On the past Monday, and with 743 projects as well as an investment of 7.7 billion pesos, President Enrique Peña Nieto announced the 2014-2018 National Infrastructure Program. Beyond the discussion of the effiency and usefulness of the specific projects that are part of the Program or the existence of six strategic sectors, the development program proposed by the President and the Secretary of Finance certainly stands out. Ever since December 2012, there have been several questions regarding the high amount of uncertainty of the economic model chosen by the current federal administration. After the historic infrastructure budget made headlines, the model appeared to be clearer: budgetary expenditure – similar to the post-WW II Keynesianism – will lead the short-term economic growth, acting more as a palliative or illusion of growth and employment, and the energy sector will be the icing on the cake of the long-term added value (if a strong and constant technological transfer is to be ensured). The aforementioned will be sustained by taxing the formal sector of the economy (which is now less competitive due to an average 300% increase in tax burden for each company).
Luis Videgaray Caso stated that the Program and the structural reforms will provide an additional 1.8 or 2 percentage points for the usual economic growth (currently around 2.1%), as well as an additional 350 thousand formal jobs per year. However, this Program, its “potential consequences” and the timing in which it was presented raise at least five specific questions.
Firstly, it seems that the Program has been presented in a late manner. Looking back at the 2013 public expenditure impasse as well as 2014’s first quarter, the billionaire infrastructure plan sets out a boomerang effect. Although many may think that 7.7 billion pesos justify a scarce and limited expenditure throughout all 2013 and thus far this year, the truth is that these were lost years and the economic growth was lower than it was forecasted. Secondly, the amount of money in the Program is a call for not spending at all as well as a sector that is fraught with a high corruption index as well as a low or non-existent transparency. Thirdly, public expenditure has not been efficient by any means. Not only is there a high rate of temporary delays on infrastructure projects (an average of 18 months) but also with a 30% rate of extra costs. Fourthly, due to its characteristics, the construction sector has one of the highest rates of informality and illegal recruitment – just like it happens with the retail trading sector. “Clean” money that is distributed in informal dealings directly impacts the productivity of this economic activity as well as the effect of national development. Finally, even though the National Program is quite specific, the planning of infrastructure is highly variable and temporary, there always seems that there is a “more urgent” matter regarding public expenditure.
The latter raises several doubts about an economic model based on an emphasis on public expenditure and that it is different from other models based on innovation and technological advances, educational development as well as a boost of productivity using other methods. This does not necessarily mean that the Program didn’t present any novelties. The development of energy infrastructure is vital as is the support for the development of metropolitan areas – particularly within Mexico City, the region that benefits the most from these projects – as well as the proposal for infrastructure expansion in the tourism sector. That way, although we can clearly envision the development model undertaken by the federal government, we still ask whether this vision will be enough and if it will be focused on enhancing the Mexican economy or we are simply allocating a historic amount of resources to projects with a high probability of ending up as unproductive, inefficient and unnecessary.
The potential cost of the infrastructure expenditure project cannot be ruled out. Although the Mexican infrastructure clearly requires a substantial amount of investment, there is a risk that the ensuing deficit will grow and thereby, bring the sort of vicious cycles that led the country to financial crises throughout the 1970s as well as the 1990s. Time will tell if the government project turns out to be efficient and will lead the economy to grow or if it is just a reenactment of the 1970s administrations, along with their devastating consequences.
CIDAC
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