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In Mexico, A Lesson In How Red Tape Feeds Black Markets

Mexico seems to be returning to more regulations, paperwork and taxes, which fuels the underground economy and encourages the government to overspend.

Open markets in Mexico City
Open markets in Mexico City
Luis Rubio*

MEXICO CITY — The comedian Groucho Marx used to say that politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies. Governments are particularly good at identifying technical problems, but tend to be profoundly ignorant about what motivates ordinary people. They assume people will respond to their instructions without batting an eyelid or even doubting the government's altruism.

But Mexicans have seen governments come and go for centuries, and their response has not changed: They obey without following orders. They just adapt. Human nature is stubborn but predictable, and people do not go against their interests or willingly comply with bureaucratic preferences. Therein may lie a logical explanation of the country's current, pathetic economic performance.

I have no complex mathematical models to clearly explain why the economy is performing so badly, but I observe the way the population is acting and responding to the endless parade of new norms, rules, procedures and taxes. There is one particularly telling observation: A sharp increase in use of cash.

A notary told me that cash transactions, which had practically disappeared (in good part for the tax on deposits), were making an irresistible comeback. Why? Because people are afraid their accounts and credit cards will be checked. So instead of advancing toward an increasingly efficient economy with a financial system mediating in transactions between economic agents, we are returning to bartering. Less efficiency means less economic activity. Add all the operations taking place this way nationwide, and you can imagine their impact.

The logic of a higher tax rate is that with more money in the public purse, the government can spend massively, with highly palpable results. Thousands of small transactions are thought not to have the same impact as one great public works project. That may be so in Sweden, but in Mexico even construction is in decline. Costs rise while the economy fails to respond.

Certainly, months of increased spending will make their impact down the line, but it will be less than the government imagines, and perhaps in unintended ways. It is obvious why. Because government spending is supremely inefficient. While people only spend what they can, governments overspend, often in the most absurd manner. There is furthermore no end to the corruption that people see every day — abusive trade unions, parliamentarians selling their votes, officials angling for bribes, over-generous pensions, etc. This all reinforces the public's contempt for bureaucratic "solutions."

How it all goes wrong

Instead of fomenting confidence and helping build a more efficient economy, government actions nurture the informal economy. It is an economy with privatized taxes: Inspectors, policemen and trade union chiefs pocket them personally, ensuring they never reach the treasury. Instead of simplifying tax payments and reducing the costs of creating formal enterprises, the current strategy fuels an informal sector in which businessmen have cut their costs and operate outside the government radar. This sector's logic is impeccable, but its effect is to reduce the economy's overall growth.

Current laws have considerably raised the tax burden in Mexico and paralyzed consumer spending and investment, hence the economic situation. It is not a technical problem, instead relating to human nature. In the 1970s, governments insisted on imposing their bureaucratic logic on daily living, and spent like there was no tomorrow. The results were crises, inflation and chaos. People did not — and do not — respond as the state functionary anticipates.

At the heart of it all is the inexorable contradiction between the population and government determination to plan people's lives. The sociologist Leonardo Curzio has written in his introduction to the book Tráfico de Armas en México (Arms Trafficking in Mexico) that, once, during an argument, the great painters and notorious rivals Diego Rivera and David Siqueiros took out their pistols to impose their opinions. That seems to be the logic of the government's economic strategy: impose not persuade, authority instead of leadership.

Imposition is no good in the age of globalization. The country needs order and attention to those little-big issues — like a sense of security among the population. The public response is, following an ancestral logic, to dig in its heels and pretend to implement orders. But the inevitable result of that is less economic activity, however much the government spends. Whose fault is that? Clearly, the millions of ordinary Mexicans and business owners who just don't understand the instructions they've been given!

*Luis Rubio is an economic analyst and president of the Center of Research for Development, an independent research institution devoted to the study of economic and political policy issues.

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