The Treasury vs. the Economy

The great learning gleaned from the crises of the seventies through the nineties was that economic stability depends on prudent management of public finances. Whenever fiscal accounts became unbalanced, generally due to excessive expenditure that led to growing public debt, there was a devaluation of the peso and the entire society suffered. The greater part of the politicians of that era finally ended up recognizing that the public finances could not be played around with. What has never been acknowledged is that from that premise Mexico's financial managers took a step into the abyss, creating a contradiction between the fiscal interest and economic growth.

The stability of the economy is a condition sine qua non for achieving high and sustained growth that permits the generation of wealth, jobs and incomes. This formula is not novel nor is it exceptional, but not for its being evident is it less true and, at the same time, more rare. Independently of the depth of implementation of the the reforms that the country has undergone since the eighties, all governmental activity has been oriented toward engendering conditions for high growth: liberalization of imports, an energy opening,  rationalization of the regulatory framework, etc.

Notwithstanding this, the average growth rate continues to be a pathetic 2%. Although this average veils more than it reveals (some states -like Guanajuato, Querétaro and Aguascalientes- grow at nearly Asian rates, while others do not backtrack, in the best of cases). That is, all of those efforts have not translated into a better performance, above all in regions and entities where there is a predisposition against development, as has been proven in several southern areas. The big question is what is it that has generated this state of affairs.

My hypothesis is that there are two factors that have had an impact on bringing about this circumstance. On the one hand, despite so many reforms, the government, in its function as regulator and issuer of permits, has become an enormous dead weight. There are more and more regulations every day; the bureaucracy grows; adminstrative requirements multiply; inspectors are up to their old tricks;  payment of taxes –and procedures for doing so- have become ever more complicated; and, in general, the counterpart of the  the entire process of obtaining permits, paying taxes and complying with regulations and other obligations, comprises an immense source of extorsion and corruption. There’s (almost) no politician who did not fatten up his piggy bank for the next electoral campaign (or his pocketbook), making his current job a source of extorsion for everyone who dares to try to set up a business, grow an investment or, God forbid, produce a little wealth and employment.

The other factor impacting the poor economic performance is macroeconomic and may be summed up in one line: the interest of the Treasury  (financial stabilty) has not been compatible with the growth of the economy.  Specifically, the manner in which an equilibrium of the fiscal accounts has been procured has not been favorable for the growth of savings and investment: rather than cancelling useless, excessive or frequently counterproductive  programs or projects, what has been done is to extract more of the society’s resources to defray their costs. In this way, instead of attaining equilibrium by lowering the expenditure, this has been achieved by raising revenues. Taxes have wound up not being a form of redistributing revenues to generate better equity within a context of accelerating economic growth but a route to preserving the status quo, impeding the economy from growing significantly. If to the latter one adds the extremely poor quality of public investments and their low returns, the government constitutes an encumbrance to the economy and not a source of growth.

Behind this perversity lies the reality of the country’s political system: the professionals of the economy –except for those who have thought themselves politicians and used the fiscal acounts to advancing their own political aspirations via spending and thus indebtedness- have acted within the limits imposed by the circumstances of their milieu. In contrast, Mexican politicians have lived for themselves –for their privileges, perks and interests- and have possessed sufficient power to safeguard these and nourish them systematically, regardless of the cost for the remainder of the population. In this context, the professionals of the economy, tagged, disparangingly, as "technocrats," have operated to preserve stabilty, and better economic conditions were only acquired when the political circumstances allowed.

In this fashion, the bureaucratic and fiscal interest clashes with that of economic development. The population has experienced less growth –and worse opportunities for development- because the bureaucratic interest –the extortion and corruption that the country endures on a daily basis- and the fiscal interest -more taxes and greater complications for functioning- have won the day. A change in government, and of paradigm, as the one coming about, could well start from here.

The views expressed here are solely those of the author.