Second Chance

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What happens when an irresistible force meets an immovable object? When the economic reforms began and the North American Free Trade Agreement (NAFTA) was negotiated at the end of the eighties, the irresistible force was the urgency to achieve a high rate of economic growth. The immoveable object was the imperious need not to alter the status quo.
Quite infrequently appreciated is NAFTA’s political dimension or the context within which the first series of economic reforms were undertaken nearly three decades ago. That context was key for defining the nature and content of the reforms but also their limitations. The reforms were launched when the economy experienced unprecedented turbulence. The old economic model (“Stabilizing Development”) had collapsed; the government had extended its tentacles throughout the economy, paralyzing many sectors and thwarting entrepreneurship and investment; the huge debt made it impossible any movement; and much of the private sector faced bankruptcy. The reforms and privatizations were meant to revive the economy but without threatening the PRI’s monopoly of power. This condition led to contradictory decisions; an insufficient, but above all incoherent economic liberalization; notorious favoritism; and, on the whole, an unwillingness to create conditions for the reforms themselves to be successful.
Now, in a radically distinct political context, the country is facing novel challenges, some old and pending, and fundamental decisions, each of which entails definitions. Negotiation of the Trans-Pacific Partnership (TPP) agreement and the possibility of the U.S. negotiating a trade agreement with the European Union oblige us to define whether Mexico is amenable to advancing its development and confronting the challenges implicit in both projects.
The contradictions inherent in the reforms of the eighties and nineties explain in good measure their limited results: liberalizing without liberalizing, institutionalizing but without institutions, growing but at no cost. In contrast with Canada, which saw NAFTA as the beginning –as an instrument- of its internal transformation, in Mexico it was seen as the end of a process of reform. While Canadians dedicated themselves to constructing infrastructure, supporting the adjustment of their economy and affording facilities to their citizens for achieving a successful transition, the Mexican Government slept on its laurels. Not losing power was enough.
The cost of this truncated vision is patent in many ways: there was no recognition of the urgency of adapting the economy and the perceptions of the population, starting with the business community; the manner of organizing economic activity did not change nor did the relationship between the government and productive activity. Success ended up depending on each individual company. Despite the fact that the economy changed radically, a strategy never came about that was designed to take advantage of the North American market or for companies to adjust to the new source competition. In any case, the contrary was true: as quickly as possible, diverse subsidy and protection mechanisms were reestablished that have not exerted a greater effect than impoverishing the country and avoiding the adjustment that is bound to take shape sooner or later.
A quarter century later the country again is facing the urgency of defining itself. There are three reasons for this. The first is that the economy’s growth rate continues to be pathetic. It might be much better than other countries at this moment, but that’s no consolation. The second resides in the transformation of the North American region’s energy horizon. Finally, the US is and will continue to be Mexico’s economic factotum, and it has to find a way to increase (as well as avoid the risk of losing or seeing diluted) the NAFTA advantages. These are, at the end of the day, the factor that explains practically the totality of the growth of the economy over the past decades, to a great extent because it comprises the sole credible institution for entrepreneurs and investors.
Growth is much lower than it could be because, outside NAFTA, there is no certainty for investment; because there are key sectors of the Mexican economy –above all energy- that are not part of the investment market; and because Mexico is still bound -and limited- by the six-year political cycle, which means that everything depends on the decision and mood of the current head-of-state. The irony of the latter is that the success achieved by President Peña in just a few months reinforces the notion that everything depends on the decisions of one person, thus there are no lasting certainties, those that can only be guaranteed by the existence of permanent and solid institutions, not subject to political comings and goings.
The energy revolution that our northern neighbors are currently experiencing is changing the history of the world. The U.S. is on the brink of becoming the greatest oil producer worldwide and could reach energy independence in the upcoming years. Canada, another world giant, is undergoing a radical transformation. The fall in natural-gas prices is revitalizing the U.S. manufacturing industry and in a short time could remove all advantages afforded to us by the vicinity. If we don’t transform the Mexican energy industry, we could be saddled with a great deal of petroleum that nobody wants and without the industry on which the general population’s well-being –and its income and employment- depends. This is not chicken feed. Continuing to bestow privilege on interests that prey upon the two energy monsters could lead us straight to the gallows.
When Mexico proposed the NAFTA negotiations to the U.S., Canada found itself between a rock and a hard place. It was just emerging from a very difficult adjustment process to its own FTA with the U.S. and the instrument was decidedly unpopular. On the other hand, staying outside of such an important negotiation in its own region was a luxury that could not be indulged in. With its incorporation into the negotiations, Canada ensured the advance of its own interests. Mexico today is found in the same tessitura: we must be part of these negotiations.
The problem, the true challenge, is not that they accept Mexico in the process (although this is not obvious either), but that in order for us to participate we would find ourselves obliged to do everything that was not done twenty five years ago. Mexico possesses institutions that are not institutions: they are not permanent, they are not independent of the political ebb and flow and, in the case of regulatory institutions, these are not focused on productivity growth. If we want to be in the big leagues, we have to devote ourselves constructing the scaffolding that is the sine qua non for doing it. In this no shortcut is worth its salt.

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Luis Rubio

Luis Rubio

He is a contributing editor of Reforma and his analyses and opinions often appear in major newspapers and journals in Mexico, the US and Europe (New York Times, Wall Street Journal, Financial Times, International Herald Tribune, Los Angeles Times, Washington Post, National Public Radio).