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.

www.cidac.org

@lrubiof

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

www.cidac.org

@lrubiof

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.

www.cidac.org

@lrubiof

 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.

www.cidac.org

@lrubiof

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).

www.cidac.org
@lrubiof

Luis Rubio

The great myth of Mexican politics is that there was in the past a strong and competent government that successfully guided the national destiny and that the only thing lacking is a return to that idyllic past for all our problems to be solved. The reality is that the “old regime” was an authoritarian system that imposed order and, for a good number of years, imposed an economic policy in keeping with the times and successful in that regard, but that ended up creating a crisis. The combination of political stability and economic growth allowed for development, until the crisis undermined the system’s legitimacy and cast open Pandora’s box. The great but weak state ended up producing crisis, violence and the dislocation that characterizes Mexico today. Mexico needs a new State, not the reconstruction of one that was neither successful nor one that can even be recreated.

The return of the PRI has generated much nostalgia for the old system and has revived the notion that the country’s success depends on the will of he who governs. Unfortunately, what is involved is an institutional, not an individual, challenge. The old system worked under internal and external conditions that are inexistent today where the population feared, not respected, the government. In reference to a similar process in present-day Russia, a few years ago Martin Wolf wrote that “The KGB-state is incapable of understanding that fear and respect are antitheses, not synonyms.” What Mexico requires is a new institutional structure that permits enforcing the law possible, maintaining order and constructing a new political reality. An effective government can be instrumental in achieving this, but the key resides not only in that things function but also in the development of institutions –checks and balances- that confer upon it legitimacy and permanence. The alternative would be sheer effectiveness without modifying the essence. While not proposing this as such, it is what the past two governments tried and, judging from the result, failed to accomplish. Independently of their ability, their main problem lay in accepting the status quo and making it their own. The challenge today is to transcend the (indispensable and welcome) efficacy in order to achieve a strong institutional foundation from which emanates a strong, functional and effective State. As well as democratic.

The difference between an effective and institutionalized government is enormous. An effective government can impose order, modify the terms of the system’s functioning, and carry out diverse reforms. The best and most successful example of the latter is without doubt former Mexican president Carlos Salinas. His government proposed the transformation of the country’s structures and achieved the redefinition of the relations between the government and the groups now denominated “the de facto powers” and imposed a series of reforms that breathed life into the economy for the ensuing decades. However, as successful as this was, it also unearthed the limitations of a project based merely on effectiveness it lasts as long as it lasts, summarily collapsing because everything depends on one person commandeering an authoritarian government. This was worse yet when his own actions undermined the power of the structures devoted to supporting the system.

An institutionalized government implies constant negotiation, the power of persuasion, conflict and permanent complexity. That is what we have witnessed in the legislative ambit and in the relations between the states and the Federal Government in the past few years. It is to be expected that this same dynamic will characterize the relationship with the “de facto” powers: the Mexican National Educational Workers Union (SNTE) is the most obvious, but surely not the last. The Peña-Nieto government has assumed the responsibility of pacifying the country and of creating conditions for economic growth. Both are necessary but will not be sufficient if these do not entail a radical transformation of the nature of the government itself.

That is where the relationship between the Executive and the other branches of government becomes crucial, but very particularly with regard to the opposition parties. The Pact signed in December is an excellent beginning but insufficient, as illustrated by the internal crisis produced by the participation of the PAN and the PRD. That crisis revealed another of the myths of our current reality: in Mexico we have not achieved the institutionality from which there emanates a loyal opposition, a term implying that a party recognizes the legitimacy of a government’s origin although it competes head on in the electoral realm.  Some politicians  –beginning with the signers of the Pact- are operating in this manner, but others advance agendas that evidence them as disloyal in the previously noted sense, if not inclined to adopting anti-institutional strategies.

These realities derive from two processes. The first has to do with the peculiar nature of the political transition that, on not being the product of a broad political agreement with precise definitions of objectives and processes, allows each political actor to define it as best suits himself. The second is the product of old political rivalries that decades of electoral competition have proven insufficient to resolve. One of these is that which dominates left-wing politics, where the exPRIists, now in the MORENA movement, have become the main source of disloyal opposition. The PAN is not far behind: its current divisiveness brings to light the discord between its constituents born into anti-PRIism par excellence and those attempting to construct a new politico-institutional foundation.

The government could take advantage of (and even foster) these divisions and rivalries to construct temporary coalitions and promote the confrontation of one opposition cadre against another to advance its agenda. The question is whether this would afford permanence and transcendence. The example of the reform era of the eighties and nineties shows that that this could be a functional strategy, but one that is short-sighted and liable to engender crisis. The alternative strategy would imply submitting the Executive to the rule of law, something that has never existed in Mexican history. In the era of the Magna Carta, Henry de Bracton wrote that “The King is under the Law for it is the Law that maketh him a King”. To accept this premise and to convert it into a principle of action would entail not only a revolution of conceptions, but also the opportunity to construct a political system with long-term viability.

According to Fukuyama, the three components of a modern political system –and a precondition for a flourishing capitalist economy- are a strong and competent State, subordination of the State to the rule of Law and accountability to the citizenship. The new government has demonstrated that it is capable of achieving functionality and efficiency in its daily undertakings. Now what’s missing is its advance toward consolidating the foundations of a modern country.

www.cidac.org

@lrubiof

Luis Rubio

It never fails. As dawn heralds each new day, on the initiation of each governorship or municipal presidency complaints begin to flow on the excessive debt that the previous administration acquired. The scene is typical: the new governor arrives at his post with enormous plans and projects, only to find himself with empty coffers and, worse, that the funds that the entity will receive were already mortgaged by his predecessors. This structural problem will not be resolved until the conditions that create it change.

The perennial discussion reminds me of a Hindu legend that I once read. According to the tale, apparently deciphered from a photograph of the Krishna deity playing chess with the Radha, the local king, the latter had an inclination for challenging his guests to play a round of chess. One day there appeared a wise traveler who accepted the challenge, modestly asking the king for a few grains of rice were he to win: one grain for the first square and later double the number of grains per square in each of the following matches, until the gaming table was filled. The king lost and ordered payment to the wise man according to the terms established and it was then that he noted the trap that had been set for him. What the wise man had requested as payment was none other than the exponential growth of rice grains that, after sixty four filled squares, represented 210 billion tons of rice. In other words, what half of humanity would consume for some centuries to come…

Large or small, state and municipal debts are the result of a structure that rewards the today at the cost of the future. Worse, it rewards the first local government that had the opportunity to put its entity in debt, in order to usually squander it in the most unproductive ways. Let’s take this by parts.

Credit serves for carrying out works that benefit the population. In theory, these works permit better lifestyles, attract investment, therefore jobs. Just as a businessman who requests a bank loan to expand his productive plant, the state government seeks to construct today an infrastructure project that will be of service in the future. However, in contrast with the company, whose credit would be paid off with the additional production generated by expanding the business, public works –if carried out well- involve very long maturation times and, in the majority of cases, do not generate direct revenue. That is, even though the project is well conceived, the credit afforded to a state or municipality depends on the income obtained by the entity through taxes or federal transfers that are not related with the public works themselves.

In recent years, the states have discovered new instruments for obtaining resources, all of these tied to future income deriving from these two sources. In this manner, countless states have committed these resources for the next three generations. That is, they obtained resources today that will be paid for with the product of taxes and transfers in the upcoming decades. The first state governor or municipal president who contracts the debt enjoys the benefit; all of the others and, of course, the locality’s inhabitants, suffer the consequences.

The first structural problem derives from the very fact of a governor even being able to shamelessly mortgage the future in such a way. Independently of how meritorious his projects are (and many of the latter, perhaps the majority, are not), the fact is that the future is compromised. The evident consequence of this situation is that all of the governors implicitly dream, suppose and expect that the federation will absorb their state’s debt; thus, with this, a new vicious circle begins. And that is the second structural problem: instead of constructing a healthy fiscal structure, everyone prefers to negotiate (or blackmail) the federal government rather than collecting taxes directly.

Credit, whoever the beneficiary, is granted depending on capacity to pay off of the potential debtor. This payment capacity is determined by the current income sources that whoever requests the credit possesses. As illustrated by the contrast between a company and the previously cited government, the problem of state governments in Mexico is that they do not collect taxes. That is the basic problem; the rest is just acting.

The discussion about state and municipal debts brings to the fore other much more transcending angles than the money itself. Although formally the country possesses a federal structure, that is, one that separates the attributions and responsibilities of each of the three levels of government, the objective reality is that, throughout the greater part of the past century, the federal government claimed unto itself all of the functions and left local-level political and administrative structures weak and undeveloped. Worse yet, it created a culture of petitioners among the governors and impeded the development of a system of checks and balances between local legislative powers and the respective executive power. With the decentralization of political power in the last decades, the governors acquired huge amounts of resources with no supervision whatsoever. The indebtedness was not the product of chance.

But the consequences of this reality can be observed, among others, in the violence characterizing a good part of the territory. During the era that the federal government controlled all political and police activity, security was in its charge. With the decentralization of power, the federal government no longer had the ability, power or resources to maintain security and, in general, the governors have not taken charge of constructing modern and effective police departments as well as functional judicial system. The security crisis did not occur because of the decentralization of power, but it did take place within this context: it came about simultaneously with the growth of the mafias of organized crime in the national territory. The result has been that the country does not have the mechanisms to deal with the phenomenon.

Debt and criminality are only two symptoms of the fundamental problem. Today’s federal structure is very good in theory, but is dysfunctional in the present reality. The problem goes back to the fiscal structure lying at the heart of federalism. In a word, states and municipalities must collect the taxes that will allow them to carry out and pay for the services (including, of course, the police and the judiciary) that their inhabitants require. Without a healthy fiscal structure that is sufficient for resources and expenditures at the local level, safety or prosperity will be impossible.

Instead of controlling the resources, the federal government should create a system of incentives for this change to occur, which would entail the greatest political revolution of our times.

www.cidac.org

@lrubiof

Luis Rubio

Everything changed but everything stays the same. That’s the sum of nearly two months of government. In less than a week, the new government installed itself and changed the political dynamic of the country: the professionals had returned and, with them, formality in politics. Forms are without doubt an essential part of a country’s political life but, without substance, forms do not suffice. Perhaps the greatest risk for the new government –and for the country- is that it perceives that its initial success, as enormous as it has been, leads it to conclude that it’s not necessary to do anything, that the problem was the incompetent actors of before and not the reality.

In a few weeks something unusual has take place: the sensation returned that there is a government. It has advanced towards restoring state rectorship and showcases efficiency. It didn’t take the new team more than a few minutes to displace the former, to wipe off the map –or from the media- themes that get in its way (such as criminality) and to make itself felt as a preeminent and omniscient presence.

Even with the difficulties it has encountered in the legislative arena, the old practices are back. Money flows like water. No vote is too expensive: everything and everyone may be bought. When money is no longer effective other instruments will come into use, less palatable. The media are finding out that the era of “license” is coming to an end. Now there is authority that is willing to employ its means and resources to reward and punish. Like before. Similarly, there are signs that another of the old vices is returning: self-censorship.

The existence of authority is an enormous asset if employed for carrying out relevant changes. Form is fundamental as long as it serves for something. The PRI of yesteryear constructed a modern country but afterward the party became stagnant, lost its compass and nearly destroyed the country. While that was happening, the forms continued to be impeccable: the same as the proverbial story of those who discussed the menu on the Titanic as it sank. The government has reestablished a sense of authority and possesses the capacities and skills to convert that enormous asset into a source of transformation. If it opts for watering down its reform proposal and lives off the assets that prior administrations constructed (which, with all of their limitations, were not few), in a couple of years, if not sooner, it will begin to see the limits of control without substance. Or it will end up running straight into a wall. By that time it will be too late to begin. The time is now.

The central matters are evident: public safety, economic growth and political stability. None of these is new and the three constitute basic challenges that are not resolved by the fact that there is a credible government in place, although without this it would be impossible to confront or resolve these.

Public safety is much more than fighting organized crime or, as many propose, ignoring it and allowing it its space, as long as it doesn’t get in the way. The country existed for centuries with weak judicial and police structures, all subordinate to the central power. Violence and crime were growing during the eras of weak central power (the XIX Century) and diminished with strong powers at the center, as occurred during the era of Porfirio Diaz at the end of that century and in the PRI era. This observation has led many to conclude that it is evident that what is required is the recentralization the power. The problem is that decentralization did not take place by will but rather through the evolution and growing complexity of the society and the globalization of the economy. While it is evident that a new political structure is required, the notion of centralizing would not work there either. The country urgently needs strong institutions that respond to the citizens and to resolve their problems.

Economic growth has been the objective and concern of all governments since the Porfirio Diaz era, but in recent decades –within a complex and highly competitive international context- it has been fleeting, when not slippery at best. Although there were moments and actions of great vision, such as the NAFTA, an integral strategy for transforming the country never developed. The contrast with Canada, which converted the same instrument into its ticket to development, is impacting. Of course the circumstances and characteristics of both nations are very distinct, but the main difference lies in the capacity, and above all, the willingness of the Canadians to define their objectives, construct strategies likely to reach these and to do everything necessary to achieve them.

Economic success will require a radical change of vision: to accept that the required transformation will entail costs but that once carried out, these become sources of investment, employment and wealth. In the past few decades, we have witnessed moments of vision but an environment of risk aversion: it is no coincidence that so little has been harvested. The results that we have seen are the product of the limitations of the objectives as well as of the strategies adopted. Even at the most visionary moments, enormous benefits were promised but the actions undertaken -like privatizations, deregulation and economic liberalization- were never themselves visionary or decisive. The easy way was always chosen, that of short term benefits and maintaining the status quo. If the government wants to be successful it will have to take the bull by the horns with a long-term perspective because everything succumbs when there’s an attempt to dodge the immediate costs.

The political stability that the country has experienced has been propped up by structures that gave out a long time ago. The “federal pact” doesn’t work and the best evidence of this can be noted in the inexistence of modern and functional police and judicial institutions at the state level, and in the way the public expenditure is exercised. The easy way out was also chosen in this ambit: leave things to take their course without authority or, as they now and once again phrase it, without rectorship. Our system of government is dysfunctional, weak and out of phase with the needs of public safety as well as those of a modern economy: there is not a sole check and balance. Without checks and balances, no country can be successful. Viewed from this perspective, it’s incredible that we are not worse off.

It’s been decades since the country has had an opportunity as enormous as the current one. A competent government and one capable of exercising authority is indispensable, but it is not sufficient: it if wants to transcend or, even, end in peace, the government had better begin utilizing its skills to transform the country. In its previous era, the PRI went astray because it allowed itself to be dominated by “de facto powers” that paralyzed the country. If it doesn’t get rid of them, they will snuff out the new government.

www.cidac.org
@lrubiof

Luis Rubio

Perhaps there is no greater evil, or one more despised by the Mexican society, than that of impunity. Impunity, the twin sister of corruption, is not the product of our culture or customs: it is the direct daughter of the way that Mexicans have chosen to organize themselves. The problem, as in other similar societies, is that one ends up believing that it’s something natural. In a recent article on Russia, Misha Friedman, a NYT photographer, affirmed that “corruption in Russia is so pervasive that the whole society accepts the unacceptable as normal, as the only way of survival, as the way that things ‘just are’”. Mexico is not so distinct.

And with good reason: observation of the daily panorama shows that impunity reigns above all. The examples are vast and very diverse. There’s a candidate who has run in four elections in his lifetime, but who has only accepted the results in one of these, the one he won. In the remaining three, he didn’t lose: the victory was stolen from him. We witness a farce between a communications enterprise and the government in which the only thing that’s clear is that nothing is transparent in the management of spectrum concessions and, worse yet, that all of those involved in the business (politician and media mega companies) appear to like the system. There are thousands of deaths, “disappeared” journalists, citizens who have been abducted but only a handful of judicial investigations. And all that seems normal to us.

Corruption is no more than a mechanism that allows the functioning of a society within a context of impunity. In the face of the impossibility of resolving the problems, the citizen adapts and corruption is a means of achieving this. That’s how daily problems like a traffic fine are solved, or a permit from the authorities or a visit from an inspector. The problem is not the corruption itself but the impunity that makes it possible and, from another angle, inevitable. And impunity is the product of our institutional weakness.

One of the myriad myths of the old political system is the supposed strength of the country’s institutions. Our image of institutions is that of great monuments and edifices or the way that politicians were disciplined before the presidential authority. However, the relevance of institutions resides in the rules of the game that they entail. An institution, noted Nobel Prize winner Douglas North, are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction. The more these rules are clear and defined, the greater the institutional strength and the lesser the potential for arbitrariness of the authority, thus the greater the impunity.

Echeverría’s foreign investment law was a monument to discretionary actions and a perfect example of the source of corruption in our country. The law established a set of precise rules on limits for foreign investment, national and foreigner shareholder rights, and differences among sectors of the economy. Although the law was highly restrictive, one of its articles conferred upon the authority full discretionary powers to act distinctly from what was disposed by the law in cases in which it considered it necessary. That is, the law established very rigid rules but subsequently a space of absolute impunity was generated. This same principle exists in all of our legislation and comprises what generates permanent uncertainty, in addition to spaces for impunity. When the authority possesses faculties so vast that it is legally immune to punishment, corruption becomes a natural survival mechanism.

Three examples illustrate the costs and the opportunities available towards the future. Some years ago I had the opportunity of attending an apparently normal process. A lawyer friend of mine accepted the case of some brothers who wanted him to help them separate the businesses that they had inherited. The legal and the business part followed its own dynamic, but what stood out for me was that the most complex and extensive part of the process was the way in which the clients would pay him for his services. Under normal conditions, the lawyer would have sent them an invoice for his work and they would pay. Period. However, the concern was that after arduous work involving multiple expenses, the clients would end not paying him, hence the need for a cumbersome arrangement that would guaranty payment. This was the extent of the distrust but, above all, the weakness of the institutions that we have. The difficulty of making someone comply with a contract generates absurd distortions.

This example contrasts with the way that building inspectors act in the US. For example, the rules regarding the number of spaces in a parking lot per foot of construction is clear and specific, not subject to negotiation. The inspector is invested with no faculties other than to establish whether this number of parking spaces exists. Because he does not have the faculty to modify (or “stretch”) the rules at will, his decision is binary: yes or no. It is not by chance that we Mexicans frequently clash with Americans in affairs of great transcendence: our frame of reference is radically different.

Fortunately there are examples that it is possible to diminish or eradicate corruption: when the spaces of arbitrariness and impunity are eliminated, corruption stops being possible or inevitable. That’s what happened at the end of the eighties at the then SECOFI (now the Ministry of the Economy) where a change in the rules modified the entire nature of this ministry devoted to commerce and industry. Historically one of the spaces of greatest governmental corruption, the SECOFI bureaucracy lived from the exploitation of their discretionary faculties in the awarding of investment, import, export, and other similar permits. With the liberalization of the economy (which, essentially, consisted of the substitution of permit requirements with tariffs or rigid rules), the entire industry of corruption at this ministry disappeared. Thousands of bureaucratic paper shufflers (or impeders of papers being shuffled) had no reason to exist and the ministry was reduced to less than 10% of what is had been. In that world corruption simply disappeared. It is noteworthy that many prefer the old system…

The day that Mexicans have clear rules in migratory affairs, electoral issues, radio and television concessions and property rights in general, as well as an authority disposed to and invested with the faculties to make them stick without looking back, the country will be another. The issue is to end the discretional faculties that render arbitrariness and impunity permanent: all the rest is mythology.

www.cidac.org
@lrubiof

JANUARY 2013

In the Lurch between Government and Chaos: Unconsolidated Democracy in Mexico

By  Luis Rubio

https://www.migrationpolicy.org/research/lurch-between-government-and-chaos-unconsolidated-democracy-mexico