic strategy was abandoned and a decade of growth commenced based on deficit spending, financed with the foreign debt. That era ended obstreperously when the combination of inflation, indebtedness and recession practically bankrupted the country. The worst thing was that it left in its wake a trail of consequences and distrust that have yet to be erased from the minds of citizens and investors alike. In the eighties there began a process of economic reforms that, little by little –often reluctantly and not always integrally-, started parceling out viability to the country.

Regrettably, this impetus was lost once again with the Zapatista uprising, the governmental turmoil, the political assassinations and the 1994 financial crisis. At the beginning of that year the bearings were lost of the development adopted in the previous decade and, although stability was maintained (not a lesser feat) the country was not to procure a total transformation.

During the present decades, the country has survived and prospered thanks to two circumstances: on the one hand the financial stability that has enabled very low interest rates, growth of consumer credit and the gradual consolidation of a middle class that has become the cardinal factor of both the economic as well as the political stability the country possesses. On the other hand, the backbone of all this has been the North American Free Trade Agreement (NAFTA) that has converted exports into the motor of the Mexican economy and that has slashed the prices of all sorts of consumer goods, allowing the acquisition of consumer staples (above all food, clothes and shoes) with a declining percentage of available family income, all culminating in better quality of life levels. Absent still is for the whole economy to join this transformation process in order to magnify the benefit for the entire population.

To achieve this transformation two simultaneous ingredients are required: a development strategy and the capacity to put it into practice. Both components are necessary and each entails its own characteristics. The strategy must be compatible with the environment in which it is to be implemented (NAFTA, financial stability, exports, the “old” manufacturing sector that languishes away) while it maximizes the potential of increasing the productivity of the economy in general. This combination of leveraging what’s successful and driving the growth of productivity forward could be the determining factor of the future of the country’s economy. For its part, the capacity to manage this political complexity is a sine qua non for implementing the strategy that the government decides to adopt.

Over the past two decades many ideas have been conceived for accelerating the growth of the economy, but a growth strategy has never been consolidated. Whatever the case, in all of this time the great absentee component in the mix has been the political skill to get things done; that is, even if there had been a viable strategy, the political incapacity would have made it irrelevant, as it actually did. Under the necessary conditions and in the presence of experts and well qualified advisors, the strategy could have been constructed with relative celerity. However, if the political side is lacking, the strategy may be extraordinary but it cannot be implemented. In other words, the strategy is necessary but it is not enough of a factor: it requires the capacity of political instrumentation.

The great opportunity that the country has before it is precisely that, as it has demonstrated in the last few months, the government today has more than sufficient political capacity, something not seen since January of 1994. What’s missing is an economic development strategy that transcends the commonplace scenarios, the list of occasionally disjointed reforms and the revamped mechanisms of political control. The government certainly knows how to do this. What’s needed now is for the government to clearly define what must be done. And to do it.

www.cidac.org

@lrubiof

Luis Rubio

A Canadian university professor was famous for never failing anyone in his classes. One day, some of his students argued in a debate that the policies of the government would eliminate poverty and would become a great equalizing factor of the society. Skeptical, the professor proposed an experiment to them: from that moment on, he would average the grades of the entire class group and no one would get an A (a 10 in Mexico) and no one would flunk the course. The first exam came and went, the professor averaged the scores and everyone got a B. Those who had studied hard were upset, while those who had studied little were content. Then came the second exam: the students who had studied hard for the first exam studied less and those who had studied less for the first one didn’t study at all for the second. The average grade was D. In the third exam the average was F, representing a failing grade. The experiment illustrated a facet of human nature with which politicians worldwide in general have not yet come to terms: a result cannot be legislated.

Politicians can legislate a set of rules (laws) and regulations that, they trust, will produce the desired results, but they can never determine the way that millions of citizens will react in terms of their preferences or objectives. Neither prosperity nor poverty can be legislated; neither can a healthy financial system nor can less traffic in a city, nor can wealth be multiplied when it is divided, be legislated. Human nature is not inert: individuals perennially respond in favor of survival despite politicians’ bad ideas and to preserve what’s important to them: they do things that even the most inured of politicians could not predict or ever even dream of their doing.

In past decades, U.S. politicians, employing fiscal mechanisms, obliged banks to make mortgage loans in massive fashion to low-income persons who had no possibility of paying these back. Thus was born the crisis of recent years: bold as brass, but deliberately in the knowledge that there was no possibility of utilizing traditional mortgage loans for this segment of the population, the bankers thought up a type of credit, the so-called “subprime loan”, especially designed for individuals with low incomes: the monthly payment for the initial years was very low and easy to pay, but the payment rose suddenly some time afterward. Millions of persons acquired homes in this manner that later, when the payment went up, these ended up being abandoned. All the while, the bankers had converted these credits into values that were resold throughout the world. Eventually the bubble burst with the consequences that we all know.

The lesson seems very evident to me: when politicians utilize subsidies, taxes, preferences or protection for the benefit of certain social groups or to advance their own agendas they end up distorting the economic rationality embodied by everyone in their being –human nature- and producing results that are not always desirable. The point is, in their actions, politicians create incentives that they not always (or nearly never) thoroughly understand.

In Mexico City, in the eighties, the government had the brilliant idea of limiting automobile use through the program known as “a day without driving”. The program was announced over a three-month period and exerted a notable effect in some weeks, because one fifth of vehicles disappeared from the streets. However, at the end of the trimester, the local government made the program permanent, with which it changed the scheme of incentives: the population had responded precisely as the government had wanted while the program remained a temporary one because everyone understood the consequences in terms of the environmental effect of automobiles. However, once the program was made permanent, the population responded in logical fashion: buying an additional vehicle. The effect on contamination was fatal not only because the original number of vehicles returned into circulation, but also because the majority of the cars added to the mix were clunkers, thus they contaminated more. The result was that the number of vehicles and the contamination increased.

The matter didn’t end there. Between the end of the eighties and the present, everything possible has been done to increase the number of vehicles in circulation: second-storey traffic arteries above the first have been constructed, real estate projects are ever more off in the distance, the price of new cars diminishes in real terms, public transportation has not grown significantly and all gasoline types are highly subsidized. That is, every imaginable type of incentive has been created for the population to be able to acquire more automobiles. What is the government’s response? You can readily imagine it: it wants to go back to limiting the number of vehicles in circulation, this time coercively. It’s not difficult to anticipate the outcome, except if one is the politician charged with making the decision.

The financial legislation that the government has proposed follows the same line. Its objective is praiseworthy: it wants to increase credit as a percentage of the GDP and is attempting to create incentives for this to happen. The legislature proposes two mechanisms, one positive and the other negative. The positive one, which takes as its model the Brazilian Development Bank (BNDES), consists of endowing national development banks with mechanisms for these to support the productive plant. Nothing wrong with that, except that the Brazilian example itself has poignantly brought to light the risks of lending to companies that are not financially viable, because if they were, the commercial banks would already be lending to them. On the negative side, the bill proposes impeding commercial banks from buying up government bonds with the resources that they are not employing for loans. The objective is to provide incentives for banks to increase extending credit with these resources. As with the Mexico City traffic it is easy to predict that, before extending risky credit, banks will seek other things in which to position their resources, such as in real estate or in instruments that typically creative minds will develop to preserve their own interests. Again, a result cannot be legislated.

“Public policy”, wrote Thomas Sowell, “must be understood by the actual structure of incentives that it creates rather than by the rhetoric of hope of the makers of the policy”. The Mexican is as intelligent and competent as any other human. Betting on his stupidity or on his disposition to submit to the desires of bureaucrats does no more than cast doubt on the character of the bettor.

www.cidac.org

@lrubiof

a quick-translation of this article can be found at www.cidac.org

Luis Rubio

A Canadian university professor was famous for never failing anyone in his classes. One day, some of his students argued in a debate that the policies of the government would eliminate poverty and would become a great equalizing factor of the society. Skeptical, the professor proposed an experiment to them: from that moment on, he would average the grades of the entire class group and no one would get an A (a 10 in Mexico) and no one would flunk the course. The first exam came and went, the professor averaged the scores and everyone got a B. Those who had studied hard were upset, while those who had studied little were content. Then came the second exam: the students who had studied hard for the first exam studied less and those who had studied less for the first one didn’t study at all for the second. The average grade was D. In the third exam the average was F, representing a failing grade. The experiment illustrated a facet of human nature with which politicians worldwide in general have not yet come to terms: a result cannot be legislated.

Politicians can legislate a set of rules (laws) and regulations that, they trust, will produce the desired results, but they can never determine the way that millions of citizens will react in terms of their preferences or objectives. Neither prosperity nor poverty can be legislated; neither can a healthy financial system nor can less traffic in a city, nor can wealth be multiplied when it is divided, be legislated. Human nature is not inert: individuals perennially respond in favor of survival despite politicians’ bad ideas and to preserve what’s important to them: they do things that even the most inured of politicians could not predict or ever even dream of their doing.

In past decades, U.S. politicians, employing fiscal mechanisms, obliged banks to make mortgage loans in massive fashion to low-income persons who had no possibility of paying these back. Thus was born the crisis of recent years: bold as brass, but deliberately in the knowledge that there was no possibility of utilizing traditional mortgage loans for this segment of the population, the bankers thought up a type of credit, the so-called “subprime loan”, especially designed for individuals with low incomes: the monthly payment for the initial years was very low and easy to pay, but the payment rose suddenly some time afterward. Millions of persons acquired homes in this manner that later, when the payment went up, these ended up being abandoned. All the while, the bankers had converted these credits into values that were resold throughout the world. Eventually the bubble burst with the consequences that we all know.

The lesson seems very evident to me: when politicians utilize subsidies, taxes, preferences or protection for the benefit of certain social groups or to advance their own agendas they end up distorting the economic rationality embodied by everyone in their being –human nature- and producing results that are not always desirable. The point is, in their actions, politicians create incentives that they not always (or nearly never) thoroughly understand.

In Mexico City, in the eighties, the government had the brilliant idea of limiting automobile use through the program known as “a day without driving”. The program was announced over a three-month period and exerted a notable effect in some weeks, because one fifth of vehicles disappeared from the streets. However, at the end of the trimester, the local government made the program permanent, with which it changed the scheme of incentives: the population had responded precisely as the government had wanted while the program remained a temporary one because everyone understood the consequences in terms of the environmental effect of automobiles. However, once the program was made permanent, the population responded in logical fashion: buying an additional vehicle. The effect on contamination was fatal not only because the original number of vehicles returned into circulation, but also because the majority of the cars added to the mix were clunkers, thus they contaminated more. The result was that the number of vehicles and the contamination increased.

The matter didn’t end there. Between the end of the eighties and the present, everything possible has been done to increase the number of vehicles in circulation: second-storey traffic arteries above the first have been constructed, real estate projects are ever more off in the distance, the price of new cars diminishes in real terms, public transportation has not grown significantly and all gasoline types are highly subsidized. That is, every imaginable type of incentive has been created for the population to be able to acquire more automobiles. What is the government’s response? You can readily imagine it: it wants to go back to limiting the number of vehicles in circulation, this time coercively. It’s not difficult to anticipate the outcome, except if one is the politician charged with making the decision.

The financial legislation that the government has proposed follows the same line. Its objective is praiseworthy: it wants to increase credit as a percentage of the GDP and is attempting to create incentives for this to happen. The legislature proposes two mechanisms, one positive and the other negative. The positive one, which takes as its model the Brazilian Development Bank (BNDES), consists of endowing national development banks with mechanisms for these to support the productive plant. Nothing wrong with that, except that the Brazilian example itself has poignantly brought to light the risks of lending to companies that are not financially viable, because if they were, the commercial banks would already be lending to them. On the negative side, the bill proposes impeding commercial banks from buying up government bonds with the resources that they are not employing for loans. The objective is to provide incentives for banks to increase extending credit with these resources. As with the Mexico City traffic it is easy to predict that, before extending risky credit, banks will seek other things in which to position their resources, such as in real estate or in instruments that typically creative minds will develop to preserve their own interests. Again, a result cannot be legislated.

“Public policy”, wrote Thomas Sowell, “must be understood by the actual structure of incentives that it creates rather than by the rhetoric of hope of the makers of the policy”. The Mexican is as intelligent and competent as any other human. Betting on his stupidity or on his disposition to submit to the desires of bureaucrats does no more than cast doubt on the character of the bettor.

www.cidac.org

@lrubiof