28 July 2012
Although Mexico’s July 1st elections officially gave a victory to Peña Nieto of the PRI, irregularities and disputes remain over the results; Andrés Manuel López Obrador, leftist PRD candidate and second place in the voting, has announced he will challenge the vote results.
Amid the turmoil and protests over the official vote tally is a deeper discussion about the future of Mexico. Many believe that the country’s economic potential is being wasted on inefficient drug wars and government spending, and Obrador campaigned on an eco-nomic platform that would seek to elevate the Mexican economy to the BRICS level.
To learn more about Mexico’s economy—the challenges and opportunities it faces—the Diplomatic Courier sat down with Fernando Turner Dávila, a key economic advisor to the Obrador campaign. Mr. Turner holds an M.A. in Public Administration from the Harvard School of Government, and was named Entrepreneur of the Year by Ernest & Young, Mexico in 2010, and was selected to be Secretary of the Economy in the event of an Obrador victory.
[DC:] Your focus is to help bring more outreach to the business community. Tell us more about what you’ve been doing and how you see things.
[Fernando Turner:] I joined Andrés Manuel López Obrador’s efforts to gain the presidency because he approached some business leaders to help him build bridges with the business community so they could learn about his proposals. He asked us to help him to create an economic development plan based on their primary ideas. We have been communicating our economic plan to the business community all over the country, and also somewhat in the United States.
Our proposal is based on six points. One of the first points is to create a new macroeconomic balance. The macroeconomic situation in Mexico has been prized worldwide, but that has created a stagnation of the economy, because it is based on the very big government spending, heavy taxation, and a price of energy that is more expensive than in the countries that we are competing with. The electricity company and electronics company are monopolies, and the government has used those to extract more income for their op-erating expenditures, which has created a negative incentive for industry to invest–it reduces its profitability and competitiveness.
The second point is to operate an austere and efficient government. Government expenditures have been growing constantly in the last ten years. The total cost of government to the economy has grown from roughly 20 percent of GDP to 26 percent of GDP. So even though the economy does not grow, the government keeps spending and taxing. We estimate that we can save about three hundred thousand million pesos, which is roughly US$25 billion. In a budget that is roughly 3.8 billion pesos ($350 billion dollars), that’s about an 8 percent of the total budget.
The third aspect of our plan is to have competitive prices for energy. Mexico is an oil exporting country, but the energy sector was managed very poorly by the past PRI and PAN governments. It’s full of corruption and inefficiencies. But that’s not the cause of having high energy prices. The cause is [that the energy sector is designed] to extract income to pay for government expenditures. For example, Monterey, which is an industrial city with steel, cement, glass companies, is very sensitive to the price of energy. In the last 30 years hundreds of small companies that are dependent on energy, like small glass companies, crystal-making companies, have disappeared. And that has caused unemployment.
The fourth aspect is changing the monopolistic practices in the business community, starting with the government using their monopolies to extract extra income from industry and consumers. The intention is to reduce or eliminate the anti-competitive practices that are pervasive in the Mexican economy. We estimate that 50 percent of the Mexican economy is plagued with this problem, important sectors like telecommunications, television, construction materials, food, banks, and infrastructure like roads. The Federal Trade Commission estimated that the cost of those practices are elevating the pricing of the consumer [goods] between 12 and 15 percent, and that 40 percent of whatever is spent by the consumer is overpriced. That is why Mexico, who is often an economy to the world, and is a very open country in trade, has not opened its economy in the domestic market. If we [open domestic competition], we estimate that investment will grow substantially, by about 16 percent per year, [with total economic growth] at 6 percent per annum during the six-year term of the presidency. That will be enough to create 1.2 million new jobs, covering the roughly 920,000 positions that are going to be needed by youth coming every year into the workforce.
[The fifth aspect is that] we need to restructure the incentives of the banking sector; they are part of the oligopolic structure that I had mentioned to you. The banking system is about 20 percent of the GDP which is very, very small; [the United States’] is I think 200 percent of the GDP. A middle-sized economy could be something around 80 to 100 percent of the GDP. In Brazil, the last years of Lula, the banking sector was about 20 percent and moved to about 80 percent. You need a lot of financing if you intend to grow. A proposal we have is to create an organization similar to the U.S.’s Small Business Administration to create a business environment that is fertile for investors and entrepreneurs. In Mexico, 75 to 80 percent of the total investment is private, while 25 percent is government. If we don’t induce the private sector to invest, Mexico will not be able to grow as we need.
[The final part] is to reinforce the police forces, the national police system, the courts, the attorney general, and the legal system. The system of justice today is accusatory to a more modern system—an oral system instead of a written system—and we want to change it: make it more open, change the basic concept of “now you are guilty until proven innocent.” Nearly 60 percent of the population of jails are people who have not been tried. Some of them, if tried and found guilty, they will have spent more time in jail than the maximum penalty for that crime. The concept of justice, of security, has to be a completely integrated system that includes the police, intelligence, cooperation with the United States and other countries, plus reinforcement of the municipal police, the state police, the courts, and the penal system. This must be solved by a government that is strong enough, efficient enough, to really clean up the old system.
[DC:] With everything that’s going on in Greece and Europe now, do you predict any impact on Mexico’s economy?
[FT:] If Europe or the United States does not go into recession, not very much. We are estimating, according to the IMF studies, that the United States will grow slowly, but still growth, at 2.5 percent; that Europe will not go into recession and will see very slow growth but not recession; and that China will reduce its growth rate but will not go into recession. Mexico has very few relationships with Greece, but we have much more with Spain. We, in a way, are a little bit worried about the Spanish banks because two of the major banks in Mexico are owned by Spanish banks. The government has to be very careful to avoid any contamination of the banking crisis in Spain to their subsidiaries in Mexico. In the case of the United States, the biggest bank [in Mexico] is owned by Citibank. During the crisis Citibank was very careful not to contaminate that subsidiary, which, by the way, is very profitable for Citibank. So as long as that economic picture does not change substantially, I think Mexico is relatively safe.
The banking system is small, and it is very strong because the exposure is very low; government finances are also relatively strong. The most important factor is our own internal policies, or our own domestic market growth. It is very large market. Mexico is the 13th largest economy in the world even though we have not grown much. As you know, 80 percent of the total purchases of Mexico abroad are from the United States, so we are a very substantial consumer of U.S. products; our exports are also substantial to the U.S. But we should not rely solely on exports. We should rely mostly on strengthening our domestic market. It increases jobs, increases salaries, increases investment, so as to accelerate the internal domestic market.
Photo by Guerry.