In a civilized country, campaign slogans translate into objectives, public policies, and government programs composed of specific projects duly budgeted and scheduled with clearly defined targets. Their results are measurable to evaluate if the particular objectives were accomplished.
It does not happen in Mexico. One of AMLO’s main slogans was “The poor are first.” As it happens, when in 2018 he was sworn in, 42% of the population were living in poverty (52.4 million). By March 2021, that percentage had increased to 54% of the population (67 million), in part as a result of 3.8 million who were considered middle class and became poor.[2]
Even worse, in 2018, 7% of the population lived in extreme poverty (9.3 million); by March 2021, the percentage increased to 15% of the population (21 million).[3] Mexico, along with Honduras and Ecuador, are the countries where extreme poverty increased more as a result of the pandemic, according to ECLAC.
A large percentage of the employed labor force (56%) works in the informal sector, resulting in a lack of access to health services (social security) and millions of non-taxpayers. Also, only 36.5% of those between 25 and 64 years old have upper secondary education or above. Yet, education is not one of the top priorities of this administration. There is no plan, no strategy, only tactics aimed at increasing the leader’s popularity.
“A demagogue is a political leader in a democracy who appeals to people’s emotions, fears, prejudices, and ignorance to gain power and promote a political or personal agenda.” Wikiquote
As a result, Mexico has suffered the effects of a prolonged economic contraction that began in the second quarter of 2019, a year before the pandemic. The gross fixed investment, the engine of growth, began to fall even before the start of this administration, after the announcement of the cancellation of the multi-billion new airport for Mexico City. This downtrend has continued as erratic policy decisions dent short- and mid-term investment prospects, both domestic and foreign. Hence in 2020, gross fixed investment accounted for 17% of GDP, its lowest in almost 25 years, which averaged 22%, becoming a strong headwind for GDP growth.
Mexico’s economy contracted sharply in 2020, falling 8.3% on a yearly basis. It caused 1.1 million firms -out of 4.9 million- to close permanently. The 2021 federal budget amounted to 3.3% of the GDP. Public spending represented 24% of total expenditures of which, 11% were allocated to the President’s pet projects, which include pensions for the elderly, support for field workers, and support for students who are neither studying nor working. Government handouts buy votes and help alleviate the suffering of those who live in poverty, but they cannot generate wealth.
“Good governments are not the ones that use taxes from the workers to give them to the lazy… The best governments are the ones that create the conditions for everyone to have a job.” José Mújica
Income inequality is enormous. The wealthiest 20% of the population holds over 52% of the national income, while the poorest 20% only has 5% of Mexico’s total income, according to CONEVAL. To make things worse, in the first two years of this administration, income per capita fell from $9687 in 2018 to $8421 at the end of 2020. But there can be no income distribution, equitable or not, when there is no income; for this, there must be economic growth.
“You cannot help the poor by destroying the rich. You cannot strengthen the weak by weakening the strong. You cannot bring about prosperity by discouraging thrift. You cannot lift the wage earner by pulling the wage payer down. You cannot further the brotherhood of man by inciting class hatred. You cannot build character and courage by taking away people’s initiative and independence. You cannot help people permanently by doing for them what they could and should do for themselves.” William J. H. Boetcher (Wrongly attributed to Abraham Lincoln.)
Remittances from workers abroad account for 4% of GDP and are the second-largest source of foreign exchange, more than tourism and oil exports. They boost consumption for low-income families and act as a buffer to poverty. However, the government has no merit to brag about, as it should be the opposite given the inability to create conditions for domestic progress.
“The People do not need their government to complain and blame their predecessor. It is voted to improve the situation, that is why it was elected … to provide solutions. To nitpick, we have the people. ” Attributed to Eva Perón
Public charity is the axis of economic policy, as evidenced in the 2022 Economic Package submitted to Congress, along with the Income and Expense budgets. Aside from the president’s pet projects (an oil refinery to produce gasoline, a tourist train in the Maya region, the refurbishment of a military airport for civilian use that replaces the new airport for Mexico City canceled when it had 30% advance, and an interoceanic corridor in the Isthmus), the bulk of the not-compromised public expenditure goes to his so-called “social programs.”
“That candidate who gives things away for them to follow is not a leader. He is a merchant of politics” José Mújica.
After a year of recovery, GDP growth for 2021 is estimated at 6%, provided the supply chains get back to normal, as it affects the most dynamic sector of the economy and the most important source of foreign exchange (auto exports). The government’s target rate of growth of GDP for 2022 is 4.1 %, against the experts’ prediction of 2.1-2.9 %. They are counting on the multiplier effect of public investment, which increases 17.7% in real terms, on the impact of the recovery in employment that has been observed this year, and on the increase in real wages that will have an effect on the domestic market, which will support higher consumption.
Public expenditure will continue the trend to rely less on oil-related revenues, leaving the highly indebted Pemex with some room to breathe. It remains to be seen if the way in which the resources will be applied is correct and if it really does generate productive capacity. Also, it remains to be seen if the oversight of large taxpayers, which is the focus of the revenue strategy, continues to be sustainable, big ifs that will determine the possible outcomes.
As for the peso exchange rate, given that it is the second most liquid currency of the emerging markets and the 11th most liquid globally, trading $100 billion daily, its value is determined more by the appetite for return over risk in a world flooded by the excessive creation of money by the developed economies’ central banks, than by the sound macro-economic fundamentals of Mexico.
An adjustment of the developed nations’ money supply would help control inflation and induce a rise in interest rates, with the double effect of increasing the cost of servicing debt and the migration of funds from emerging markets, which combined could induce a depreciation of the peso.
Sadly, the reputation, qualifications, and credibility of the new Secretary of Finance are not enough to revert the damage done every morning to the mood of investors, foreign and domestic. Had he arrived under different circumstances, it would have been a sure bet that the economy would take off on the right path and pace towards catching up with the most vibrant Asian economies, modernizing the supply chains, investing more in education and technology, and reinforcing institutional strength.
The most frequent line used by this administration, besides blaming the corruption of the previous administrations, is the defense of sovereignty. However, if it is to be defined as the freedom and ability of a State to carry out its national project, in practice, there is no national project, and the actions adopted have increased the country’s vulnerabilities, aside from the institutional destruction and the increasing lack of the rule of law given the regime’s view of what they consider justice which, they insist, is above the law.
There will be no economic growth if there is not a friendly environment for private investment and certainty in public policy– the government’s pushback against private participation in specific industries and the weakening of regulators is building into strong headwinds for private investment-. The economy’s potential growth rate depends on productivity growth. That requires investment. Hence a continued decrease in investment leads to lower capacity in the economy and a down-trend in the economy’s long-term sustainable growth rate.
. If there is no economic growth, tax collection cannot increase, and that is a severe problem for the public finances because, until now, it was possible to cover the expense with cuts in investment and spending and with the savings left by previous administrations in contingency funds and trusts to guarantee the fulfillment of support commitments to strategic sectors, but they are already depleted; If revenue collection does not increase and the “social programs” are maintained, they will have to be financed with debt.
If that happens and is combined with the very probable increase in interest rates, the decrease in the amount of remittances, and with the latent danger of the downgrading of the sovereign’s, Pemex’s, and CFE’s debt, the scenario is very uninspiring. Suppose we add the component of a quarrel with the neighbor on whom the country’s economic stability depends and with the high degree of vulnerability existing on so many flanks. In that case, it is possible to affirm that the perfect storm is in sight and the country is moving in that direction.
SEPGRA Economic Analysis Group
[1] For an extensive version of this report, go to https://sepgra.com/mexicos-economy-second-semester-2021/
[2] In case someone living in an alternate reality challenges the validity of the numbers presented here with “other data,” it is disclosed that all the statistics and projections are based on official information published by Secretaría de Hacienda y Crédito Público, Banco de México, INEGI, CONEVAL, IMF, World Bank, and forecasts from J.P. Morgan, Citibank, Morgan Stanley, and Credit Suisse.
[3] These calculations are from the Research Institute for Development with Equity (Equide), a study center of the Universidad Iberoamericana, based on the figures available from CONEVAL and of the INEGI National Household Income and Expenditure Survey.
SEPGRA Economic Analysis Group