Mexico’s Most Critical Problems are Also Our Own

September 25, 2010  |   Mexico Politics and Policy

August 15, 2010

By Paul Crist

 Mexico’s once growing middle class is under attack from above and below, and the stress is showing up in the shrinking numbers who can claim middle class status.  This trend predates the current economic crisis, but has been greatly exacerbated by it.  Middle class Mexicans face a political and economic system stacked in favor of the super-rich above them, while from below they face kidnappings and robbery by desperate and angry criminal poor.

Predation from Above:

Despite modest progress, entrenched crony capitalism where bribery is the rule and who-you-know counts for more than knowledge, hard work or risk-taking, remains the order of the day in Mexico.  Leaders from across the spectrum of Mexican politics must accept the majority of blame, although there is culpability north of the Mexican border as well. 

Progress toward political transparency and economic liberalism has been incremental in some areas, nonexistent in others.  Privatization of formerly government-controlled industries have enriched a handful of wealthy and politically connected Mexicans, as well as a fair number of politicians.  As a popular Mexican saying goes “un político pobre es un pobre político,” (“A poor politician is a poor politician”).

Mexican consumers pay higher prices for a lower quality of service and reduced availabil­ity of goods.  The state-corporatist system of price supports, subsidies, and special-interest tax exemptions gives an unfair advantage to wealthy and well-connected businessmen while restricting competition and obstructing eco­nomic growth.  Of course, the most critical result of anticompetitive policies for Mexican workers is a severe shortage of jobs.  

Examples of anticompetitive practices and opaque deal making between political elites and powerful monopoly rent-seekers are ubiquitous.

When the government of President Carlos Salinas privatized Telmex, the Mexican telephone giant, a group of investors led by Carlos Slim (who was among Salinas’ inner circle) arranged a sweetheart deal under which payment took place over the course of several years, using money earned by the telephone company, post privatization.  Just prior to privatizing Telmex, Salinas approved regulations that protected Telmex’s long distance monopoly, thus vastly increasing the value to the buyer.  Yet, Slim paid a mere $1.7 billion for the nationwide telephone system. 

Salinas was later found to have enormous bank accounts in tax havens around the world.  Since then, more than a few politicians have benefited financially thanks to a “close personal relationship” with Mr.  Slim.  Telmex still controls 85% of the fixed-line telephone market and Telcel, the wireless carrier also owned by Slim controls 77% of the cellular market.  While middle class Mexicans pay the highest telecommunications charges in the Americas, Carlos Slim has become the second richest man on earth.[see note 1]

In television and radio, Televisa and TV Azteca maintain a duopoly, thanks to both firms having been granted free access to publicly owned broadcast spectrum.  A 2006 Television and Radio law designed to preserve limits to market entry was found to be largely unconstitutional by the Mexican Supreme Court in 2007, but congress has failed to follow through with required legislation addressing the anticompetitive aspects of the 2006 law.  Consequently, the Televisa/TV Azteca duopoly continues to dominate the Mexican television market in 2010. 

Such extreme concentration of broadcast media significantly limits freedom of expression and the diversity of opinions that much of the public has access to.  It can also lead to chicanery and collusion between politicians and media executives.  Ties between Televisa and Enrique Peña Nieto, the PRI governor of the State of Mexico who most consider to be the frontrunner for the 2012 presidential elections, have come to light through journalist Jenaro Villamil’s book, “If I Were President.”   Peña Nieto used state funds to pay Televisa to expand his publicity and boost his popularity and image. 

Mexico is not a country where press constraints are obvious.  Diversity of opinion in print media is strong (though it should be noted that the majority of Mexicans get their news from television); and the government does not actively censor.  However, this freedom is both thin and increasingly fragile. Violence against journalists has increased self-censorship in all media sectors.  Weaknesses of the legal regime, both in terms of libel & defamation laws and the level of criminal impunity are serious challenges.  Freedom of expression relies on journalistic courage rather than affirmative protections.  

Domination by broadcasters Televisa and TV Azteca has strangled the development of a broadcast sector with the capacity to provide balanced, comprehensive monitoring and reporting.  One ought to also ask if the programming on both networks, comprised mainly of mindless sitcoms, crime and natural disaster reporting, and entertainment “news,” is intentionally designed to keep the viewing population docile, entertained, and uninformed on issues that might lead to demands for real political change that so threatens elite privilege.

Predation and anticompetitive policies are not, however, limited to business and political elites.  Even those who profess to be the protectors of Mexico’s working and middle classes are in fact economic predators and parasites amassing wealth and power at the expense of those they claim to represent.

Predation from Labor Leaders and Labor Market Rigidity:

Jobs creation and upward economic mobility in Mexico is also held back by what might be called a “labor elite.”  Mexico’s powerful unions have had a vice-like grip on the labor sector since the 1930’s, yet have done little to improve working conditions and safety, wages, or labor productivity.  Of the 178 countries covered in the World Bank’s “Doing Business 2008” report, Mexico ranks 134th with regard to employment.  Hiring employees is problematic, and there are rigidities throughout the employment system.  Firing anyone is extremely difficult and costly.

There are sectors where unionized employees have fared well.  Public sector employees enjoy excellent health benefits through a separate public healthcare system that is widely regarded as superior to the systems available to the general public.  They also receive generous pensions, and have substantial job security.  These benefits have not, of course, fostered productivity, accountability, or efficiency among public-sector workers, and they have done little to ingratiate government workers with ordinary citizens who resent not having similar benefits.   PEMEX (the state-owned petroleum company) employees are similarly well cared for by Latin America’s richest labor organization.  But for most workers and the economy as a whole, the benefits have been very limited.  Instead, the nine large, hierarchically organized unions exist mainly to benefit union leaders.  They have fostered an adversarial relationship between business owners, workers, and union leaders, while accomplishing little to benefit workers and nothing to foster worker productivity that would justify wage increases.  The result has been long-term insufficient jobs creation.

Union dues in Mexico are paid directly by employers, and in most companies, unionization is required by law.  For employers, this is galling, and for workers, who are mostly unaware that their employers pay substantial union dues “on their behalf,” there is no sense of “ownership” to union membership.  There is no financial transparency, and union leaders are rightly held in very low esteem among business managers.  Corruption in the unions is as legendary as it is in the labor arbitration courts that pass predictable and punitive judgments (and large awards that go mostly to attorneys and into union coffers) for employee dismissals.

The immense political power of the National Educational Workers’ Union (a teachers’ union with about 650,000 members and the largest labor union in Latin America), or the oil workers’ union (the richest in Latin America), or the social security employees’ union (which has thwarted any attempt at pension or health reform for years) remains largely unchecked. Independent or locally organized unions are very rare in Mexico because the politically powerful oligopoly of nine large unions have a complex web of legal protections working in their favor.  Even a weak attempt at reform­ing the labor market by the Vicente Fox administration- which avoided sensitive measures, such as linking wage increases to productivity increases-was rejected.   

Economic stagnation that has resulted from a multiplicity of structural distortions and rigidities in the economy has impeded jobs creation, forced 40 per­cent of Mexico’s workers into the informal sector, and increased out-migration pressure. 

Out-Migration Pressures and Reliance on Remittances:

One result of insufficient economic growth and job creation has been increased pressure for migration to the U.S., which has greatly increased tensions between Mexico and the U.S., particularly along the border. According to Inter-American Development Bank (IADB) statistics, Mexico’s economy is heavily dependent on the more than $24 billion in remittances that Mexican migrant workers in the U.S. send home each year. These remittances equal about one third of the total wage earnings in the formal sector of the Mexican economy and 10 percent of Mexico’s exports.   Many observers believe the actual measure of annual remittances would be even larger if it measured the flows through other channels, like the unknown quantity of cash that migrants bring with them when they make visits back home, as well as money sent via the Internet and cash smuggled in by criminals. These channels are not reflected accurately in the official statistics.

The remittances that Mexican workers in the U.S. send home to their families are spent mostly on goods and services. If a portion of this money could be drawn into investments to start small and medium-sized businesses in Mexico, and if those investments could be made in the context of a reformed domestic economic environment, the resulting economic stimulation and job growth would reduce out-migration pressures significantly. This could be achieved if Mexico’s federal and state governments adopted pro-growth economic policies centering on job creation, robust free-market com­petition, monopoly-breaking privatization of public-sector enterprises, and anti-corruption measures.

A Bleak Outlook for Workers in the Absence of Structural and Political Reform:

Anticompetitive policies have provided enormous benefits for the elites who control the monopolies, oligopolies, state-owned firms, unions, and the levers of political power.  The few examples described here barely scratch the surface of a corrupt legal system and political economy that is firmly under the influence of the super-rich.  Despite antitrust laws and a government agency  tasked with combating anti-competitive market behavior, monopolies, duopolies and oligopolies continue with impunity in gasoline, electricity, fixed-line and cellular telephone services, telecommunications, television & radio, airports, construction, food production, and much more.

Recent reports from AT Kearney, Transparency International, the World Eco­nomic Forum and the Organization for Economic Cooperation and Development (OECD) have detailed the decline in Mexico’s attractiveness as an investment destination in the face of competition elsewhere, especially from Asia.

Without reform, consumers will continue to pay higher prices for inferior goods and services, while wealth and political power will continue to accrue increasingly upward.  Economic growth and job creation will continue to be inhibited while domestic and global competitiveness will decline still further.  Economic freedom and mobility, already a distant dream for most Mexicans, will worsen in an oligopolistic system that preys on the middle class, while the poor have almost no chance to move into the ranks of the middle class.

According to the “2010 Index of Economic Freedom,” published by the Wall Street Journal and the conservative Heritage Foundation, Mexico ranks #41 of 179 ranked countries, among the lowest of all OECD member countries.[see note 2]  One OECD report estimated that Mexico could capture at least $30 billion more in foreign direct investment if competitiveness were improved.[see note 3]

A massive informal economy, once the purview of low-wage earners and estimated to constitute 40% of total GDP, is the way many middle class Mexicans make do today.  Many are slipping back into poverty after years of gains.  Tax receipts, already meager relative to economic activity, and urgently needed to improve public infrastructure, are falling. 

Among the 30 wealthiest OECD countries, Mexico’s total tax burden, at 21.1% of GDP in 2008, was at the bottom.  That figure has fallen to an estimated 17.3% in the first half of 2010, despite pro-cyclical tax increases pushed through the Mexican Congress by President Felipe Calderón.  The clearest explanation for the declining tax burden relative to GDP is a growing informal sector and declining administrative capacity to combat rampant tax evasion.

There are multiple detrimental effects from insufficient tax receipts and a growing informal (tax-evading) sector.  Budget constraints make it impossible for Mexico to make needed infrastructure investments in transportation, communications, education, public security & health, and capacity building of government bureaucracies.  Without adequate public investment, Mexico’s ability to compete globally will continue to lag, and future economic growth will be stunted. 

Workers who drop out of the formal sector no longer contribute to a strained social security safety net, and also lose access to significant portions of that safety net.  As safety net coverage declines along with formal-sector employment, consumption demand may decrease disproportionately to (already declining) household wages, as families are forced to save for potential economic setbacks such as an unexpected illness.  In addition, increased mortality and morbidity can be expected, increased crime is likely, and poverty rates will grow.  As these phenomena continue, public frustration, anger, and distrust promote increasing class enmity and social breakdown. 

Economists estimate that Mexico’s economy needs to grow by nearly 7% per year to keep pace with labor-force growth.  Over the past decade, growth has averaged only 3%.  The result is a growing underclass of young people with two obvious alternatives:  Crime, including drug cartels and other forms of criminal entrepreneurship; or heading north of the border in search of opportunity, despite the risks to life and health.  Millions of young people are classified as “NiNis” (Ni trabajan, ni estudian…they neither work nor study).  The NiNi phenomenon represents a very serious problem for Mexican society.

None of this constitutes a recipe for moving Mexico into the ranks of highly productive first world consumer economies.  Optimism in the 1970’s and 1980’s has been replaced by cynicism and frustration for a majority of Mexicans. 

The long term threat posed by lack of upward mobility and increasing downward mobility exceeds the threat of violence that Mexico is currently battling.  Indeed, the current violence is in large measure a symptom of socioeconomic trends of the past decade.

The risk for Mexico, and for the U.S., is that Mexicans could turn to anti-Americanism, protectionism, and authoritarianism unless the economic trend is reversed. 

Mexico is our second largest export market, and our close neighbor with whom we share a 2,000 mile border.  U.S. security and economic interests are enormously affected by what ensues in Mexico.  A democratic and economically vibrant Mexico would send fewer poor northward, and buy more of our goods and services.  Far fewer of Mexico’s young people would be drawn to organized criminal activity if there were viable alternatives in the formal job market.  A political turn toward authoritarianism and anti-Americanism on our southern border would pose serious security risks for the U.S. 

What Is To Be Done?

First, U.S. and Mexican media need to provide better and fairer reporting and analysis on economic and other issues relating to Mexico.  And U.S. policy makers need to pay much closer attention to what is happening south of the border.  That attention must go well beyond the headlines of drug cartel violence.  Presidents Calderón and Obama are certainly aware of the tremendous growth opportunities being missed, and the increasing vulnerability to competition from Asia.  Both leaders could do much more to educate their constituents about what is needed from both sides of the border.

Key challenges that Mexico must confront include improvements in the administrative capability of the tax authorities and greater decentralization of taxing authority; further energy sector reforms (a huge obstacle, given Constitutional limitations on private participation. But both Brazil and China could serve as examples of how private investment may be leveraged in publicly owned energy firms); a large, sustained, and predictable commitment to infrastructure investment in highways, communications, education, and public health (private-sector participation will be required in infrastructure development, but transparency in contracting and management will be essential); Private-sector monopolies and duopolies should be broken up (enforcement of existing anti-trust laws would be a start, but more effective legislation is also needed); increased enforcement of intellectual property rights laws is needed; elimination of distortionary price controls, and subsidies would improve competition, encourage foreign direct investment, and lead to lower prices and greater consumer choice;

There is much that the U.S government and the U.S. private sector could do to support these difficult reforms in Mexico.  Bilateral assistance that co-funds key infrastructure projects would help to create jobs in Mexico while building the infrastructure needed for greater competitiveness.  Technical assistance could lead to improvements in the educational system, agricultural production, and government regulation and institutional capacity. With reform, private investment will follow, which will further consolidate gains.

U.S. assistance to Mexico should not be considered, and must not be sold as, a handout to our southern neighbor.  The U.S. has vital short term and long term security and economic interests in helping Mexico to join the ranks of wealthy, stable, and competitive producing and consuming countries.  While most of the heavy lifting must be done by Mexico, the U.S. has an important and beneficial role to play.

The problems that Mexico faces are also our own.


[1] To be fair, Carlos Slim’s wealth is not entirely from the telephone systems he controls.  The political rents he has earned over the years from Telmex and Telcel have financed a tremendous diversification of his holdings.  He owns a string of industrial and retailing firms; is the largest tenant in Mexico’s shopping malls; is the second-largest shareholder of television giant Televisa; and has enormous holdings in the U.S. and Latin America, including a $250 million stake in the New York Times.  At $60 billion, his for­tune amounts to 6.3 percent of Mex­ico’s annual economic output.  If Bill Gates owned a similar chunk of the U.S., he would be worth $784 billion.

[2] Economic freedom is defined as the right to control one’s own labor and property.  In economically free societies, individuals are free to work, produce, consume, and invest as they please, with that freedom protected by, and unconstrained by, the state.

[3] Sauvant, Karl P., Wolfgang A. Maschek, and Geraldine McAllister. Foreign Direct Investment by Emerging Market Multinational Enterprises: The Impact of the Financial Crisis and Recession and the Challenges Ahead. OECD. Dec. 2009.

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