A Future

About 25 years back, Mariano Grondona, perspicacious Argentinean observer, explained his skepticism about the liberalizing reforms of that era. His argument was two-fold: on the one hand, he said, “We are surfacing from some decades during which it came to be thought that the State is the panacea… now we run the risk of believing that the market is that panacea”. On the other hand, he inquired, “Is capitalism a movement that emerges naturally when we remove all of the controls…? Latin America has cultural roots that are not capitalist. Our structure is based on the family, not on the society. Our idea is that the family is the model and that the State is not unlike the paternal custodian of a large family. That is where we come from. And I do not think that can change simply by throwing out the rules and letting the market operate magically”. “What has died is the belief that the State will fix everything”.
Twenty five years and many crises later, Grondona’s words continue to have an impact on me. Not only did he clairvoyantly anticipate the problems of his own country, but also his skepticism has been well justified. Although it cannot be denied that, at least in some countries, beginning with Mexico, there has been great material progress during these decades, it is also evident that we are far from having consolidated a sturdy route to growth and development.
Mexico has achieved the consolidation of a powerful growth engine in exports but has fallen behind drastically in its internal market. Two things illustrate the latter: one is, plain and simple, the differences in the growth of productivity: while corporations that export and those that have transformed themselves exhibit spectacular productivity growth rates, the traditional manufacturing sector experiences negative productivity year after year. Thus, although the average growth of productivity gives every appearance of being dismal, that number conceals more than it reveals, and what it reveals is a political and social problem that successive governments have been unwilling to attack: they have preferred the status quo, regardless of whether this implies systematic impoverishment of those in the low-productivity economy, rather than the risk of the process of change and adjustment that would be necessary to carry out in order to give growth a chance in that lagging economy. Concern about the risk is reasonable, in view of that something like 80% of the population employed in manufacturing is concentrated in the “old” economy, but the consequences of going down that road are not at all promising: it’s enough to observe other cases in the south of the continent.
The other example took place in 2009. When the U.S. crisis began, many economists expected that, because Mexico exports the equivalent of one third of the GDP, the economy’s contraction would be approximately one third that of the U.S.. But the opposite happened: the contraction was three times greater. Instead of the internal economy getting the country back on its feet, its contraction placed in evidence its dependence on the demand generated by the economic demand produced by the exports.
The current government is attempting to construct a new domestic engine of growth in the form of public deficit spending and investment in infrastructure. This is not an innovative mode of promoting growth but, given the evident deficit in infrastructure that the country is undergoing, everything helps. The problem lies elsewhere: as we saw in the period between the seventies and the nineties, that is not an engine that can be sustainable because it entails the risk of exacerbating the growth of imports and, with that, a currency crisis. With this I do not mean to be catastrophic: a moderate deficit might work; but the historical antecedents are not kind in tests of moderation and restraint.
The long-term viability of the economy resides in something that Grondona understood very well: the only way to secure development is through the constitution of a strong market and a strong State, one balancing the other, and each holding in check the excesses of both. A strong market impedes the government from running riot and undertaking extravagant and counterproductive policies. A strong government establishes rules of the game for the market to function efficiently. All successful countries boast a good combination of these two factors.
Simplifying, without the desire to generalize excessively, it seems to me that there are two types of countries: those that have achieved an equilibrium between State and market (an equilibrium that is very distinct in Hong Kong from that of France, but both with strong markets and governments) and those without. Very few countries have been able to transit from precarious economic and governmental structures to a consolidated market. The European crisis of recent years has exposed the absence of equilibrium in some nations (e.g., Greece) as well as how unsustainable the equilibrium was in others (e.g., Spain).
But only a handful of nations have achieved a successful transition: evident examples are Korea and Chile. The strength of these two nations lies in their having devoted themselves to constructing the foundations and scaffolding of a modern State and economy. Each followed its own particular path and neither was free of violence and abuse, but both have something important to teach us. The question is why our inclination is toward imitating lost cases (or, at least, not winners) such as Brazil, rather than heeding those that have taken the great leap ahead. That is our challenge and if the government doesn’t rise to it, it will end up like all its predecessors.