MEXICO CITY — The Mexican government's response to the coronavirus couldn't contrast any more sharply with how things are being handled in the United States and, more generally, in most of the developed world. President Andrés Manuel López Obrador has refused to contemplate any deviation from the strategy he envisaged from the start of his six-year term. Keep Calm and Carry On, as they say — come hell or high water!
I am certain the government must adopt a proactive response to the economic panorama we face, though I am not so sure the proposals being floated are ideal or even possible. The broad proposal right now is for the government to incur (more) debts, to help out firms that have suddenly lost their customers or individuals who lost their jobs.
Such proposals vary, but they all imply tax credits, postponement of tax payments or direct aid paid to firms and individuals. The most developed and disinterested proposal, made by Santiago Levy in the review Nexos, focuses on minimizing the regressive effects of the crisis. It suggests extra protections for the jobless and especially the poorest among them while keeping macroeconomic stability, all with the intention of ensuring a swift recovery once the health emergency draws down.
One of history's first and foremost lessons, and one to which I imagine this president is paying attention, is that excessive government debts cause wider economic crises. This need not be accepted as an unflinching principle, as there are circumstances that justify borrowing money, albeit only if it can be repaid, is spent to create public goods to better living standards, and will raise productivity and ultimately generate wealth.
The problem is that so far, Mexican debt has practically never been used productively but rather to finance current spending. In other words, it often had political (or electoral) motives, constituting a deviation of public resources rather than becoming a source of increased prosperity.
There are circumstances that justify borrowing money.
I would wager that most of the debt besetting the state oil firm Pemex was never used to develop fields, but spent instead in ways that had nothing to do with the firm's basic activity. Who knows, perhaps the money never even reached Pemex. It would be bold then to contend that borrowing money now would help mitigate the costs of the pandemic, and more so under a government marked by prejudices against economic growth and the actors that make it happen.
Local producers trying to make a sale in Toluca — Photo: El Universal/ZUMA
Furthermore, one cannot separate the political moment and the pandemic's inherent risks when recession is literally becoming worse by the minute. In ordinary conditions, like those of 2009, financial markets and the population understand the nature of the emergency and do not enter a state of panic. But in a period that has not seen a single investment project since Trump's 2016 election (except for the Mexicali brewery scuppered by López Obrador himself), any move over spending or debt could have an exaggerated effect on an already hard-pressed national currency. Recent warnings by rating agencies on the government's investment grade are not helping either.
What can be done in this context? Clearly, support must be given to people who have lost their earnings, especially those working informally as they are numerous and more vulnerable. If in addition, they could be made to formalize their employment in exchange for aid. That could benefit everyone. It is also crucial to help key industries hit by the pandemic, like those tied to tourism.
The second step here is to reorder public expenditure to attain such objectives. No government in recent memory has made as many changes to public spending as this one, and so there's no reason for the López Obrador administration not to act. Obviously the government would have to abandon certain pharaonic projects that contribute little to local and regional development, like the Dos Bocas refinery and Mayan Railway. Just canceling them would show good spending sense and raise the threshold of tolerance for a slight increase in public debt.
The crucial thing is not to lose sight of the objective. The aim is to reduce the recession's impact on the poor in Mexico, and assure a swift recovery once the emergency ends. But if the spending priority continues to be to keep your support based on costly, unproductive expenditure, then the economy will shrink without a chance of recovery. And that means less good governance and more crime.
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