Luis Rubio

Holy Week is a good time to reflect on my recent readings. Here are some of those that made me think and change my points of view.

Conrad Black is a worldwide press magnate who ended up in jail in the U.S. In A Matter of Principle he offers an intelligent –and coarse- analysis of the accusations and sentence that he underwent with special emphasis on the U.S. penal system where, in the interest of accelerating processes, a person considered innocent very frequently has to accept being guilty of a lesser charge to avoid the punitive costs of a trial. The extraordinary value of the book lies in the way that it strips down the criminal system of that country, which is considered an example for the world. It’s one of those books that moreover leave one troubled.

Carlos Elizondo devotes With or Without Money to the dilemmas of government spending. He explains with an extraordinary clear mind the dynamics of spending,  with particular emphasis on two criteria; what is government spending good for, and why it is not just a matter of raising more taxes. He dwells on the consequences of taxation, their impact on economic growth and the problem of a weak State that cannot even enforce the law. If you read only one book about Mexico or budgets and taxes this year, this should be it.

Luigi Zingales is a particular case. Professor of Finance at the University of Chicago, he has written a seminal book. In A Capitalism for the People, Zingales argues that capitalism was designed to benefit the citizen and the consumer, but that the growth of lobbyists and lawyers of special interests has ended up distorting everything: from taxes to spending, passing through businesses and the government’s favorite causes. Although the book refers to the U.S., the message could not be timelier: when opportunities for individual development, which are the essence of capitalism, stop being available because the playing field is not flat, capitalism stops being functional.

Anne Applebaum describes the way that the Soviet regime little by little placed the population of Eastern Europe in submission. At the beginning, the Russian Communists, believers in their system, supposed that Europeans who had been left under their yoke at the end of the war would join forces with Communism without a whimper. Although the process in each country was distinct, the State soon controlled all aspects of the economy, the police, the press and the State apparatus. For this author of Iron Curtain, the Soviet error resides in wanting to control everything: the schools, the social organizations, the unions, the churches. Thus, any conflict or difficulty translated into a source of illegitimacy for the system in its entirety. Repression became inevitable and, accompanying this, any pretension of democracy or popularity disappeared. The book is particularly interesting when one contrasts it with the PRIist system. Although hard-nosed, the PRI never came to dominate the whole society nor did it attempt to do so. That perhaps is one part of the explanation for their capacity of adaptation and survival.

The Dictator’s Handbook is a fascinating book devoted to explaining how a leader (in any activity or sector) will do whatever’s necessary to stay in power. Bruce Bueno de Mesquita and Alastair Smith pose critical questions such as why do leaders who wreck their countries keep their jobs for so long, or why do “natural disasters” disproportionately strike poorer nations? Their analysis concludes that a leader is leader because he is always dedicated to satisfying the coalition that maintains him or her in power.

The human being is, according to Aristotle, a “political animal”. Many would remark that in these recent years of crisis worldwide the former part has had dominion over the latter. In a great history about politics, On Politics: A History of Political Philosophy from Herodotus to the Present, Alan Ryan affirms that politics is fundamentally a philosophical matter and then goes on to elucidate towering questions such as the source of State authority over the citizens, individual rights and the order of the collective, and the limits of individuals as well as of the State. A good book written to think over matters of the here and now.

The most fascinating book that I read in this period is about a new industrial revolution. In Makers, Chris Anderson says that the next stage of industrial development will come in the conjunction of open design models that permit, via the Internet, the improvement of products, all from a desk. His argument is that the new revolution will be as important as that of personal computers and will change the entire concept of production because it will allow for flexibility and a capacity for adaptation to client and market needs that are inconceivable under the current manufacturing model. Employing three-dimensional printers and access to financing, the new revolution will espouse the rise of a new entrepreneurship based on micromanufacturing that will terminate the mass manufacturing monopoly, in the same way that the Internet did away with that of the traditional mass media.

Two contrasting books present the panorama of options facing Western countries. In When Markets Collide, Mohamed El-Erian addresses the collapse of the Western economies after the 2007 debt crises, the beginning of an era of “new normal” that, unless governments massively reduce their debts and deficits, will be distinct from what existed formerly, more like Japan’s last two decades, with paltry economic growth levels. For his part, in Capitalism 4.0, Anatole Kaletsky takes the opposite line: for this author the future is promising and a good combination of economic stimulus and governmental leadership could create a new era of generation of wealth. Both arguments are persuasive and whoever is right will determine what happens in the world economy for years to come.

In closing, Plutocrats, by Chrystia Freeland, is an interesting book because it explains a little understood phenomenon in recent years. Instead of focusing on the famous 1% of the richest people in the world, her focus is on the 1% of the 1%. For this author, the true phenomenon of our era resides in the concentration of new wealth above all deriving from the development of technology and in the financial sector. The book foresees difficult time of adaptation due to the imbalances that the new wealth generates as well as to the impact of these new wealth sources on the job markets.

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Luis Rubio

All presidents believe that they are destined to change the world. Very few, in fact nearly none, achieve this. However, this proven fact has never served to convince presidential hopefuls and less so those who have already reached the topmost office and feel themselves to be omnipotent once there. But the problem does not reside in the desire to change the world, legitimate in itself, but in the fact that the majority of presidents believe that the mere fact of sitting in the chair carries with it a change in the reality. History demonstrates that this is not so: power is not to be preserved or accumulated but employed because there is nothing more futile, nothing more ephemeral, than presidential power.

My impression of four decades of observing eight Mexican presidents is that when a president assumes office and, above all when he consolidates his power, he feels that the world owes him a living and that he’s “got it made”. Nothing can thwart his triumph and the only thing missing is for the reality to begin to evidence a radical change. History illustrates that dreams of grandeur are just that: dreams. All the rest is hard work. Unfortunately, very few presidents perceive that power is to be employed, thus few accomplish their task.

Years ago I visited one of the Tutankhamun and The Golden Age of the Pharaohs exhibitions. No group of sovereigns ever enjoyed the illusion of such great power. Ramses II reigned for 66 years: judging from the images of power, the pyramids and the colossal monuments at Luxor and Abu Simbel, the power was enormous; but nothing at all remains of all that. All that power vanished and all that is left, centuries afterward, is a poor country with few opportunities for development. On leaving the exhibition I remember having pondered the futility of power, the impotence that, in the last analysis, it represents.

It didn’t go much better for Napoleon Bonaparte. In the summer of 1812 he led an army of over one million that marched toward the gates of Moscow.  Three years later he was found wasting away his life on the Isle of Elba. In 1940 Hitler commandeered the most powerful army in the world; in 1945 he complained that only Eva Braun and his dog remained faithful to him. At the end of his life, according to the story told by his personal physician, Li Zhisui, Mao Tse-tung was a pathetic figure who no longer inspired even the least authority. History is saturated with powerful and frustrated men.

It is instructive, and sobering, to observe that, in the last decades, the only Mexican president who is prominent for having survived the opprobrium of history and the population’s generalized reproach is the least ambitious of them all. The sole president who has won the respect of the population is the one who devoted himself body and soul to a set of limited but realistic objectives: he saw to the problems of the moment, leaving dreams of grandeur and historical transcendence in the closet. Ernesto Zedillo could perhaps have taken aim at something grander but, with the perspective permitted by time, he is the only one who achieved what he proposed and is widely recognized for that. It’s no small thing and less when compared with the rest.

The grandeur of power is not found in symbols, appearances or gratuitous acolytes, but in the results of its exercise. As the saying goes, the most difficult year of the Mexican presidency is the seventh because that’s when reality sets in. It is at that moment when the recent ex-president starts to look out at the world as it is and not how he imagined it. Presidents who stand out are those who can look back and see at least one respectable legacy. Of the eight that I have watched closely, only one passes the test. History would suggest that it is imperative to learn from the past the need to assess power with humility, as something temporary and in the last instance, ephemeral. Power is not what is possessed but rather what is done with it.

The point is not to deny the value or transcendence of power, but to observe its limitations as well as its possibilities. A powerful president can do immense good, but also immense harm. Those who are successful accept the reality as it is and employ their power to cull every possible benefit from it. In this era of the world and of Mexico, reality is measured by two very simple things: the degree of the institutionalization of power and of the society and the growth of productivity. It might appear sophomoric to reduce the entire gamut of presidential power into these two elements, but this concerns something that is by no means trivial: these are the factors that could transform Mexico. A president who exerts a favorable influence on these would transform the country and, with this, would acquire the legacy that was impossible to come by for seven of the eight last presidents.

Institutionalization of the country is a promise that goes back to Plutarco Elías Calles, the first president who understood the need to procure it but, like a little child who knows what shouldn’t be done but does it anyway, he preferred to reap the benefits of power, whether or not ephemeral, to that of institutionalization. Institutionalizing implies limiting the president’s powers, which is why nearly none of them has promoted it. The paradox is that only a powerful president can drive an agenda of institutionalization forward.

It is sufficient to observe the painful spectacle offered by entities such as the IFE, the IFAI and various economic regulatory organisms to recognize that the country has not achieved institutionalization of its main executive functions. We presume that we have but we all know the flimsiness with which these have been constructed. The obvious temptation would be to abolish the concept and ordain trustworthy sacristans. What should be done is to name civil servants who are dedicated and committed to the State, not to the government. Irreproachable persons not single-mindedly devoted to fretting about their name and covering their back, but solely committed to the success of their institution and function. Persons who don’t back down in the face of pressure from the higher authority.

In the economic ambit one doesn’t have to be a rocket scientist to know that the success factor is denominated productivity. Everything that contributes to its growth should be welcome, everything that hinders it should be eradicated. The keys to productivity are competition, elimination of obstacles, less bureaucracy, simplification, zero preferences (and discrimination, whether positive or negative). All the rest impedes the growth of productivity, the factor that enables raising the population’s incomes.

Institutions and productivity. That’s what power is for, if the president really wants to transcend. It might seem like a small thing, but it’s everything, much more than a president ever could imagine in his freshman year.

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Luis Rubio

Everyone wants the economy to grow. The government promises growth. The worldwide economic situation becomes complicated. Three realities that must be dealt with.  In concept, there might be many ways to achieve this so greatly coveted growth. But the only one that would permit conciliating the three circumstances is raising the productivity of the economy in its entirety and making it more flexible and adaptable.  Whichever one’s preferences are, Right or the Left, liberal or conservative, the only way to achieve growth is through productivity. However, the government is doing the contrary:  it is strengthening the mechanisms of protection through tariff and non-tariff barriers, developing industrial policy strategies and, carefully but certainly, incorporating control mechanisms over the states, the private sector, the unions and other components of the society. We’re not going to get there that way.

The business community is delighted with the industrial policy, the subsidies and the protection. Bureaucrats and politicians revel in the controls and the spending. All of these come out ahead at the cost of growth. In this manner, although there is agreement on the need for growth, little by little we are seeing that the mechanisms the government is adopting constitute a poor take on the nature of the problem and/or an attempt to imitate the practices of other countries, above all Southern, which look good from a distance but are unlikely to yield the desired result.

Mexico requires a strategy for growth. In concept there are only two things that can achieve this in a relatively brief time period.  One is employing stimulus measures that foster economic activity, as the construction of infrastructure has typically been. It is not the only kind of stimulus possible, but in a country that continues to entertain an acute deficit in infrastructure (quantitatively as well as qualitatively), this route continues to be valid, above all if it is the product of a joint view that coordinates federal, state, municipal and private efforts.

But the key to growth in the long term does not reside in the infrastructure, as important as it is (but whose impact is limited in time), but rather in the existence of a political and public policy framework that drives it. There is no other way. This is not an ideological mantra but merely practical: when general measures are adopted the whole population can benefit; when individual measures are employed (often favors), such as those inherent to industrial policy, some win and others lose due to political or bureaucratic decisions.

There are innumerable instances of the former. When high tariffs are imposed on the importation of soles for shoes one would  think that this would favor development of the footwear industry; however, what we have observed in recent decades is that Mexican shoe manufacturers have been dying out because they cannot compete with the imports given that the soles are too expensive. Protection for the one implies the destruction of the others. The same occurs with NOM (Official Mexican Norm), the norms emitted by the government and that frequently serve to protect an industry, or a company, in particular. According to the respective NOM, electrical cables in Mexico must be twisted in a distinct direction from those of the U.S. and Canada. Thus, consumers of these cables have to pay for the privilege of consuming more costly goods than their competitors. Impossible to find a more flagrant example of impervious favoritism.

The important point here is that this type of measure, greatly relished by businesses, unions and bureaucrats, does nothing other than limit the potential for the general economic growth because it hampers productivity from burgeoning and discriminates against those who could be excellent entrepreneurs but who lack the capacity to curb these particular favors.

A growth strategy has as its objective the systematic rise of productivity and for this to happen it will gravitate toward creating general conditions for growth, eliminating preferences and discriminatory mechanisms, revoking formidable regulations (frequently useless and always a source of corruption) and, above all, adopting measures that diminish the costs of creating and opening businesses. Some actions deriving from this general framework are long-term, other of immediate impact, but all must be implemented.

Lowering costs would imply actions such as the following: improve the training of those emerging from the educative system (reduce retraining costs); improve the infrastructure (reduce transport costs); improve security; facilitate compliance with fiscal responsibilities, of the IMSS,  etc.; greater work flexibility (we demand this from the Americans for the migrants, why not for Mexicans?); lowering of tariffs practically to zero; review all regulations with the cost criterion for functioning of the economy; eliminate or drastically reduce the use of subsidies in production; ensure the supply of energy sources at competitive prices; ensure efficiency and competitive prices in providing services. The point is to create the conditions for productivity to grow briskly. There is no other way of achieving this: reform that does not heighten productivity is irrelevant.

These matters take us back to the function of the government in the society in general and in the economy in particular. What I have observed in the months during which the current government has been in power is that it wants to establish itself as the authority in order to impose the rules of the game. This seems to me a necessary and even commendable trajectory. The country has for some time has lacked a sense of direction and the capacity of conducting public affairs. Decisions and actions on diverse fronts are vital, implying a government with the faculties and the capacity to execute its mandate. The question is how the government is going to use this enhanced authority: to control or to make development possible. As the ad says, it’s not the same and it’s not alike.

The country requires a government that as such works not to control the population and its diverse subgroups, but to generate prosperity. For this general policies are needed, that is, institutions, not actions directed toward endorsing the favored groups at the cost of all of rest. Nor does it require a bureaucratic resource allocation system. What are urgent are institutions to exert effective checks and balances without paralyzing the government or the functioning of the economy. Much is at stake with respect to the criterion chosen, but where it’s been going recently will not cut it.

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Luis Rubio

The times change, but not that much. I remember a comic strip of Abel Quezada in which he made fun of political reactions regarding the surgical procedure that the Mexican president had undergone. Comparing the precise details published on the surgery that President Reagan had had some time prior and the absence of details in the case of the Mexican president, Quezada cited the responses and reactions that there had been in Mexico: “Healthy operation honors Mexico” one headline entreated. Others read: “Congressmen applaud the operation”, “The economy will be strengthened with the operation: CANACO”, “Fidel states that the operation is positive for the country”, “CANACINTRA and CONCAMIN support the operation”, “The operation: one more triumph for Mexico, asserted Bartlett”. Judging by the reactions to the detention of Elba Esther Gordillo, the country hasn’t changed that much. But what has changed is indeed significant.

In contrast to what Quezada related in the eighties, reactions to the detention of “The Teacher” were revealing of the perspectives, interests and standpoints of today. While the majority of reactions were more like than unalike those of Quezada, one notable aspect was the willingness of many to permit their most intimate feelings to be observed. In the past, everyone held himself in restraint before “Mr. President, Sir”. Today the Head of State is appreciated, admired or criticized but what one (almost) never sees is that manifestation of uncritical discipline that was the prototype of the old system. In a word, the country has matured politically and that in no way detracts merit from the President of the Republic for consolidating his power.

Observing the reactions not only allows one to understand personal or group motivations, but also to evaluate the degree of advance or retreat that Mexican politics has experienced. As would be expected, there was a little of everything. Some reactions were noteworthy because of the perception of power they employed: above all, the inability of the onetime union leader and her acolytes to read the political times. Beyond her personality or the motive that enlivened her exercise of power, what is clear is that “The Teacher” did not understand that times had changed. In my life as an observer of national politics I have come across only three presidents who are men of power and Enrique Peña-Nieto is certainly one of these (the others were Echeverría and Salinas). Not understanding that the former era of Mexican politics was returning ended up being tragic for the teacher. More than a sin, said Oscar Wilde, it was stupidity.

Perhaps the most impressive reactions came from the Panists who, without even a wink, assumed the detention as if it were something personal. Ignoring Mark Twain’s maxim that read “never argue with a fool, onlookers may not be able to tell the difference”, some Panists hailed their wisdom. The legal process will take its course, but it is evident that the charges faced by the now detained teacher will overwhelmingly stem from information gathered throughout the previous administration, and much of it from the very ministry the loudest voice is hollering. Better to keep their mouths shut than to place the poor exercise of the previous administration or unconfessed complicities in evidence. It is revealing of their reality that a good number of Panists were incapable of recognizing that their alliance with the teacher ended up being an example, itself powerful, of all that was distressing and pathetic about their passage through power.

More interesting was the absence of public reaction on the part of the frightened, those that know (or assume) themselves to be “guilty” for their abuse of power or, at least, susceptible to similar actions. Some have not even taken note of this, but for all of the observers –the disinterested ones- of national politics it is clear that the environment has changed and that the rules heretofore will be others. Welcome the discipline and the existence of authority, if they are not arbitrary. A keen analyst warned that there may not have been many differences between the form and charges facing the teacher and those of the Frenchwoman Cassez. For a government for which complying with form is a distinctive and characteristic display of the care with which this process was conducted, whatever follows needs to be equally clean and impeccable. In terms of what is in store for interests or groups – the de facto or veto powers- who have not read into the implications of the detention vis-à-vis themselves, it would be worth it to them to “get cracking”.

The big losers did not hide their feelings. The perennial excandidate may not have liked the current government but understood to perfection that “the times they are a’changin’”. The same appears true of the majority of the teacher’s disciples, minions and sidekicks. All nice and quiet or sending out signs of peace (and submission?) to the president. They reminded me of a big and prominent businessman who, immediately on hearing of the detention of the oil workers’ leader La Quina, caught the first plane out of the country and spent many timorous weeks on foreign soil. He returned when, in an attempt to elucidate his own situation, he called the president’s secretary with some spurious excuse and the secretary picked up on the first try.

This lesson seems crucial to me: the exercise of authority has two possible derivatives. On the one hand, it leads a good number of persons and groups aware that they are vulnerable to quake in their boots. Nothing bad about that, except that fear is a poor prescription for the development of productive activity (as well as political or otherwise). On the other hand, the exercise of authority, if it leads to the institutionalization of power and, with this, to the transformation of the country, constitutes what Weber termed legitimacy. President Peña now finds the choice on his hands of setting himself up in power as all of his predecessors did but without the possibility of transcending, or of constructing a modern country. Power for power’s sake or power for transformation.

In his theatrical work on the relationship among hierarchy, scientific inquiry, politics and truth, Bertolt Brecht explored how distinct actors are reflected in the reality. In the version of David Hare, the most dramatic moment og “Galileo” is when the inquisitor refuses to look through Galileo’s telescope: the Church had decreed that what Galileo said he’d observed could not be there. The inability to see things as they are, even if the consequences are distasteful, is apt to be disheartening and, in politics, tragic.

The teacher’s detention uncorks the opportunity of redefining the direction of the country and constructing the foundations of a modern one, but it doesn’t guarantee it. It would be tragic if it were to end up a mere settling of accounts and not the dawn of an institutional transformation. Of the former there is a surfeit of experiences. Of the latter not a one.

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 Luis Rubio

Don Quixote was a simple nobleman, belonging to the decadent lowborn nobility, who sprang from a lineage of ancient wandering knights in the Middle Ages. But the time-worn prestige and power that these men possessed had disappeared with the fall of feudal society, bequeathing no quarter to these antiquated knights. The nobility of old in which they had a rightful place had undergone important changes and, with the birth of the professional army, the only honorable way out for these idolatrized cavaliers was that of enlisting.

Enrique Peña-Nieto’s government represents a project of power, but it’s not evident whether it contemplates one of development. With the detention of the teachers’ union leader (on charges of embezzlement) the government has ventured onto a new stage that frees up a galaxy of possibilities. It is now that we will see what it wants that power for and whether, as in the world recreated by Cervantes, it will adapt to the exigencies of the modern world.

Mexico has experienced a brutal transformation over the last 50 years. From a chiefly rural country, with a population of less than one third of its current numbers, it went on to being a complex, modern, demanding nation full of conflicts and unfinished reforms. Whosoever looks back cannot be other than impressed by that has changed. More than suffice to say that the system of government that had characterized the country fifty years back is thoroughly incompatible and inadequate –and could even be counterproductive- for the present-day reality. But I fear that it’s what the new administration could be attempting.

In this half century the country has experienced a metamorphosis in its economic and political structures, in its social reality, in the governmental-societal relationship, in the growing autonomy of a primitive and ineffective judicial system. We went from a closed and protected economy to one that is a fundamentally open and subject, at least in terms of goods, to market rationale. In politics it proceeded from an authoritarian political system to an incipient –albeit conflictive- democracy. The country has decentralized and the society has multiplied the number and ways it relates with the rest of the world. What practically hasn’t changed is the nature of the system of government.

While the people adjust and adapt to the changing reality because they have no alternative, the government, as generic entity, continues to be guided by ancestral criteria. The government does not dedicate itself to “serving the people” nor is it designed to resolve or address the people’s problems or to promote development. Governmental logic is always one of control, subordination and imposition. A great number of public servants and politicians continue seeing it as a means of political ascent, or as a wellspring of access to corruption. None of this is unusual or novel, but it is certainly incompatible with the needs of an ever more competitive economy or with the criteria of effectiveness proposed in his campaign by the now president. In this scenario, what does the detention of Elba Esther Gordillo mean?

Perhaps the main reason that Enrique Peña-Nieto won the presidential election lies less in his programmatic offering than in the sense of authority betokened by his presence, his history and his campaign strategy. However great the very significant advances over the past several years, the sensation of disorder was growing relentlessly, shielding everything else from view for an extensive number of voters.

The disorder started from at least the dawn of 1994 –at the zenith of the PRI era- with the Zapatista uprising; however, the proliferation of violence, insecurity and the apparent incapacity to achieve the much heralded economic transformation ended up opening the door to whomever offered the promise of reinstating peace, effectiveness y in governmental function and, above all, a sense of order. The visual message was in the end much more powerful than the specific offer.

It was thus to be expected that the president would act forcefully. A president with a vocation for power could not tolerate the perennial and systematic challenge to his authority that “the teacher” had been practicing. Her detention is a clear indicator of the government’s intent to recover its authority in order to govern, something nearly unheard-of since the beginning of 1994.

Whether it recognizes it or not, the government’s leading challenge resides in its converting power into a tool for development. The new team has demonstrated an extraordinary ability to get things done; however, the crux of the challenge is that a system of government does not exist that is liable to create conditions for the permanent development of the society, of the economy and of the country in general. Even in the good PRI years, the country was never governed with an eye to development; it was always organized for the control of the population and administration of power. I ask myself whether a government holding as its model the old PRI era’s most successful president –Adolfo López-Mateos- will construct a system of government that is appropriate for the present era, radically distinct from that of those bygone years. The detention of the leader of the teachers in Mexico opens up the possibility, but is not a guarantee, of its converting this into an opportunity.

As the number of deaths and economic difficulties that increase daily illustrate, the enormous success of the debut of the present administration in its first months cannot make the reality of the country nor the problems besetting it disappear. The fact of being in the process of building the legal scaffolding  (such as the law of appeals) and the image of power (such as acting against “the teacher”) permits the government to deal with the problems, groups and interests that keep the country paralyzed and confirms the project of power. But establishing and imposing the authority for which many Mexicans are eager is indispensable, but not a substitute for a modern system of government, befitting the circumstances of today.

From my perspective, the great deficit of the most recent governments was due to the inexistence of a strategy of development, but above all to the total absence of the political capacity for carrying out the changes that the country requires, that is, what the politicians do to reach deals and get things done. The Peña-Nieto government has exhibited a surplus capacity for this. The sum of legal and political instruments that the government is amassing with the evident capacity to make use of them to advance its aims implies that there is one half of what’s needed: the half that was found lacking in the prior administrations. Without that, this government would be akin to the former administrations and would not entertain a better prognosis for success.

The president has begun to take charge. Now we will start to see what he wants and how he will employ the new found power. If he achieves the fusion of a vision of development with his new powers,  he could end up replicating the success of the administration that he has employed as a model, but with a version that is applicable to and viable in the XXI Century.

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FORBES- Luis Rubio

How times change! Years ago, the quip that financial market operators chuckled over was that “Latin American countries are geometric because they have angular problems that are discussed at roundtables by large numbers of square people.” In recent months the same can be said of the U.S.

The financial situation of that country is pathetic and highly dangerous and, nonetheless, its population as well as its politicians act as if there were no problem at all:  The reason there is no sense of urgency is that its debt is denominated in its own currency (the dollar), thus they are not confronting an imminent devaluation. In Mexico’s case, between the seventies and the nineties, the fiscal disequilibria in which we incurred translated into acute devaluations that exerted the effect of raising the value of the debt suddenly and disproportionately.

Under infinitely less serious conditions, Mexico had no alternative: the crisis obliged us to carry out an adjustment that would restore stability. With a high debt denominated in dollars, the devaluations led to economic collapse. Achieving the stabilization of expectations from the end of the nineties was no small feat, even though it would not be sufficient for a strong recovery. The Americans have not lived through a crisis of that nature, which has allowed them the (dubious) privilege of thinking that they can steer clear of a deep fiscal correction.

Financial disequilibria are unsustainable because they absorb the society’s resources that, were there none, would be devoted to consumption and investment. More importantly, sooner or later the creditors of the debt will refuse to continue financing the deficit, which will trigger a severe rise in interest rates and defaults or other responses, which could include exchange controls. While it perhaps would last longer than what happened in Mexico, the disequilibria will eventually force an adjustment and will cause a downturn in economic activity. Under distinct circumstances, that is what is happening in Europe. Eventually it will happen in the U.S.

Despite this obviousness, the discussion in the U.S., where in recent weeks they’ve been playing hide-and-seek about the matter, is concentrated on what Walter Russell Mead calls “ideal models” that suffer from the lack of any realism whatsoever. For this observer, the Republicans live in the era of the end of the XIX Century –low taxes, high growth, limited governmental participation in the economy- while the Democrats inhabit the world of the fifties of the past century: growing social programs with a demographic pyramid capable of financing them. For Mead both are out of sync with today’s world in which the expenditure is excessive and the retired population grows rapidly, all artificially financed by the Federal Reserve.

Perhaps the most important question would be why, under similar circumstance (at least conceptually), Mexico had to carry out monumental adjustments, while the Americans haven’t? Just for illustration, in the eighties, Mexico’s entire governmental expenditure diminished by nearly 12 percentage points with respect to the GDP: a brutal adjustment in public finances. It’s not that Mexican politicians or the expenditure’s beneficiaries were happy about it: the reason for its happening was that there was no alternative. It was adjustment or chaos.

But that’s not how it’s perceived in the developed nations that today exhibit disequilibria even greater than those characterizing Latin American nations in the eighties. The privilege of not confronting an immediate crisis has led the politicians of those nations (and their populations) to think that the party can last forever and that there is no cost or consequences for incurring enormous deficits or reaching debt levels higher than their total GDP. That notion that there are alternatives and that the public expenditure can continue to rise is so generalized that it should scare us all. As Any Rand noted at some point, “You can avoid reality, but you cannot avoid the consequences of avoiding reality.”

And just what could these consequences be? The first and most obvious is that the longer society’s resources are re-routed to finance the deficit (identical whether via taxes or greater debt) the less (or negative) the economic growth and the greater the unemployment. In societies with growing populations of retirees this may not be perceived, at least at the short term, as very alarming, but in younger societies, such as those of Spain and Greece, the impact is dramatic and can be appreciated in unemployment rates of over 50% among the young.

Perhaps the worst implication of phenomena such as the “fiscal cliff” or the “sequester” is not an immediate economic matter, but rather the fact that governments have ended up crippled by the enormous amount and power of the myriad interest groups that prey on the budget, that pay no direct taxes, and that expect attention exclusively to their interests. That is, the grand theme is that of governability: how to solve basic problems in the face of such powerful interests.

Evidently there are solutions to fiscal problems that are currently exhibited by developed nations. In technical terms it is not difficult to envision the areas on which the adjustments could be concentrated, nor would it be difficult to identify the costs of budgetary cuts or changes in taxes with respect to others. But, as depicted by the case of the VAT in Mexico, the matter is not economic but rather political. The sole reason that Mexico’s public expenditure was able to be cut so drastically in the eighties was that the circumstances –the reigning economic chaos- made it inevitable.

And even so Mexican politicians did not learn: it took an additional decade –and another mega-crisis, this one in 1994,  for the need for macroeconomic stability to be accepted as a requisite condition for economic functioning. Evidently, the stability of fiscal checks and balances cannot be an end in itself, but our experience demonstrates it to be a conditio sine qua non.

I’d never thought that governability –in this case depicted in the fiscal ambit- derives from factors that make it inevitable to act. Mexico has demonstrated an enormous capacity for response when it has no options. The problem of the developed countries is that they think that they do have them.

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Luis Rubio

What would make a government successful: the consensus or the results? The government of President Peña won an election legitimately, which would allow it to govern with full endorsement. However, Peña has been working to bring the opposition forces into a political pact with his own PRI: that is, he prefers a consensus to a legislative majority. Without doubt, a government that achieves transforming a country with the support of the whole of the relevant opposition parties would break with decades of deadlock and pessimism and would afford new impetus to development. And it is precisely for this reason that this is quite unlikely to occur. But not for this should the effort be abandoned: yet the president should ensure that the search for consensus does not paralyze end up paralyzing his government.

There are two ways of conceiving of a consensus. One, as statesman Abba Eban once declared, “a consensus means that everyone agrees to say collectively what no one believes individually”. On the other hand, the philosopher Maimonides affirmed that “the truth does not become truer if the whole world were to accept it; nor does it become less true if the whole world were to reject it”. The Pact that achieved articulating the government broke with years –or decades- of recriminations, established a common agenda in which all Mexicans can participate and dealt a sense of direction to the government itself. The leaders of the parties who accepted to join forces behaved as statesmen, but it is also necessary to recognize that they assumed the enormous risk that the wager agreed upon regarding the transition would fail. Taken together, it is impossible to minimize the political and symbolic value of the masterstroke.

Nicos Poulantzas, a political philosopher, said that alliances suffice as long as they satisfy the objectives and interests of those participating in them and that the winner is always the one who breaks them first. On pursuing this logic, the PAN as well as the PRD would be running the tremendous risk of being used by the government mercilessly because, save for a catastrophic error, there’s no way that, in a presidential system, the opposition could amass sufficient power to be equal to or overtake the president. On the other hand, the existence of a basic agreement on the direction of development is ideal for the president –and the country. It’s a win-win situation. Would there be a way to reduce the risk for everyone while simultaneously constructing on the platform of the pact?

Let’s begin at the beginning: Why procure a consensus? Given the polarization that has characterized the political debate in general and on development in particular –crisply reflected on the electoral plane-, the answer would appear obvious. However, in reality this concerns a political artifice of dubious validity. Of course, the existence of a shared course constitutes an asset of immense worth for the country because it confers certainty on the citizenry and the business community, thus creating development opportunities that are inconceivable under other circumstances. At the same time, no one is served by a straightjacket that leads the government to postpone the reforms it considers priorities -as has been happening- or that entail civil war within each of the opposition parties.

The search for consensus derives from the origin of the PRI. As the coalition of an array of dissimilar forces, the old PNR (PRI’s predecessor founded in 1929) constructed mechanisms –starting with the “unwritten rules”- for processing decisions and maintaining a semblance of unity. But the true strength of the consensus was the regime of loyalties that maintained all PRIists focused on the promise of eventual assumption of power or access to the wealth (i.e. corruption). As long as the system complied in a sufficient number of cases in keeping the promise believable, the consensus was unbreakable.

Things changed with the fiscal crises and the economic hecatomb of the seventies and eighties. The definition of consensus changed: as the PRIist governments lost their legitimacy the need for support from outside the party lead to alliances outside PRI. In that era, it became possible to advance only with the cooperation or the opposition -mostly with the PAN. The product of this stage, certain key reforms, especially electoral reforms, eventually led to equitable electoral competition. That era concluded with the defeat of the PRI in 2000. Today the Peña-Nieto government enjoys full legitimacy, originating directly from the ballot box and does not require consensus to be able to function: a legislative majority should suffice. In fact, in a democratic system, the quest for consensus reflects one of two circumstances: that the government does not feel legitimate or that it seeks the support of the opposition parties through the pact to reduce its own costs or to dilute the reforms that it is presumably negotiating.

Whatever the case, in its current form, the pact will probably not withstand the inherent tensions. If the government intends to “blame” the PAN or the PRD of what corresponds to it, these parties will end up going their own way; one possible indication of this are the alleged electoral alliances (at state level) for this year. On the other hand, if the objective is to water down the reforms for the benefit of the de facto powers close to the PRI, the result will be catastrophic for the government itself, which will fail in its purpose to accelerate the growth of the economy. In other words, the collapse of the pact would be advantageous for no one –starting with the government. The question is how to avoid it.

The solution might be found in something that Maurice Duverger, a political theorist, explained decades ago: to conceive of the pact not as a straightjacket but rather as an arrangement between the government and the “loyal” opposition, a term he employed to identify parties that recognize the legitimacy of the government but that compete openly for the power. That is, there is a need to increase the flexibility of the notion of the implications of subscribing to the pact so that all those participating in it share the general objective and the agenda but do not need to be part of every single legislative vote to implement it. Circumstantial legislative alliances would make it possible to advance the agenda without risking the pact. With such an arrangement all run the same risk and all share the potential benefits. The pact becomes more equitable, thus functional.

The idea of the pact is brilliant. It permits creating an environment of trust and consensus. It breaks, in one accord, with a decade and a half of botched encounters and polarization. At the same time, it establishes a passageway that all parties and political forces can make their own. But no pact can be a substitute for the government or for the responsibilities –and costs- of governing. The pact constitutes an investment on the part of all of the co-signers, but above all on the part of the opposition parties, who know that they can be left hanging from a thread at any moment.

It is possible that the government harbors the hope that the pact will serve to avoid carrying out reforms or to make them less costly for its constituencies: the unions and other so called veto or de facto powers. Were it thus, sooner or later the government would end up banging its head against the wall. There’s no progress without investment and there’s no investment without risk. There are ways out, but only if the government recognizes that the way it’s going won’t get it there

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Luis Rubio

When Alexander Pope, the great English poet of the XVIII Century, was on his deathbed, his physician ensured him that his breathing, pulse and other vital signs were improving. “Here I am,” Pope said to a friend, “dying of a hundred good symptoms”. The government runs a similar risk. When a country is small and lives next to a large and powerful one, it has no alternative other than to adjust when the larger one changes the game. The Mexican Government cannot afford the luxury of ignoring what is happening in the North. The issue of immigration is already on the table and the government can either help or be in the way but cannot sit with its hands in its pockets.

The U.S. is a nation constructed of successive waves of immigrants. For nearly a century and a half, immigration was formally welcome and promoted. However, from the beginning of the XX Century, the view changed and in 1924 a quota system was adopted that gave rise to bitter and interminable debate with respect to its migration policy.

That debate changed the manner, actors and characteristics, but the content remained the same: those who see immigration as a threat as opposed to those who view it as an opportunity. The “bad guys” tend to change over time: during one of those times it was the Italians, during another the Jews, then the Cubans, now the Mexicans. There’s always someone, in every era, who rationalizes his opposition with arguments relative to the specific origin of the migrants, but if one observes nearly one century of debate, what’s left is that basic confrontation: threat vs. opportunity.

The recent presidential election, in which Obama gained overwhelming support from the Hispanic community, reintroduced the theme to the legislative agenda. Although both views prevail, legislators of both parties are well aware that they cannot evade it, thus the debate promises to be rich and transcending. The question is what, in the face of this reality, are the options left to the Mexican Government.

Similar to the internal debate of the U.S., in the government as well as in Mexican society there are two very clearly differentiated positions: that of those who consider the migratory theme to be an internal matter of the U.S. and those who consider it to be a matter of national interest for Mexico. The former would prefer to put on blinders; the latter would embark upon a crusade. The problem is that both are right in their position, therefore the government can do no more than act, albeit with an intelligent, appropriate, active and discrete strategy.

On the one hand, it is evident that the migratory issue is of an internal character because it involves what is most essential to any nation: the composition of its society. In addition, what is at play is the authority of a sovereign government to decide on the legal treatment of a population that violated its laws at the very instant of entering the country or when it remained within its territory beyond the time permitted by its entry stamp. The Mexican Government has nothing to offer in these fields nor can it run the risk of putting its presidency at play in a decision where it can wield little or no influence. Also, previous experiences of undue dependence on decisions made in Washington have taught the current administration to be cautious and remain distant and aloof.

On the hand, we are speaking of over 10% of the country’s population, of a constituency directly linked with over 50% of the population (siblings, parents, children) and that, in some states, represents more than one half of the total number of its inhabitants. It is impossible to ignore the internal political transcendence of the decision eventually adopted by the U.S. Government. Nor is the impressive impact of remittances on an enormous number of Mexcian families. Finally, although improbable, a scenario in which prodigious numbers of persons who now live there would end up forced to return is not inconceivable. As much as the government might wish to lie low, in this debate there are vital matters that cannot be skirted.

The Mexican Government must develop a strategy that is suitable to the circumstances. The conditioning factors are very clear: a) this is an internal affair, thus the strategy must be discrete; b) Mexico would be enormously benefitted by the legalization of those already living there today; c) these Mexicans are not now nor will they ever be a political “instrument” for the Mexican Government: they are persons of Mexican origin who aspire to live in the U.S. as citizens with their legal status in order; d) there are powerful sources of opposition to any migratory liberalization and their arguments are both legitimate and respectable; e) the U.S. society is highly decentralized and the ideas as well as sources of support and rejection – and fears- in this matter derive from below; and f) the immigration debate itself provides opportunities for a reencounter between the Mexican Government and Mexicans who opted to migrate, but also between the two societies and their governments.

These conditioning factors establish the parameters within which it is imperative to act. There are two key elements: one, to define, in private, a formal position before the U.S. Government and to develop and maintain all of the channels of communication open and fluid with its Executive branch and Congress. The Mexican Government should present itself as an actor respectful of but interested in the results and willing to assume its part for these results to be favorable. The remaining element is that of acting discretely but deliberately in order to attend to, undermine or eliminate opposition sources at the root.

The latter is crucial. When the NAFTA negotiation was launched, the Mexican Government, directly and through diverse actors across the society, devoted itself to catering and paying attention to the oppositional sources, above all in the states most vulnerable to the trade agreement, particularly those related to the manufacture of textiles, automobiles and other similar products. The objective was to explain, seek options and to join together to neutralize the opposition to the extent possible.

The migratory affair is similar to NAFTA except for being monumental in size. The government must develop a strategy to look after the complainers, the Right, the aggrieved, the employers and to the communities of Mexicans. The objective: explain, join forces and show the benign effects of migrants already there illegally, to calm Americans’ fears. A grand effort that, paradoxically, does not need to be very public (meaning in the national media), but broad and everywhere. A great low-profile political operation: with the proper budget allocation and with the appropriate redefinition of the role of the consulates. Above all, going beyond the formal structures and involving the society and the diverse actors, here as well as there. Not, by its nature, too PRIist a strategy, but indispensable nonetheless.

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 Luis Rubio

No government, however powerful, can do it all. In fact, its core function is not, nor should it be, “to do things”. Its prime function is making it possible for the country to prosper and for this to create a favorable atmosphere for prosperity, to keep the population safe and to guarantee the protection of the latter’s rights, in the broadest sense. To achieve this implies choosing: defining priorities and facilitating the achievement of its objectives with the participation of the entire society.

The government of President Peña has come in with enormous and overwhelming impetus and has achieved changing the tonic of Mexicans’ attitudes and of public opinion in general. This said, it is brandishing so copious a surge of programs, projects and initiatives in all ambits, that it runs the risk of losing its concentration on the essential. Not only that: the need to maintain the initiative in the media is leading it to daily pronouncements that, while having the benefit of “making it felt” that there is a government in place, it entails the risk of losing its sense of direction.

Just to illustrate, in the ambit of investment and expenditure projects, governmental officials have announced programs to combat hunger, to construct railway lines to Querétaro, Toluca, and another in Yucatán, and they propose modifying the pension regime, developing oil and gas projects and constructing new infrastructure projects. In addition, they will be required to confront the matter of state and municipal debt. In concept, none of this can be criticized: what is doubtful is whether the government has the financial capacity to achieve this. On taking advantage of high oil prices and low interest rates, public expenditures have grown significantly in recent years, leaving little elbow room for the many projects that the new government proposes to undertake.

The point is not to find fault with the projects, but to propose the need for focusing its energy in another direction: instead of pretending to fulfill these projects itself, why not create conditions for private investors to carry them out?

Some months ago, for example, the country began to experience the scarcity of natural gas for industrial uses. It turned out that there was no lack of gas but rather of infrastructure to transport it from the wells where it is produced to zones where there is a demand for it. PEMEX has developed numberless projects for laying gas ducts, which implies, in many cases, that the tracing of these already exists as well as the rights of way to these. Because there are no constitutional restrictions in this matter, I ask myself whether it wouldn’t be logical to offer concessions throughout the country to take advantage of the already advanced state of things in this area and to create myriad regional development engines. The fact of having gas at extremely competitive prices entails a unique opportunity for promoting a new era of industrial development. From this perspective, it is absurd to accept the bottleneck represented by the lack of gas ducts as a done deed. The solution is obvious. And urgent.

The same could be done in all ambits of the infrastructure and, if a serious reform in matters of energy does indeed advance, up to the exploration and exploitation of deep-sea deposits, shale and the whole gamma of petrochemicals that are at present reserved for the State. It would be relevant for the government to develop a true capacity to set and enforce rules through its attributions of regulation and concession granting. Much more intelligent and productive than the use of scarce fiscal resources.

At heart, the great theme of economic development is to be found in the enormous amount of bottlenecks that exist in all activities and that, typically, respond to two types of circumstances: operative or financial incapacity on the part of the government (including the parastatal sector) or poor decisions in matters of previous privatizations and, in general, of economic regulation. These two factors have become apparently unsalvageable chains that bind.

The existing bottlenecks have to do with the way entities such as the CFE and PEMEX operate: their objectives and priorities are not devoted to creating a competitive environment for growth of the economy. Both act as if they were entities independent from the rest of economic activity. On its part the government is confused with respect to its own functions and objectives. Einstein said that “confusion of goals and means seems, in my opinion, to characterize our age”. This without doubt has been the case of the Mexican Government for decades.

The Mexican Government has been an entity wrapped up in itself, devoted to satisfying the interests of its own bureaucratic, political, vested interests and clienteles. This takes place, on some scale, in all political systems, but in Mexico the concentration of this is infamous and translates into lower economic growth rates. Historically, the government has purported to do it all –starting with that which all politicians love to talk about, the “rectorship” of the State, but which they have never done well- and has ended up scoring very poorly as a project promoter, market organizer or company privatizer. Despite the trade liberation, which has been in place now for more thirty years, the country continues to endure the lack of competitive markets, competition in the services area and a clear strategy for growth.

The central matter is that now that there is a government with a renewed sense of authority and with the decision of transforming the country there exists the extraordinary opportunity to redefine its priorities for acting and the very nature of their act. Effective economic rectorship implies the establishment of rules of the game that generate competitive markets, thus opportunities for private investment. It also implies conceiving of the government as the entity responsible for the creation of conditions for prosperity. Margaret Thatcher stated in an interview that the key lies in the government’s not being a burden on society but rather the factor that facilitates its development. This makes all the difference.

Politics is not defined on the plane of intentions but on that of results. As the case of the gas ducts illustrates, there are so many opportunities literally within arm’s reach -low hanging fruit as it were- that a good development strategy and a well-established set of priorities could constitute the transforming factor in the very short term. Henry Hazlitt says that the art of governing “consists of looking not merely at the immediate but at the longer effects of any act or policy; it consists of tracing the consequences of that policy not merely for one group but for all groups”. Here’s a good place to start.

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Luis Rubio

What’s the problem with Mexico’s development? How can we direct the economy so as to recover its vitality, generate wealth and satisfy the population in general? Part of the answer lies in understanding the nature of the problems that we are facing and the context within which these occur. The other part resides in constructing the political capacity to deal with these. One without the other turns out to be irrelevant.

On thinking about this I found myself with an unvarnished diagnosis of our problems. This is it in sum:

• It is the fault of the country’s failure to adequately modernize its governing institutions and its economy -its public sector and its private sector.
• The problem is that the people are unprepared for the future, and the situation is not so much the cause of that problem as the embodiment of it.
• It will not be easy to regain our old trajectory. Economic growth is in essence a function of two factors -workforce expansion and productivity improvement- and the growth of the past half-century has involved both in roughly equal measure.
• This suggests that economic growth in the coming decades will depend decisively on productivity growth. If we are to experience anything like the prosperity of the postwar era, our economy will need to be more productive than ever. Efficiency must be the watchword of our economic policy.
• The private economy is not exactly getting geared for efficiency either. The failure of education reform makes it difficult for too many younger people to gain the skills that they will need to compete with foreign workers in tomorrow’s economy.
• The key is driving productivity and innovation but nothing is advancing there.
• The tax code, meanwhile, undermines the competitive position of local producers and imposes immense efficiency costs on the entire economy.
• Economic policy is increasingly dominated by an ideal of state capitalism, in which regulators prefer to work with a few large players in each industry -functioning essentially as public utilities- while making the lives of small competitors and innovators next to impossible.
• By using the government’s immense leverage to drive innovation and contain costs through competition (rather than to drive volume and inflate costs through price controls), it would be possible to reform the health system.
• Finally, we should pursue a human capital agenda to help supply the labor force our economy will need if we are to pull off a productivity revolution.
• The real heart of a human capital agenda must be education reform.
• Productivity and efficiency need not come at the expense of financial security and social cohesion; indeed, they have often gone hand in hand throughout our history.
• Economic growth driven by competition and innovation has been easily the most effective means of lifting people out of poverty, particularly when coupled not with an empty promise of material equality but with a fervent commitment to upward mobility.
• Mexico needs more than economic growth. But without growth, we cannot hope to take up our other priorities.

This summary of the study highlights many of our weaknesses and illustrates the challenge confronting us. What is significant about the summary is that it does not refer to Mexico. It is an analysis of the U.S. and the only thing I did was to insert Mexico where it said “America”. The message is that, in a globalized world, the challenges of development are not exclusively of our country. The reality is that, despite the reforms of the past decades, the country has become stiff in the joints and has not broken free of its vicious circles.

In the economic ambit, there are two factors that characterize the Mexican economy. One is the existence of two, radically different, industrial sectors, one focused on productivity and exports, and another entirely focused on the internal market. Typically, the former compete with the best in the world, the latter live precariously, protected, in some cases, by tariffs and subsidies, but the majority by means of traditions and ancestral forms of consumer behavior. The other factor that characterizes the country in general, and not only the economy, is the fact that the government, at its three levels, has not modernized itself. This has produced an exceptional circumstance: we have first-world enterprises but a fifth-world government.

This is not the result of chance. The reforms of the eighties forced the private sector to compete, but they did not do the same for the government-owned corporations. They opened up importation of goods, which forced the manufacturers to compete or die, but nothing similar happened with services, what the energy monsters produce or the government itself. Now, fully engaged in the XXI Century, we must deal with the consequences of what was not done. That is, at the core, the argument of Yuval Levin, the author of the previously cited text*.

The grand question for the new government is whether it will have the disposition and the capacity to reform the system of government that characterizes the country. That is where our greatest problems lie, where the pettiest interests hide and where the status quo is preserved as if it were the government’s and the country’s raison d’etre.

The risk at this moment of change is that we will fall into the willfulness that is the product of arrogance: “the ones before us were very inept; we’re the ones who really know how”. In reality, the country’s problems transcend parties and cannot able to be resolved with nothing more than will. What is required is vision (clarity about what it’s necessary to do); power (the capacity and disposition to sway the interests that they defend and benefit the status quo and that, in their overwhelming majority, are an integral part of the PRIist coalition); and the what for: that is, understanding that the historical objective of the PRI (to protect the interests of the revolutionary family) is unsustainable and that the only thing that’s relevant at this time is to create a wealth base that fortifies the country, generates jobs, makes development possible and recognizes that only a private sector that is competitive and not protected will be capable of achieving this.

The country needs a radical transformation. It’s been decades since such a possibility has been in the cards, the reason why the opportunity is so extraordinary and why the cost of not advancing would be so high.

*Our Age of Anxiety (http://www.weeklystandard.com/print/articles/our-age-anxiety_645175.html).

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