Moreno-Brid on Mexico's political economy

For the second installment of our Global Roots of Inequality series, we met up with Dr. Juan Carlos Moreno-Brid, Associate Director of the Mexican office of the United Nations’ CEPAL (Economic Commission for Latin America and the Caribbean–or ECLAC–in English), to discuss inequality and development policy in Mexico and the wider region.

Moreno-Brid has also just recently published a book, with colleague Jaime Ross, through Oxford University Press entitled “Development and Growth in the Mexican Economy: a historical perspective.” It’s now available in both English and Spanish.

In our interview, Moreno-Brid pins Mexico’s inequality ills largely on a lack of fiscal reform, which has been systematically blocked by elites. These established elites, who have an interest in resisting taxation, Moreno-Brid argues, assert that government spending is inefficient and ineffective. It’s a dynamic of control and distrust, he suggests, that can be traced back to Spanish colonization, and the 18th century Bourbon Reforms. Those reforms, while successful at increasing tax revenues, were aimed specifically at improving Spanish –not colonial– economic welfare and political life.

We’ve posted the edited transcript below.

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[So, Dr. Moreno-Brid], where would you say the history of inequality in Mexico begins? Is it with the arrival of Columbus and the other Europeans, or is there a pre-contact history? Where would you start the story?

Well if you look at very poor, technologically backward economies, given that their surplus is rather small, you can argue that it’s very difficult to find the high degrees of extreme inequality that you find in more modern economies . You need a certain amount of surplus in order to generate the acute inequality that you see in more modern economies. In any case, I don’t think you can put the roots of Mexico’ inequality back at pre-hispanic times. … I mean, obviously there was some inequality but not the kind of inequality that [you see] with capitalist, more modern societies… The root of inequality [lies] not so much with the Aztecs, but [rather]  with the colonial period, with the [significant] inequality between the Peninsular Spaniards and the native population.[1]

So was it a sort of cultural model, brought in by the colonial experience, that set off what we see the remnants of today, in terms of the difference between the rich and the poor in a country like Mexico?

You would have to look at very different aspects of inequality. Une, say,is  the [issue of] income, but also overall wealth,  in its different manifestations, inter alia, household inequality, factor inequality both at the  national or  regional level, and so on. … Yes, in a way, with the vast exploitation that the Spaniards imposed on the population of  ‘New Spain’, as it was called–on the colonies–inequality increased enormously… At the same time, of course, poverty also increased dramatically with disease, and the exploitation, the living conditions of so much of what was to be known as the Mexican population became very, very difficult for many decades…

But even if you trace the roots of inequality so far back … are we doomed to being unequal, or not? I don’t think we’re doomed to being unequal… That is the more interesting question from a development perspective, here in the 21st century.

Right, absolutely. So, with respect to how Mexico compares to the rest of North America now, in the present day, there seems to be, still, a considerable gap, so there must be some sort of colonial or historical legacy that has brought us to this point. But, from this point, going forward… is there a positive trajectory to be had for a country like Mexico?

Well I think the interesting comparison is not so much with the rest of North America, which is Canada and the United States, but with Latin America, which has a more similar colonial history . And, in that sense, one must always remember that Latin America is the most unequal region in the world, nowadays. Mexico is not the most unequal country in Latin America. [It’s], let say, average. So in that sense, there’s a [particular] pattern, either of colonialism in Latin America, or the way that capitalism has been developing in Latin America in a way that ha–so far–been unable to reduce inequality.

And one of the roots of that problem is, essentially… [well] it’s a fiscal problem. If you look at [Mexico’s] political economy, we’re unequal because we do not have the political will to implement policies that effectively reduce inequality. The political system in general doesn’t really treat inequality as a key problem. It  treats … poverty [as a much more] important problem than inequality.  I think inequality has just very recently [become] a bleep on the political monitor, on the agenda of development [here]… Actuallly at CEPAL, where I work, we just launched a publication [called] “The Age of Equality” [in which we examine] equality … not only as a byproduct of development, but as a condition, a pre-condition for development. But in general you wouldn’t find many [Latin American] politicians or policymakers [who] consider  inequality as a main concern, as a cause of underdevelopment.

In general, [what you see is support for the] trickle-down model of development: first, an economy has to grow and [only] then it may worry about distribution and egalitarian development. But ‘trickle down’ has  simply not  worked.  Growth is necessary but not sufficient to promote equality.

Now [that said], I think we’re moving in the right direction… If I may dare , say, compare the 1960s to today..

[Yes], sure.

Latin America [and Mexico] in the 1950s, 60s and 70s managed to grow at a very impressive rate… Then, we [experienced]  the international crisis, not the recent one, but the one in the 80s … the ‘lost decade’, which led to … a series of macroeconomic reforms, [in which] the idea of policymakers in power was that the previous [development] model was erroneous in the sense that the state intervened too much in the economy and the markets had to be ‘liberalized’ …as well as the finance sector in order to be able to put the economy onto a path of sustainable and long-term development. Unfortunately, that just didn’t prove to be the case. Because, two or three assumptions [behind the reforms] weren’t really valid. One was that the public sector’s investment was crowding out private investment. And what we saw, afterwards, was that, on the contrary, private investment and public investment are complimentary.

So when [policymakers] or governments decided to significantly downsize  the public sector, to eliminate many of the policy instruments … [at their disposal], they ended up throwing the baby, how do you say out with the …. ?

Throwing the baby out with the bathwater. Right. So—where did this notion, that public investment was driving out private investment—where did this notion originate?

I think is was… well, it was ideology in one sense, but also many important economists thought that public investment acteed in that way by unfarily pulling resources away from the private sector. You can [almost] divide economists in that sense into [those who think that] the public sectors works, or is able to work effectively, in one way or another, and others who just think that the public sector is always doing stupid things, intervening in the wrong way, creating distortions…

…but [in any case] going from a position in which the public sector was leading industrialization, to the other position in which the public sector was only allowed to take care of the police, health and things like that, was an extreme position… [And] I think we’re finally seeing a reversal in the last 10 years, more or less, in which we now are moving towards having a much [stronger and hopefully more effective] public sector and I think—with some exceptions here in Latin America where [there’s still or has been] a very antagonistic relation with the private sector—now you see there’s much more collaboration between them.

[And as a partial result,] before this international crisis that started in 2008-2009, Latin America had seen for the first time in [something] like 50 years, 5 continuous years of growth in real GDP at more than 3% per year.

5 continuous years of growth at more than … ?

We saw, from 2003-2008, in those [5] years, the real  GDP per capita in Latin America grow at more than 3%. And that was nearly unheard [of] in the last, say, nearly 40 [to] 50 years. … So [it’s come to be seen as] a new boom, a new era in Latin America.

But, then came this financial crisis.. [Regardless], during those years, in the [most recent] decade, you [do] see some decrease in inequality, which has been good news.

Really? This is Latin America-wide, or just Mexico?

No, Latin America-wide! I mean, there are a few exceptions, [such as] Costa Rica… the other I don’t remember [at the moment] but I invite you to read our text…

There are many reasons why this has happened. In particular we have  the demographic boom. Employment improved, and, actually, economic growth as such also helped to improve labor conditions and real wages …In addtion, the improvement in the terms of trade were an important element in increasing national income in many South American countries.

The resumption of economic growth automatically brought more tax revenues to the public sector, even without any drastic fiscal reforms. Some governments were partcularly favoured by the increased tax revenues collected thanks to the increase in the international prices of commodities and  mineral resources.  And the state,, in its social policy agenda, became much more concerned with  poverty alleviation. In fact  in many countries of Latin America a substantial amount  of resources has been shifted towards the poor through specially focused programs. So, there’s been a fortunate  mix of events, both internal and external, that [have] made [for] a reality of… decreasing inequality [here in Latin America]… Whether this trend is significant, and will last? I don’t know.

Is there a sense of historicity to the fact that, say, during the Cold War-era, the minimization of the government’s role in fostering development was viewed positively, whereas, now that the Cold War’s long past, is there more space for a plurality of development models?

Oh I think so. Yes, sure. I mean, with all the problems that the US has nowadays, along with the shift to the Left in many countries in Latin America,  I think [miltarily] intervening in Latin America is… out of the question. Politically, economically, financially, there’s no way of that happening in the scale it did not so long ago.

At the same time, one thing [about] Latin America, which is evident in the last 20 years, is the advance towards democracy as such. You could criticize what kind of democracy we have, but … in just the sense of having elected governments and changing hands, from left-wing to right-wing or the other way around, say look at Chile, anywhere, even Cuba if you want to … it’s much more difficult when you have [this] much stronger [current] civil society to [have blatant] imposition from outside.

And in addition I also think there’s this myth that the US [unilaterally] imposed the whole neoliberal economic model [onto] Latin America. I think it was not so much military,  financial or political power but also ideological influence. This is a very important influence that the US had and still has, when you talk about the “Chicago [school]” boys, that was one experiment… But, in Mexico, say with the [Miguel de] La Madrid government, many key government officers studied in the United States and learnt theories favorable to, say, free- market economic models … so there’s a way of transplanting ideas which is not exactly [tied] to whether is was ‘Cold War’ or not ‘Cold War’.

So I think there’s much more political space [endogenously being] created in Latin America… that’s one thing… and in addition, there’s a lot of frustration with the macroeconomic reforms that we [in Latin America undertook] in, say, the early to mid 1990s … those who were elected [then] were elected on a platform of bringing free [or at least freer] markets because  they would bring development. And that didn’t happen.

And this would’ve begun in what era [exactly]?

This is the 1990s, say. The 1980s are known as the lost decade. And that, as  I said,  was interpreted as proof that the economic model of state-led industrialization, import sustitution via  controls and protectionism had failed…

This is the input substitution industrialization—‘ISI’—era?

Right, well the ISI era ran from the 1950s, to the late 1970s. And that’s when Latin America grew enormously. Very, very fast. But then we ended up with the international debt crisis in the early 1980. So, then the [next] political elite ended up interpreting all those 30 years as a strategy that had once worked but, because of its own self’created distorsions…  [led] to its own implosion.

Right.

So, then it was seen that that whole ‘experiment’ [generated some] good things–mainly  economic growth, but [that they] couldn’t be sustained. That was the official interpretation of those years.

So then came the shift in the mid 1980s  towards…free -market reforms. In all of Latin America, policy space was changed in such a way [as] to diminish  the influence of the state… in the sense of eliminating its instruments of financial and industrial policy, as related to subsidies, etc. … [This was] in order to [give] a much more powerful role to the private sector, and the banking sector,. … And the idea was that this shift would bring the economy into a period of export-led growth.

Exports did grow. But strong and sustained ‘economic growth’ didn’t really materialize, except for the few relatively minor sectors linked to the export sector. So, then we end up with a much more ‘open’ economy, with a [much] reduced role for the state, which were the main premises they were trying to implement in order to have this new kind of economic model. But then that didn’t happen. In fact, economic growth was not faster in the 1990s then it had been pre-1980.

Hmm.

If you look at economic growth here, it took … and, just forget about the 1980s … if you count the 1980s, it’s even worse… it’s actually methodologically acceptable, or recommended, in Latin American economics…

To ignore the 1980s?

Ignore the 1980s. Just ignore the 1980s for comparitive purposes between the ISI strategy and the “neoliberal” one . Because in a way you can say that the neo-liberal model was ‘adjusting’ in the 1980s and thus the fair comparisons periods are post 1990 and the import-substitution era, meaning, from the 1950s to the late 1970s. [Given] this change of model one [supposedly] ‘cannot really judge’ the new macroreform era because of the decline in the 1980s. But let’s say that in 1990 the model was working at full scale… And in the 1990s, the growth rate was lower than in the 1960s and 1970s. It was also lower than that in other developing regions of the world. And it was not high enough to be able to employ the amount of people annually joining the labour market. It was also lower than its potential output. In any way that you want to compare it, the neo-liberal model was not performing as well as it was supposed or expected to by its advocates.

And at the same time… one could say that in the 1980s the problem was that the United States was not growing, the [International Monetary] Fund was not lending, nobody was lending to Latin America , and we had to pay back huge amounts of debt–both principal and interest. But—in the 1990s—that was not the case. We had… access to capital markets, we were exporting tons of things, we had the tragedy or ability to have vast numbers of our people migrating for work—whether legally or illegally. And at the same time our societies became much more democratic. This linked in people’s minds democracy with economic development, and put additional pressure on governments [who wanted to] stay in power to produce goods and deliver economic development… but [those expectiations were not being met].

So, there’s this frustration that you see in Latin America by the late 1990s, in that,we did implement major macroeconomic reforms, market reforms, but then economic growth simply did not occur. It was not  there. And as [to] a decrease in poverty, it happened a bit, but not as much as was promised.

How does the change in the trajectory with respect to inequality match up with the [end of the import substitution industrialization]—ISI—era… ?

It was very persistent.

It was persistent. There was no remarkable change post-adjustment?

No. Well, you have to look at different places in Latin America, and then in some countries maybe [you’d] see an improvement in equality but that would bring us to why that happened in some cases, while in others it didn’t. And I think the key… [for understanding] the economic model in Latin America, even in the import substitution era and then now, in the market reform era, is that fiscal reform, really, never happened. Except for very few cases like Brazil, the tax burden, or the share of [income generated from] taxes is extremely low.

So, you can talk about wanting to be more equal—even if you want to be more equal—but in order to be able to do that, to be able to move along that path, you have to have resources. And with the type of financial situation [you have in Latin America], with the [currently low] level of public revenues, it is just a figment of the imagination that one would be able to move rapidly and persistently to a more equal society. When the ‘society’ as such—or, [namely], the powerful and the elites—don’t want to, and are able to not,  pay taxes, it is simply impossible.

And then you end up with a chicken and egg problem, because they’ll say [to the government] we wont pay taxes because you’re inefficient. Then the government may  say, well, if we’re ineffective it is to a large degree because you don’t pay taxes. So, it’s not easy. At the end it’s [very much] a political problem. Or, not so much a [purely] political problem, but a political economy problem.

And what are the roots of that political economy conundrum, do you think?

[Breathes heavily] … Well! If you  go back to colonial times, even then taxes were not really used to benefit the population as such. If you look at the Bourbon Reforms, when there was the most impressive tax reform, it produced far more revenue for the Corwn than the colony…

What era would we be talking [about], here, with the Bourbon Reforms?

Late colonial times… Those resources were actually driven to Spain. … So, I really don’t know how to answer your question why Latin America is not prone to pay taxes… We took so long [to attain] a strong state… Democracy also… in the fundamental sense of the word… has been very late in arriving. So, I think that the more democratic a society becomes, the more its state … has the capacity to enforce tax payment. I think that would be the case. Yet there has been a kind of political agreement in which the rich, or the powerful elites, would be willing to invest, to create a climate of [stability], so long as they’re not taxed, in a fundamental sense.

So, in Mexico, in particular, they’ve blocked all the major reforms—the tax reforms, the fiscal reforms—systematically. Whether that will be the case in the future,  whether we can continue this way? I don’t think so.

Is there some obvious way to break the cycle?  Are there some leverage points… ?

Well reality turns out to be very stubborn. And in the case of Mexico what will happen is that we depend so much on oil that in the last say 20 or more years  we’ve been able to derive close to 40% of all fiscal revenues from oil.

40%? Wow, that’s… a huge portion.

Yes it’s a big proportion. So in the Mexican case one could say that the whole system—political system, economic system—was based on this understanding that as long as we have PEMEX being so strong, why would you tax rich people? You have all those oil resources, so just use those resources. That was thought to be sufficient.

So [has it been] a ‘rentier state’ model?

Yes it has been in many ways. In fiscal terms, yes. And… the problem is that in many ways  PEMEX has been seen more as a  ‘cash cow’. Is that the expression?

Absolutely.

…instead of, say, as an investment company. If you look at Brazil and Mexico, the contrast  is dramatic, because Brazil is now—and we’re just talking about the oil industry—Brazil is now a major player in the [international] oil industry with PETROBRAS. PETROBRAS’ technology [and so forth makes it a major global player].

Here [in Mexico] we have PEMEX. We have massive amounts of oil, but we no longer have state-of-the-art technology. Investment in PEMEX, exploration, extraction and refinign capacities have been very weak for decades.  Yet we’ve been using PEMEX to bring in money to complement fiscal reenues, and used that revenue for other purposes—not, in general to further develop the oil industry. So, we ended up with two very contrasting situations, in which say, 30 years ago, we had a very important, a very powerful, oil company, PEMEX, [which is still very powerful]. And we had a not so powerful [Brazilian] company called PETROBRAS that used to come here to learn… and acquire technology, etc. … I think… PETROBRAS was very much looking up to Mexico, to PEMEX. Also, many analysts argue that development banks in Brazil were looking up to Mexican development banks at that time as well. And now it appears to be somewhat the opposite case, as the size and scale of operations of Brazil’s oil company and development banks dwarf their Mexican counterparts.

When was the shift?

In Mexico, it’s been going on since the mid-1980s, in which we moved—as I was telling you before, Jordan—away from the state-led model of industrialization … In the late 1970s we had an oil boom, and Mexico [became] one of [the world’s faster growing] countries, thanks to the discovery and exploitation of huge amounts of reserves. And as I said, the interpretation of the crisis that busted the Mexican economy in 1981-82 was that we were over-indebted because we relied too much on oil. Thus the government then chose to begin to de-petrolize our exports and de-petrolize our economy… for instance, before this, in the late 70s, oil [accounted for fully] 80% of our export revenues.

80%? So, 40% of government revenue and 80% of export revenue.

Yes.  So then the shift was to move away from oil in the export sector. Which we did. Now oil is about 15% percent of exports. I’m not sure of the exact figure, but its very low. 80% to 15%?

But while we de-petrolized our export revenues, we didn’t do they same with our fiscal revenues… as a segment of our fiscal revenues oil is still too high… from any perspective… left, right or center… And anyone would say it’s impossible to keep this economy going forever relying on 40% of fiscal revenues from PEMEX, because the reserves are not so vast  anymore, given particularly that we haven’t been investing so much there. And in the end—oil will run out.

So, I think we have this, kind of curse, in a way… You have oil revenues which, if you use them sensibly, or any type of foreign exchange bonanza… you can really transform your productive  structure to be able to pull the rest of the economy onto a path of long-term growth… But then, we didn’t, we just de-petrolized our export revenues, but the type of export structure that Mexico has been developing is very much ‘maquila’, namely, bond industries. … Thus  Mexico became extremely good in exporting, but at the same time it became extremely good at importing. The figures are impressive.

If you look at the data, the figures, from exports of manufactures from the mid-1980s, … say, when NAFTA was signed … to 2007-2008… if you look at the share of exports of manufactures in the world, and you look at the increase in such shares, China is the one that’s increased the most in percentage points, but [right] behind China, is Mexico.

Directly behind China?

Directly behind China.  … We’ve been extremely good exporters. Exports of manufactures are now 80% of our exports. And as I was saying, we’ve become the second most dynamic player in the exports of manufactures in the world. Now we have a trade surplus with the US… but not with the rest of the world. At the same time that that happened, the capacity to import increased 3 times as much.

Hmm.

The term that is commonly used is the ‘income elasticity of inputs’. Which measures how fast inputs grow per each percentage amount of growth of GDP. It used to be, say, 1… [meaning] 1% growth in GDP would bring say 1% increase in imports. But that number, from 1, jumped to 3. So, an extra percent of growth in GDP would give you 3% more growth in inputs. Which is unsustainable. Given that the economy needs to expand at 6% per year it would imply imports growing at 18% annually! .

So, does this produce, in the short-run, more purchasing power for Mexicans viz-a-viz foreign products?

Well, it depends upon the exchange rate and the terms of trade. But what happened was that, when we transformed our industrial structure with the macroeconomic reforms—as I was telling you…—since we got rid of all the incentives for industrial policy, and the exchange rate tended to appreciate in real terms, imports became relatively cheap. At  the same time we put in place a  special program to promote exports in such a way that, if you’re an exporter, you’re allowed to buy imported inputs paying lower taxes than if you bought domstically produced inputs. [That led] imported inputs to became much more competitive than domestic ones.

So, the whole system of incentives was shifted [very much toward penetrating] export markets, but at the same time [at the price of not] sufficiently developing local capacities.  Recall that industrial policy was seen as a source of inefficiency, distrortion and even crruption. Thusthe idea was to open our economy as fast as possible…

This is the ideology of comparative advantage, essentially?

Well, you can’t really see it as [pure] ideology, because it has a strong basis in economic theory.… But  comparative advantage can be seen from a static point of view, or from a dynamic one.  From a static perspective an economy should specialize in technologies that use intensively the resources that it has in relative abundance. Thus an economy in which cheap labor is abundant should specialize in labor intensive technologies.  However, from a dynamic perspective, an economy must strive to specialize not in the use of its current  abundant resources but in knowledge-intensive technologies that profit from economies of scale, and allow it to move up to the production of goods and services with more complex processes. Those prodcuts are what demonstrate increasing demand in word markets.  In other words,  whatever my most abundant resources are, they should be used as efficiently as possible; but with a clear understanding that the specialization pattern of the economy in the present need not neccesarily be the same in the future.  The resources it wants to foster or promote in the future may be  different from the ones currently abundant.

[Okay…]

For example, one can say that in a developing country, not exactly like Mexico, … with abundant resources… such as an [unqualified] labour force, you can try to reorient your whole industry to  employ the unqualified labour force… making the best use of your comparative advantage at the moment… But you wouldn’t really want to be based, in the future, on an unqualified cheap labour force. Thus you could instead  use current  resources  to improve the quality of the  labour force to create different comparative advantages [for] the future…

So, you can have comparative advantage in a very static way, or [instead] create the conditions for a different comparative advantage [into the future]. I think what Mexico did in the 1990s, with the market reforms, was [based on] the belief that just with market forces freely operating–with the state not intervening–the abundant resource of an unqualified labour force would be fully used to such an extent that the  economy would enter a path of strong economic growth, that would erradicate  poverty and reduce inequality at the same time… But that didn’t happen.

It became a very dual society, a dual economy… it was also dual [in this way] before… but this duality… [increaesd] with these reforms… Then you have a very dynamic, but very small sector linked to exports… in the north in particular… [and] the rest of the economy staggering, lagging behind. That, simply, is a model that Mexico cannot keep on following.

When I was telling you about the 2003-2008 boom in Latin America, Mexico didn’t really participate in that boom… El Pais, a [popular] Spanish newspaper published, like 4 or 5 weeks ago,  a comparative table of economic growth, from the year 2000 to the year 2009. In it, from close to 180 countries. Mexico was ranked about 140th, and [displayed some of the] slowest growth …

So in the last 10 years Mexico’s been [progressing extremely slowly]…?

Very slow. We haven’t profited from the opportunities that China has offered, as many countries in South America did. Indeed, Latin America’s recent boom is largely [tied] to China as a force… because it  started buying [commodities] on a vast scale… [commodities like] mineral resources, raw materials and grains.  … So when you look at Chile, Argentina, etc. they’ve been growing extremely fast thanks to the improvement in their terms of trade and in their export revenues.

Oh, so it’s a question of a different resource base…

A different resource base, yes,to a certain extent, but also policy choices.  In this regards, Mexico is…[at] a crossroads in which it is [no longer] able to compete via cheap labor in low quality products, because there are many other countries that pay extremely low wages…

Labour can be found even more cheaply in other places at this point…

Absolutely… and at the same [time] Mexico is not investing sufficient resources into trying to innovate in technology, etc., so it cannot really compete with the Koreans, the Singaporeans, etc. … so, [there’s a question of]: what are we going to do?

So what is the niche, then, defined for Mexico in the global economy? Is it playing to its geographical advantage, in terms of its location, its proximity to the United States?

I think that was the bet, of the [Carlos] Salinas [de Gotari] government, to profit from our special geographical location [adjacent] to the United States.,. We perfomed, export-wise,  quite remarkably post NAFTA.

In what way?

I mean, we did manage to have a trade surplus with the United States. … But, at the same time, we didn’t manage to [create or maintain] a tight industrial network, in order to [allow] that export dynamism, in effect, to trickle down to the economy [at large].

So, we ended up having this niche, in which, some sectors were exporting remarkably well, closely linked to foreign capital and sales markets, relying on imported inputs. But, their dynamism and success did not sufficiently [spread] such wealth through the rest of the economy …

I think that Mexico has to move to a different strategy, in which industrial policy has to come back [into] the scenario… Public investment in infrastructure is very low. It cannot keep [heading] in that direction… Let me just mention that according to a study by the [International Development Bank]—IDB— amongst the middle-sized economies in Latin America, in the late 1990s, Mexico was one of  those with the worst infrastructure..

How is that gauged, how is that measured?

Quality of roads, quality of airports, that sort of thing. … And if you look at the amount of public investment  that goes into infrastructure as a percent of GDP, Mexico is among the lowest in Latin America [and] compared to dynamic developing countries in the rest world its performance is not good here.  You cannot  be able to have a competitive economy in [today’s] world with poor, outdated infrastructure.

Does that play into the role of tourism in the economy as well?

Well tourism and trade and such. Airports, highways, trains, you name it… All types of communications… in many [of these areas]… Mexico needs to not  lag behind world standards. But, then you go back to the key problem of fiscal resources… [How are you going to] have the money to have quality infrastructure if you don’t have sufficient revenues, if you do not implement fiscal reform?

I think that if you want to try to identify recipes for economic development in Mexico, it would be fiscal reform, first of all…

And by fiscal reform you mean restructuring the sources of revenue…?

Increasing the sources of revenue and restructuring their composition, as well as making expenditure more effective, efficient and transparent. [Each of these] things at the same time.

And [the government’s ability to do] this goes back to the question of political economy that we were discussing earlier?

Yes, certainly. But as long as you have huge amounts of oil, while the rest of the world’s reserves are declining, I mean 40% of your revenue’s there, the political system goes in such a way that, well, no party wants to pay the political cost of  pushing a fiscal reform.  Thus it’s very difficult to move in that direction without a broad political consensus, from all the different parties, that we as a society have to have a deep fiscal reform in order to reduce our vulnerabilities to oil, increase public revenues and improve their redistribution capacities.

Do you think it’ll take some sort of realization, or just some [more] evidence, that the quantity of oil available is dwindling… ?

The evidence is there! I mean, Google it. Look at the reports of the Mexican Congress, look at the reports of the OECD, of the Finance Ministry… all the evidence indicates that we simply cannot [continue to]  base our fiscal revenues to such a large extent on oil. We cannot  keep on with the status quo as such. But then nothing drastically signifcant is done on the fiscal reform side. We keep posponing to tomorrow the adoption of  important policy decisions that are urgently needed today. .’

In a way, isn’t that [short-sighted dynamic] a function of the democratic system itself? I mean, it would be the same in almost any parliamentary system, no?

Yes. But I think the State should  have a long-term view of development, as such… [Yet] we  have governments in many countries that work by mainly focusing on the polls… It’s very difficult to have a long-term development stategy if you’re [only] looking at short-term priorities …

So that’s one issue, the fiscal one. The other is the use of the exchange rate. In  Latin America… [well] there’s been a sad experience of episodes of hyperinflation, or very high inflation…

And those have been in the 1970s and 1980s?

…1970s and 1980s, yes, and some of them later, This led to the use of the exchange rate as an anchor to abate  inflationary expectation. Not moving the exchange rate, keeping it stable, is very good to control inflation. If  you appreciate the exchange rate, the prices of imported goods meawured in domestic currency are lowered. Thus, domestic prices tend to be more isolated from inflationary pressures coming from international markets.

But the point is that, at the same time,when the exchange rate appreciates, local inputs and goods and services  tend to be more expensive relative to foreign produced ones. This  function of the exchange rates, [namely,] to realign relative prices to promote international competitiveness and induce investment in tradable goods, is equaly important. And it tends to be ignored when exchange rate management focuses exclusively on stabilizating  inflation.

So then, what I think happened in Latin America, and in many other countries, is that the exchange rate has been used not as an instrument of  trade and development policy, but justas a tool to control inflation. Inflation control has been very much on the agenda of policy  reform in many countries–much more that the promotion of economic growth.

Is that a sort of IMF, World Bank-inspired, ‘austerity’ view, towards Mexico?

Some [would] say so…

And you’re saying that to some degree this holds back the … ?

Well, currently, neither the World Bank nor the IMF say so. … [And] there’s a view, which is complimentary to the one that I was telling you about before, that, as long as the state doesn’t intervene very much in the economy, and lets free markets move along, then things will move in the right direction for development. It–erroneously–believes that the state’s interventions tend to  produce inflation. And that low and stable  inflation is a sufficient condition to ensure that the economy is close to its potential capacity, given the correct market signals along with undistorted private investment.

So is it an ‘inflation as root of all evils’ sort of approach?

Yes. If you look at the terms of reference of most of our central banks in the region, we don’t have the terms of reference that the Federal Reserve has in the United States. Here, the central banks in general seem to be much more concerned  about inflation than about emplotment and growth.

It’s in their mandate?

It’s in their mandate, yes. Their mandate is not to be worried about employment, not to be worried about growth. If you look at the Federal Reserve, it must look at both inflation, and long-term growth, according to its potential path…

So, is this central focus on stemming inflation a reaction to the inflationary periods of, let’s say, the 1980s?

Yes, well, one it was a reaction as such, and also it’s an ideological position that argues that the state  should only scantly  intervene in the economy…

So, if we could discuss just briefly what the roots of that ideology, or that theory, are. I mean does it go back to … ?

Go back to Freidman [laughs], go back to the roots of liberal thinking as such, if you want, yeah, I think its roots may be there! I mean, not only in Mexico… [These ideas] are very powerful in the sense that … if you have states that were not very democratic at a certain moment in the ‘lives’, and they have a lot of power, well then there’d be a rationale to say, well, do I really want the state intervening much in the economy when one can’t remove them from power in the next election?. Then maybe there’s a rationale against state intervention in that sense.

But to have the idea, currently, that states shouldn’t intervene is ludicrous… I mean, even in the United States, look at Obama, and I’m very grateful for the things that Obama is doing, please don’t get me wrong, all states intervene in the economy. So there’s this myth that industrial policy doesn’t exist in other places. And I think that, as I was telling you before, Jordan, reality is very stubborn, and states do intervene, What we must  have is a social pact or a new political pact, which recognizes that in order to have strong and persistent economic  growth [there is the need] of a very different role [for] the state…But for the state to  intervene effectively and efficiently in the economy it must be based in a new fiscal or social pact that recognizes the need to put forward a fiscal reform that guarantees more fiscal revenues and also the  use of pubic expenditure in a transparent, accountable  way…

And are there models for this? Whether it be in Latin America itself [or elsewhere[, are there particular cases… ?

Yes, there are for example experiences of industrial policy in Brazil that one could draw upon.

Are we talking Brazil, during the [Ignacio] Lula [da Silva] era?

Even before the Lula era, but also with the Lula era, yes.  Remember that there’s been a misinterpretation of industrial policy as ‘picking winners’, and that the state is not [actually] able to pick winners, I guess because it just doesn’t have the capacity as such.  But, that’s looking at industrial policy in a very cartoonesque way…

I think industrial policy should be seen as the result of an economic pact between the state, the elite, or entrepreneurs, and the workers. What are the sectors that should be  developed? And you have to have a certain policy framework which gives incentives in a transparent and temporal way, linked to clearly specified performance criteria. We’re talking efficiency criteria, etc. …

And I think that has been happening all over the world. … Many successful companies in general have some support of the state. I mean look at the airbus industry, the [birth of the] internet, etc. Most important advances in technology [are the result of having] a certain support from the state at their roots. But we have to realize [at the same time] that there is [also a] big ideological root against the state.

Is this a carry over from the end of the communist world, as such, the collapse of the Soviet Union, and the ‘end of history’ as Francis Fukuyama put it, so notoriously? The sense [that] everyone is basically agreed that the neoliberal, North American, OECD model is the functional one, and that any statist oriented [model is backwards]?

I think in Latin America [now] it’s just the opposite. In the United States, with Obama, they’ve [just] rediscovered the state and its powerful potential action on the economy . In Latin America it was in the late 1990s that people got tired of the Washington Consensus… or the neoliberal agenda as you’re describing it… And if you look at the political platforms of the governments that have been elected in Latin America recently, in the last 10 years more or less… well, many of them were openly against the Washington Consensus.

So, I think Latin America has shifted. … It’s very much in the [current] political ‘air’, here in Latin America, that the neoliberal agenda won’t work, and never worked.. And they have moved, different governments, in different directions. Some in very, very radical directions, say in Venezuela, others in not so radical directions like in perhaps, let’s say, Colombia.

But the state has been ‘rediscovered’, in the good sense of the word… and maybe in the good sense of ‘democracy’ if democracy means pushing for a different state [if the people think its] not doing a good job, [etc.] …

So I think this shift in the ideological spectrum that favours a much more active state is very much alive in Latin America. … As alive as in the rest of the world? I leave that as an open question. But, I think that in Mexico there’s now much more acceptance of industrial policy as such… and that the state has to have a much more active role in the economy, say, in fostering development banks, in participating, obviously, in the struggle against poverty, with ‘opportunidades’ [policies] and similar programs …  I think we may be  moving in the right direction—in my  perspective—towards having a much more active state, subject to democratic questioning.

Is there a degree to which the instability in the United States—[meaning] the financial instability in the United States—in recent years, has created space for political and economic elites in Mexico to rethink how they [may want to structure] the economy? Is there less of a ‘looking up to’ [the United States in this way]?

Certainly. Yes, I think the question is very good, Jordan. I think that with the collapse of the American economy, or [at least] what we saw in the last two years, it has become evident that whatever one thought about NAFTA, the North American Free Trade Agreement, whether it had benefits or it had costs, its impact is … over.

Over in the sense that we need to think of new ways of moving ahead, either say with the US, with a new [strategic economic] pact with Brazil, or with China, or with pursuing different opportunities in world markets, I think that the need for change  has become evident for elites, and it has also become evident for the Mexican government and society. … So, yes, I think this is one very important thing that we can derive as a lesson.

Is it a silver lining to the crisis, in a sense? Did it created intellectual space to consider other options?

Yes, I certainly think so. And in addition it also makes much more evident the need to have a strong fiscal state. I mean, if you see all these fiscal crises in Greece, Spain, etc., you name it… that has a mixed type of reading, because some people would say, listen, its great to have a very austere government that never overexpends, which is true, but at the same time, one can also agree tha we need much more fiscal revenue to be able to develop and reduce the impact of external shocks and move ahead. So I think that we’re… that there’s hope. The last thing that may die is hope.

[In sum,] Mexico has to move very fast in the fiscal arena, this is evident. And I think we have to boost the capacity of the state to have a stronger national development bank, [meaning] development banks, and to [envision] a different use of the exchange rate—much more open [to the possibility] of using it as an instrument of development by avoiding any trends towards its  significant and persistent appreciation in real terms.

I think we’re not condemned to be an unequal society. We’re not condemned [to] a path of slow growth. I think that we have the capacity and possibility as a nation, as a region, to have a much more dynamic economy, that is able to fulfill the promises of, you may think, of microreforms, state-led industrialization, or democracy as such. Whether that will happen … ‘eventually’ or in a couple of years? … When it’s going to happen? I don’t know.

One last question that comes to mind is that, in Canada and the United States at least, [lately] Mexico [most often] appears in the media because of its drugs problem, the ‘narcotraffic’ problem. Is there a link between the decline in NAFTA-led growth, or NAFTA-led improvements, and instead the focus on this illicit market?

I don’t think so. What always strikes me as a very puzzling thing is that in many industrial branches, or in general, the final  part of the production and sale process is where big profits are. Say, peasants don’t earn a lot but the last [retail] sellers have massive earnings.

Meaning the markup is highest at the end?

The markup is highest at the end. When you see where the druglords are caught, they’re always caught in Mexico. One  wonders. The biggest market is not exactly in Mexico. So one wonders.

I think it’s a globalized industry. So I think it’s very difficult to have a huge win, or a huge advance  in the war against drugs, while at the same time you have, in the United States, a law that permits the sale of firearms, even by mail, in border states. So, I think it’s an international problem that affects both Mexico and the United States, and the rest of Latin America, indeed. .

So, we would have to deal with that problem in a bi-national way, as Mrs. Clinton said, or President Obama, or [Mexican] President Calderon.  It would be better to deal with it in a broad way, dealing with the arms industry, examning closely the pros and cons of the legalization of some drugs.

It’s not only because the Mexican economy hasn’t been able to grow [apace] that we have all these druglords blossoming or blooming.  I think that has been happening [since] a long time ago. And, if the government declared a war against them, then they’re going to  react, and it’s going to be a very expensive war, very costly, That said, it would be more colstly not to do anything [at all] against narcotraficcking and organized crime… One should act … but whether one country’s able to do it alone? I think that would be very difficult.

Just like socialism in one country and capitalism in one country will never succeed, I think a huge war against warlords, just in one country… it’s very difficult to succeed. I’m sure there’s lots [of collaboration] between the Mexican government and the US government, and lots of intelligence being shared. But the problem is huge.

So it seems that what you’re saying is that, even though it may not appear to be a transnational problem, it’s very much an issue that crosses borders.

It’s transnational, most certainly.

And does this relate in any way to Mexico’s economic sovereignty, in terms of its bargaining position with a large partner such as the United States?

The special, and sometimes extremely conflictive, relationship between Mexico and the United States goes way back. The [links] are much broader than just drugs. You’re looking at migration, we have trade, we have investment, we have tourism, so on.. So, the bargaining position… what may Mexico be bargaining for?

Do we want aid? No. Mexico doesn’t need aid. Are we bargaining for development? No, we’re not bargaining development. What [more] can the United States really do for us as such?

If one would think of a union a-la-Europe, an American Union … well, maybe. I don’t think the United States is at this moment able or willing to lead [all] the Americas down the path of the creation of a new regional union with resources and commitment to foster high and sustained economic growth… I mean [it could be] great. That would be great. But, if you talk about bargaining power? Maybe [viz-a-viz] legalized migration… but really I don’t know what key issue the country would be bargaining for. Mexico has the support of the IMF and the Fed, yes, and  there are also lots of American investments in Mexico. So, we’re in the same boat. Hopefully … not the Titanic!

[That’s a great place to end. Thanks for this, Dr. Moreno-Brid.]

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