The demolition of Mexico’s economy and democracy
Yesterday, I wrote about Mexican President Andrés Manuel López Obrador’s (AMLO) efforts since he took office last December to consolidate power and undermine the country’s democratic institutions. In this second installment, I detail the scale of incompetence evident in his administration as well as his doomed security and economic policies.
An increasingly inept administration
AMLO has said that the ills of Mexico stem from a “neoliberal” economic model, which he asserts has ruled the country since 1983. As such, one of his first priorities was to get rid of the “patrician” technocrats by firing them directly, in most cases breaking prevailing labor laws.
He has also decreed that no one in the public sector can earn more than the president, including employees of the federal government, as well as members of Congress, the judiciary, state-owned enterprises and autonomous state entities. At the same time he lowered his own salary to US$5,596 per month (at the prevailing exchange rate at the time of writing).
As was to be predicted, that edict meant that thousands of well-paid and highly competent technocrats, most of them with degrees from the best universities of the world, left the public sector and many also left the country.
On top of the devastating loss of human capital, the new government has placed patently incompetent – but loyal – apparatchiks in virtually all high-ranking jobs in the public sector. One example suffices to illustrate this disaster: the chairmanship of Pemex, Mexico’s oil conglomerate and the country’s largest corporation, was entrusted to AMLO’s old pal Octavio Romero, an agronomist from a fourth-tier provincial university in Tabasco, the home state of AMLO.
The list of inept or sinister characters that populate this administration is unprecedented and it has already had dire consequences for the country and its economy. Those that are somewhat competent – though not when compared to previous administrations – are overwhelmed or, worse, charged with impossible tasks for which they do not have the personnel, talent or resources to achieve. A few examples illustrate this situation.
All the purchases of the public sector have been centralized in the Secretary of Finance’s office of administration (Oficialía Mayor, in Spanish), which represents a huge bottleneck for a well-functioning economy. Some of the results have been devastating:
- – The country had severe gasoline shortages at the pump level in January and February because the order to import the necessary amounts was rescinded by someone who didn’t understand the consequences. AMLO used the real problem of illegal extractions from pipelines as a cover, but it had nothing to do with the lack of fuel.
- – For more than a month earlier this year the splinter union of teachers – not its main union, the SNTE, but a highly radicalized faction of rebellious teachers with a stronghold in the poorest states – decided to block the passage of railroads near several crucial seaports, causing billions of dollars in losses to business. After failing to limit the damage, the government caved in to demands that have dashed the hope of much-needed education reform.
- – Only two weeks ago, Mexico City, which has a long record of severe pollution due to its geography, was choked with the worst air in its history as the result of the dry season and an unusual proliferation of forest fires. It turned out that the Ministry of Finance had cut the budget to entities in charge of firefighting and the special program to hire extra workers just when the fire season was arriving. Hasty and misguided cost-saving such as this has been used to fund AMLO’s populist hand-outs and pet infrastructure projects.
- – Just last week the CEO of the Social Security Institute – the IMSS is an institution that doubles as medical-care provider and pension fund – resigned with a nine-page letter where he describes in detail how the IMSS budget was mercilessly axed, making an already mediocre service provider much worse. Other health sector entities have suffered a similar fate and the country is now facing a crisis of scarcity of medical attention and supplies.
Doomed security and anti-corruption policies
In his eagerness to change everything, AMLO decided to destroy 18 years of experience in developing a national police force capable of restoring security to the nation and invented, instead, a national guard that is nominally a civilian force but will be run by the military.
The force is organized like the army and most of its members will come from the military. The operational logic of this new force is designed to be territorial and not functional, very much like how military bases are deployed throughout the country. There is no mention of units performing key jobs of intelligence, investigation and forensic science, as in the now-defunct federal police.
There are no incentives for the state and local police forces to improve, and some experts believe that this will lead to a substitution of the local forces by the National Guard, entailing more centralization. The civilian command of the guard is in the hands of one politician with no relevant experience to speak of.
One of AMLO’s guiding principles is not to fight transnational criminal organizations since he attributes their rising power to the precarious economic conditions that resulted in poverty in many parts of the country. He expects, in return for a de facto truce with drug cartels, a decrease in violence. So far, he has fulfilled his part of the deal, while organized crime has increased its activities rendering the first semester of AMLO’s tenure as the bloodiest in the country’s history.
Regarding corruption, AMLO’s attitude is equally naïve. Since he declares himself to be personally honest, that means that everyone around him must be the same. Meanwhile, 85% of the contracts of the public sector and its enterprises have been granted to suppliers without competitive bidding, far more than any previous administration.
With this careless procurement process, much lower salaries for the bureaucracy and no transparency or oversight mechanisms, corruption is sure to flourish as never before.
How is the economy doing?
All the indicators are that the economy is screeching to a halt as there is no private investment and government spending is down substantially. The key economic problem is uncertainty, mainly from two sources: lack of confidence in the new administration and its economic strategy, and doubts about the viability that the revised North American Free Trade Agreement will be ratified by the US Congress.
So far, public finances have remained under control, but only due to the savage cutting of spending by slashing salaries, firing people and radically cutting crucial government functions, as illustrated above. But this will not be sufficient to support the spending whims of AMLO and his absurd projects, all of which will demand an increase in resources that will have to come from deficit financing.
While the value of the Mexican peso has remained relatively stable in recent months due to extremely tight monetary policy, that will all change when rating agencies downgrade Mexico and strip it of its investment grade rating. When this happens in the second half of this year, as I expect, the exchange rate will sink as portfolio investment flees the country in massive capital flight.
Opinion polls that gave AMLO an astonishing approval rating of 80% after his first 100 days in office have finally started to fall. As more people suffer the direct consequences of this government’s ineptitude, popular support will surely plummet.