The policies backed by Mexican President Andrés Manuel López Obrador (AMLO) invariably err on the side of imposing government controls, steamrolling the citizenry and the private sector in the process.
In so doing, he blatantly breaks prevailing laws and shatters constitutional mandates, confident that he has the backing of a Congress where he has an ample majority, and a Supreme Court that he has packed with his cronies by expelling unbiased judges through blackmail and threats to them and their families.
Energy reform that modernized sector canceled
His latest victory in the effort to gain exclusive control of “the commanding heights of the economy,” as Marx and Lenin defined its key sectors, was issuing a law that restores a full government monopoly of the energy sector and bans private companies from generating electricity, a de facto expropriation through the back door of US$25 billion in operating plants and investments in the pipeline, both foreign and domestic.
He ordered Congress to pass it “without changing a single comma,” a demand that the parliamentarians meekly obeyed.
This move coincides with the last of five nationwide blackouts that Mexico has suffered since AMLO took over and put in charge of the government-owned Federal Electricity Commission (CFE) an 85-year-old life-long politician, a corrupt lawyer without any knowledge of electricity. Such blackouts had not been seen in three decades.
AMLO is blaming the Texas energy fiasco, instead of his failed policies, and he is using this as a pretext to justify his aim at “self-sufficiency in energy as essential to preserve the sovereignty of the country.”
The main problem with this argument is that 85% of the gas used to produce cheap energy in Mexico comes from Texas, and the only alternative to that gas is a return to the costly and highly polluting use of coal and fuel oil, which Pemex, the other bankrupt public monopoly, produces in large amounts that no one wants to buy.
This unconstitutional law will generate myriad lawsuits, since it also violates current trade and investment protection agreements and breaches the principle of national treatment to all investors, disregarding of their nationality.
The legal proceedings will be resolved by international arbitration procedures that will surely beat the government’s illegal maneuvers and that will cost the country dearly, not only in onerous compensation payments but in persuading private investors against putting their money in a lawless country.
AMLO got so worked up by this issue that he even threatened to declare any lawyer who dared to defend the corporations affected by his arbitrary rules as “traitors to the fatherland,” a charge that carries the largest possible penal sentence and which until now was reserved for spies who commit treason or soldiers who aid the enemy.
Outsourcing to become illegal, causing job losses
In addition, AMLO has been brewing for months new legislation that will ban “outsourcing,” which is a common practice worldwide allowing firms to hire specialized companies to perform activities that are not their core ones, such as cleaning installations, preparing food for employees, and the like.
It is estimated that in Mexico, outsourcing has been a key element to reduce informality in the labor market, since workers must register to pay taxes, social security and pension contributions, which, in turn, allow them to receive the corresponding health-care, housing and retirement benefits.
In a country where 40% of the population used to live in the underground economy, the trend of luring more workers to the legal segment of the economy was excellent news, but the proposed law that bans outsourcing will not only kill that trend but reverse it, as the most recent figures show.
Even before the law is approved, and to a large extent also as the result of AMLO’s dreadful management of the Covid-19 pandemic and the ensuing collapse of the economy, the rate of informality in the labor market has shot back to 52%.
Audit reveals huge waste
Another scandal that damages AMLO and his accomplices was the appearance of a detailed audit of the government’s performance in its first full year in office. It turns out that the cost of canceling Mexico City’s new airport was three times what the government had estimated, $17.5 billion instead of $5 billion, at the exchange rate that prevailed when AMLO announced it.
It was also revealed in the same audit that none of the flagship investment projects of the government (converting an old air-force base into a new civilian airport; a new oil refinery in lands prone to flooding; and a passenger train in the Yucatán Peninsula tropical forest) had the necessary studies, cost-benefit analyses and the like, which are indispensable in such large infrastructure projects.
The audit also showed that AMLO’s “social programs,” which are just giveaways that patronize various clienteles to buy their vote in future elections, are riddled with corruption and ineptitude, something that was quite predictable since there are no controls, clarity in the targeted beneficiaries or transparency in the procedures for the disbursement of monies.
What was the reaction of the government to such bleak news? Deny its veracity, as AMLO is so fond of doing whenever he dislikes statistics that criticize his performance, and claim that “he had other information,” and to scold and threaten the auditor-in-chief, a position supposedly independent from the Executive.
The presidential intimidation worked as intended and the day after the appearance of his report, the auditor backtracked, blaming “errors in methodology.” Such submissiveness heralds the end of any credibility that the auditing agency had, and that another autonomous, until now highly respected agency bites the dust under AMLO’s increasingly autocratic rule where no challenges are tolerated.
Pemex continues to destroy value
Petróleos Mexicanos (Pemex) just published its results for last year and the bad news worsens. Its production levels are down, and it will require massive amounts of transfers from the federal government to remain afloat.
It is estimated that Pemex will require 12% of the country’s gross domestic product, or $140 billion, to absorb the losses, debt, labor liabilities and the company’s negative net worth. This amount is larger than all the taxes collected by the government. This year alone Pemex’ maturing debt will be close to $17 billion.
AMLO is fixated with the idea that Pemex is the crown jewel of the country’s economy when it is exactly the opposite, since its huge losses make it unviable. Just the costs associated with selling its products are about the same as the revenues from those sales, $12.4 billion vs $12.5 billion, which means that the costs derived from its operations, servicing its debt, salaries and administrative expenses must be paid by the government or by contracting more debt.
In this disastrous context, AMLO is blocking private investment in all activities associated with oil with the hope that Pemex can return to being the rich cash cow it once was, under completely different circumstances. He and his cronies are impervious to any rational advice and will not change their minds despite the overwhelming evidence of the debacle.
This situation will end in a complete disaster, the loss of the country’s credit rating and the government’s desperate attempts to get money anywhere, including raiding the private pension funds of workers or pilfering the international reserves of the central bank, or both, actions that will lead to a massive financial crisis. Unfortunately, this will happen sooner than later.
Manuel Suárez-Mier is an economist-in-residence at the American University in Washington, and a consultant on financial and economic issues of Latin American nations. He has a PhD in economics from the University of Chicago.