New president plots a course of economic suicide

One of the 14 largest economies in the world decided to commit economic suicide by electing a dangerous populist demagogue as its new president, who, even before formally becoming the country’s chief executive on December 1^, for a six-year constitutional term has made highly expensive policy mistakes.

The absurdly long transition period between election and inauguration – five months – has been marked by the virtual vanishing of the sitting administration of Enrique Peña Nieto and the hyper-activism of the elected president, Andrés Manuel López Obrador – known for his initials as AMLO, who has gone into a rampage of proclamations on what his government’s policies and actions will be, most of them based on “popular referenda” so skewed towards his preferences they are a sham disguised as direct popular democracy.

Mr López has also announced that he will withdraw from the “neo-liberal” market-oriented reforms started three decades ago, which have seen the country keep a steady rate of growth over the last decade, despite external shocks and challenges. Indeed, the recent important reforms in the energy sector and education had been seen as reasons to anticipate a much better economic future.

His pronouncements have scared the markets and resulted in higher interest rates on public debt, depreciation of the peso, the crashing of stock exchanges, and downgrading of national credit by rating agencies. The cost of his actions has already been immense. Every week there has been unexpected and alarming news, but since the markets react to too many variables, including those from abroad, we can only say that the tally from his many mistakes has been severe. The losses on Mexico City’s stock exchange alone until this week amount to $100 billion.

New airport cancelled

AMLO’s first gruesome error was the cancellation of the new airport being built in Mexico City, a project badly needed to replace an obsolete airfield that is saturated and literally tumbling down. For irrational reasons, he always opposed the building plan at the desiccated saline lake of Texcoco, close to the current airport on the eastern side of the metropolis, despite the fact it is the only reasonable place to have it, according to all the viability studies done since the 1970s by the world’s best-qualified experts.

Now the country is left without an important air hub, which would have been the second largest in the world, which was fully financed by private debt issued on the project’s excellent financial viability. It would have been paid for by regular revenues from airport usage. The first phase of this project was expected to be completed in two years and was already 37% completed.

The reason given for this was unproven claims that everything about the project was corrupt. However, the cost has been estimated by GEA, a respected group of economic analysts in Mexico City, at $35 billion, or 4% of the country’s GDP. That is just compensation for broken contracts and losses to investors and savers, including pension funds who bought bonds that have lost a sizable share of their value. Other losses include the cost of building a new airport in the Santa Lucía Air Force base, 60 kilometers away from Mexico City, which the future government plans to operate simultaneously with the old airport, a 65-year-old relic that is obsolete and expensive to maintain. According to all international experts, to operate flights simultaneously in both facilities is impossible since they share the same airspace.

But this was just the first of a series of rash and costly announcements made by the future government. A week after the airport cancellation the leader of AMLO’s party in the Senate surprised everyone by declaring that he had drafted legislation to reduce or eliminate all fees charged by banks, which account for more than 60% of their revenue. The shares of the banks plunged by as much as 30%.

Soon after, another of AMLO’s allies in Congress announced that he had prepared a bill to amend the law that oversees the mining industry in Mexico “in order to regulate the social impact” of their activities. As all underground resources are owned by the State since the enactment of the 1917 constitution, mining operations are in fact concessions that the proposed legislation would make much easier to cancel with the pretext that they have caused “social damage” to communities nearby.

Pension funds, international reserves

Another amendment proposed in the Congress is to reverse the law that allows private pension funds to be managed by the banking system, and re-centralize them in a single government bank, just as the Kirchners did disastrously in Argentina years ago. Yet, one more scheme proposed intends to allow the use of international reserves held by the central bank for “social projects” by the new administration and to boost faster growth through more public spending.

Just days ago, AMLO presented his new “pacification and security” plan which will see his government will form a national guard under the command of the army, incorporating the federal police and the armed forces’ police corps. This, according to most experts, promises to be a complete failure, which will simply prolong, and perhaps even worsen, the current failed “war” against drug cartels and criminal organizations that has claimed an estimated 300,000 lives over the last dozen or so years.

The two most worrying aspects of AMLO’s plan are 1) the hyper-centralization that he has undertaken to return all the threads of power to the president’s hands, canceling the federal pact by creating delegates and sub-delegates in the 32 states and 300 electoral districts in which the country is divided, so they respond only to him. This would put him in charge of managing all federal spending, circumventing state governors and local authorities; and 2) As his party controls Congress they can amend the constitution in any way they please. For his Pacification and National Security Plan, 13 articles in the constitution will have to be changed. And they can also neutralize the judiciary by creating a new court system with higher standing.

Early next month, once the new government is installed, we’ll have the chance to see AMLO’s proposed budget for 2019, but one element is certain: there will not be enough money to pay for all the promises that he has made campaigning, which involve public spending on hundreds of ill-conceived projects. Some are just cash transfers to various groups, including youths that neither work nor study, and the elderly. Others include free healthcare for all, 100 new public universities, ending exports of crude oil and building two new oil refineries – in a country that is now importing large amounts of gasoline and natural gas, passenger trains that will go around the Yucatán peninsula, and through the Isthmus of Tehuantepec to link the Pacific and Atlantic oceans via the shortest stretch of land in the country.

Paradoxically, AMLO has promised to reduce taxes along a 20-mile (32km) strip along Mexico’s northern border, which will certainly hit federal revenues and induce thousands of firms to relocate their fiscal address to take advantage of the reduction of income taxes from 35% to 20%, and value-added tax from 16% to 8%, as he also vowed to double the minimum wage in the zone.

‘No corruption’ pipe-dream

How will AMLO pay for all his humongous new spending and tax breaks without additional debt or raising other taxes? By running “an honest” government, he says, where corruption will be obliterated by the single example of his own, unimpeachable honesty. He believes that this way he will get $25 billion in additional revenue as a “no-corruption bonus.”

But, as anyone who has dealt with government corruption anywhere knows, what AMLO has in mind is a pipe dream. When dealing with any government, corruption occurs when unwise or excessive government regulation occurs, and there are clear incentives to bribe in order to avoid going through a complicated or impossible bureaucratic maze.

According to the president-elect, none of this will happen under his tenure because of the pristine example of his personal honesty, which no one can vouch for since there is no evidence of the income on which he has lived since his last recorded job in 2005. No tax returns, no records of any sort, no wealth declarations that the government requires from every government official. No bank or credit card accounts. No property of any sort. Nothing.

Even if we assume for a moment that his administration will be completely honest, that doesn’t mean that the estimated $25 billion will flow into the government’s coffers as AMLO’s “magical thinking” assumes. If anything those resources would be saved by citizens who suffer the extortion of bureaucrats to obtain contracts or provide public services.

Another “ingenious” source of savings for the new federal government is cutting its employees’ salaries to levels below what the president has decreed he will earn monthly, 108,000 pesos – $5,250 in today’s parity. This has already triggered a stampede of competent professionals who find much better job alternatives in the private sector or abroad. Added to this, AMLO announced that 70% of the federal government’s non-union employees will be fired, decapitating what is left of the thinking elite in state administration and thus ensuring that an “ineptocracy” will reign, with dismal consequences.

Hare-brained relocation plan

Another one of his many harebrained designs is to decentralize federal government agencies willy-nilly throughout the country, incurring a massive disruption of operations and enormous costs that no one has estimated, not to mention huge pain for the people involved, and making coordination of the various agencies more costly and difficult, if not impossible. To move 2.7 million bureaucrats and their families from the country’s capital to cities and towns across the land, which lack the necessary infrastructure to receive them, promises to be an absolute disaster and an additional tombstone for any hope that the new administration can accomplish anything but its own collapse.

Skirting prevailing laws also does not bother the new administration. When informed that he could not name one of his radical leftist followers to head a government-owned publishing house because he was born in Spain, AMLO ordered his minions in Congress to change the offensive law. He did the same with the law that regulates the Tax Administration Service (SAT), an agency that has professionalized and modernized remarkably over the last two decades. The SAT law required its head to possess notable skills and experience in tax and customs matters. Not anymore. Now AMLO can appoint a friend or politician from his own party, without a minimum basic knowledge of something, not even any skill to add, subtract, divide and multiply.

AMLO is no longer trying to conceal his messianic bent, as he did during the campaign. He is now using phrases like “I no longer belong to myself, I am the Nation’s servant,” reminiscent of Venezuela’s Hugo Chávez’. “As I tell you, I don’t belong to myself. I belong to the people of Venezuela, my life is yours,” or Adolf Hitler’s “Now, I only belong to the German people and to my duty.”

I believe Mexico is in a singularly alarming path to political, economic and social Armageddon since AMLO and his allies will do whatever is necessary to retain power for a long time, as their clique has done in Mexico city with disastrous consequences since 1997, and just got elected for six more years. I am afraid that the country’s future will resemble more and more the crisis in Venezuela, whose martyrdom lasts already two decades, unless there is a military coup as in Chile in 1973 which deposed the disastrous regime of Marxist Salvador Allende, or a civil war as in Spain in 1936-39 that overthrew a chaotic republic that was becoming more and more Moscow’s puppet.

Bleak prospects for the future of Mexico and its people!

# Manuel Suárez-Mier is an economist and former Mexican government and central bank official. He has taught at universities in Mexico and the US for 40 years.