Rebuilding Mexico After the Pandemic: Private Costs and Public Goods

Interview with Rolando Cordera, UNAM’s Program for Development Studies Coordinator

By: César Guerrero Arellano

Rebuilding Mexico After the Pandemic: Private Costs and Public Goods
Among the vicissitudes of an unprecedented crisis in modern history, Dr. Rolando Cordera identifies a window of opportunity to build a State that is able—through an institutional tax and budget redesign—to provide the public goods needed for the common good. In the immediate term, he proposes resorting to a public-private investment plan to protect employment, resuming an industrial policy that integrates the strengths of the export economy in the domestic economy, and uniting wills around a plan that decisively promotes the development of infrastructure and production capacities.

How does the crisis triggered by the COVID-19 pandemic compare to other adverse historical events?

It is different than all crises the world has known because it emerged—and it’s important to highlight this—from the need to restrict production activities in many fields, sectors, and companies, in order to face the most aggressive and lethal traits of the health emergency. This unchained a general economic downturn. And I’m afraid this downturn is also seen in the so-called “essential” companies, that while still operating, are going through an open recession or are close to face one. In the specific case of the Mexican economy, it also fueled the recessive trends that were forewarned since 2019.

 

 

How have sectors of the economy behaved during demobilization? Which ones are the most vulnerable and why?

Many of us have expressed our fear for the fate of a considerable number of employers and workers. How much more downtime can they take? How many companies will be able to keep their payroll or pay their social security contributions, their credits and taxes? Very few, according to social security organizations.

 

Researcher Norma Samaniego identifies a very serious and alarming fact. This time, informal employment is not cushioning the fall in formal employment as it has done, to a certain extent, in previous crises. The figure of 12 million Mexicans outside the labor market published by the National Institute of Statistics and Geography (INEGI), not looking at its precision, gives us an idea of the magnitude. Current circumstance, therefore, are extraordinary and practically unprecedented, and so must be the actions to face it.

 


ROLANDO CORDERA

 

You and other specialists warned about the magnitude of the challenge in a letter to Mexico’s president. What kind of unprecedented measures do you have in mind to face the situation? What strengths does the economy have to support them?

Trade liberalization is said to have produced deindustrialization, but the fact is that our industrial plant is larger now and, in part, has high levels of productivity and innovation. No matter if it is well integrated or not with the rest of the industrial fabric of the country, we must leverage it. We must do the same with developments in the Northwest that made us large exporters of agricultural products, to the extent that the agricultural trade balance is now in surplus. This is no small feat. We must acknowledge, however, that agribusiness flourished on land with enormous injustice and exploitation, and that the new industry still benefits from the old work organization lines and worker-employer relations. Despite the staggering productivity gains, the distribution of products among their players is practically the same in the modern export industry as it is in Mexico City. Modern industry does not need such low wages, but it leverages the absence of effective union representation mechanisms.

 

 

Can measures in the USMCA contribute to improving the country’s labor outlook?

Of course they can! Real trade unionists, and there are very few of them, should take advantage of that and leverage it. The National Union of Workers and the Telephone Operators Union tried to do so with the previous agreement, but they couldn’t get ahead. A bit of class struggle wouldn’t hurt us. I believe that the demand from the United States and Canada that worker-employer relations be “normalized” in Mexico is right. Now, this of course puts many entrepreneurs at a disadvantage, but if they want to win here, they have to distribute in another way and avoid guises. Let’s hope the Labor and Social Welfare Secretariat takes note that this change cannot be promoted without the appropriate measures.

 

The State must have this type of instruments. They are very old, but important; they must be updated. Years ago, a prominent American economist, Michael J. Piore, even proposed to promote Mexican industrial policy through labor inspectors. I’m not sure about the current administration, but previous ones had embarrassing numbers and their ways were even more so. This issue is very important and we must conduct almost pedagogical work to prevent it from causing capital flight and investment strikes. It doesn’t have to be this way, so far there is no discernible expropriating intent. The USMCA is going to force us to rethink the country’s labor relations.

 

 

What kind of support should Mexican companies receive, given that 95% of them are micro enterprises, with fewer than ten employees, and occupy 40% of the workforce?

We have a disjointed economy, what Aníbal Pinto calls “structural heterogeneity.” We have not overcome that, neither with trade liberalization nor with NAFTA. We still have several worlds that sometimes come together, but do not integrate. For example, around the great Audi plant in Puebla, The Economist noticed that its influence “doesn’t spread.” There is a serious problem that would be solved with an industrial policy—in the broad sense—and with public intervention in matters of social protection.

 

Small and medium enterprises must be supported with financing. The government rejected the emergency measures that we proposed to address companies in this situation, particularly small ones. These included postponing but not forgiving the payment of taxes, postponing worker-employer contributions, and, in the latter measure, have an option of forgiveness if necessary. We didn’t make this up, it’s is being done in many places around the world. It would be a good starting point in order for development banking to resume its role as an agent for the modernization of the country, and as an instrument of a renewed industrial policy: rehabilitating companies, supporting their modernization and strengthening worker skills.

 

 

What role will foreign trade have in the recovery of the national economy?

Romano Prodi, famous European politician, said that no export success can last if there isn’t an industrial structure underneath it to take advantage of it, nor an industrial policy. Those who have headed governments in recent times believed that with the opening of the market and the massive inflow of international capital we would become good at it and competitive. It wasn’t so. It is competitive in only a very small part of the country’s production fabric. The quick ratio is that the promised growth didn’t take place. It’s been many years since the economy has not lifted its head.

 

 

In the letter to the president you spoke of the need to “act quickly and forcefully.” What is this statement based on?

Every day that goes by is one day less, not more. Let’s assume that in the first weeks of lockdown, most of the businesses, industries, and activities deemed nonessential managed to stay afloat. Let’s also accept the ever-closer possibility that they won’t make it much longer in these conditions, that they cutdown on staff or close down. Hence the urgency of defending employment and the companies that provide the most jobs. “For the sake of a public good called health,” says José I. Casar, “we force a very large social contingent to incur private costs that were not foreseen.” It is justice 101 to compensate for the lack of employment and income.

 

I confess that the time factor is overwhelming. In such a complex setting, I don’t think medium, small or micro companies are having a ball. People must be upset and really tightening their belts. There’s a big difference between quarantining in a house with a garden, and quarantining in a one‑bedroom where five people live. We have a serious overcrowding problem in the country. This can affect social relationships. Compensation for seniors, scholarships for young people, these will not make up for the gap that was created. We have to act beyond that, and very soon.

 

 

What role should governments play in order to foster more harmonious and inclusive development?

In order to face the worst effects of the pandemic on employment, and given the circumstances, resuming the dialogue with the private sector should be the starting point. Coming up with a national investment program that involves and commits the State. Laying the foundations for a real system of economic and social planning in the medium and long term. The least we can do is build possible scenarios, revive planning, that absurdly forgotten or forbidden word and one of the fundamental mechanisms of public action. But it must be done well, with the support of specialists and technicians, and the greatest social participation that can be guided and ordered. Also, getting into the acrid discussion about the most convenient model to finance this national crusade.

 

As for the public health system, the long period of neglect and omissions it went through, the search for shortcuts such as Seguro Popular, and now magic solutions such as Insabi, have been pointed out. I believe everybody agrees on the need to strengthen the primary level of care, where the greatest and most serious oversights and lags have been found. We must take that step next to the doctors, epidemiologists and scholars that we still have.

 

 

Given the aging of the population, are the conditions there to resume the welfare State and implement social security models with universal coverage?

The first point of the agenda of the long democratic transition mentions the need to undertake a major administrative reform and of the State, in broader terms. That’s something we haven’t done and we cannot postpone it any longer if we really want to build a democratic and constitutional state, as theorists say. In a country like this one, that State must also be social; one that, taking into account 21st century circumstances, vindicates that classic slogan on the welfare state for the citizens of the United Kingdom, coined by Lord Beveridge: to provide protection “from cradle to grave.” That implies thoroughly reviewing the structure and organization of the State, in order to rebuild it with that mission.

 

 

What taxation models will enable this institutional reengineering do you think?

The in-depth reform of the State would not be complete without a tax reform that revises our deplorable—internationally unpresentable—tax guideline, and without improving practices to define the budget—currently lacking technical care, public responsibility and accountability—and exercise it. On the other side is the state’s fiscal hardship. In order to have an infrastructure, we first went about it with debt and then with oil, which ran out. In Mexico and the world there is a lot of money—and very cheap—so the debt risk remains. In development banking, in the Finance or Communications and Transport Secretariats there is memory and awareness that we must leverage to create companies, projects and infrastructure. Except that the president has made debt a fetish; I don’t understand why.

 

Activities should not be sacrificed for the sake of not getting into debt. I would almost say that this is unparalleled, because in a situation of extreme hardship, borrowing is a go-to, an economic policy instrument as old as absolute monarchies. It depends on how democracy is organized to make sure that leaders don’t divert resources to their benefit. When used well, it will bear fruit that will materialize alongside economic growth, and only this way will tax funds increase. You have to think along those lines when it comes to a country. But resorting to this mechanism without facing the State’s fiscal hardship will eventually be a problem. That’s why we need to fix our embarrassing tax system, have progressive taxes on income, review property taxation, and explore other taxes, such as on inheritances and bequests, and even discuss whether or not we want to tax wealth, which after all, is also a social product. We should reach an agreement, not for the rich to get rid of their wealth, but for them to pay taxes for that privilege society has given them.

 

 

How can we guarantee the broadest social profitability of public aid and prevent its pre-existing imbalances and inequalities?

We must strengthen our monitoring and accountability mechanisms at the different government levels so as not to incur regressive spending or expenses. Much has been done to create auditing, monitoring and control mechanisms in state governments with the support of the Superior Audit of the Federation, but we will make little progress if very weak—institutionally and politically speaking—local congresses persist. This is indeed a political problem that goes beyond a person behind a desk, as it requires an inexistent type of awareness, that these resources belong to citizens. When you mention more taxes, even to educated people in the company, the typical response is: “Why? They’ll end up stealing the money!” It is a shocking excuse; what type of citizens are we talking about?

 

 

Who is to lead global efforts for economic recovery? How could multilateral institution response improve?

It’s very difficult to answer that concretely and specifically, since this crisis is not only unprecedented, it also occurs in a social and economic context that had not been experienced in practically two centuries. We can say—not as consolation, but as acknowledgmenet—that we were not prepared for it. That doesn’t mean throwing away what we have. We must strengthen the United Nations and the multilateral mechanisms that, despite being impaired, have human capital, knowledge, and experience like very few groups around the world. That talent needs to be used to face the most aggressive and harsh traits of the economic downturn, while reviewing our social protection systems, and with these, our public health systems.

 

I believe the World Health Organization must carry out its functions focusing on the medium term and in a less hostile environment than the one we have subjected it to, in particular Mr. Trump. Joining efforts around a universally accepted goal: to climb out of this huge swamp nature put us in, and to do so as an international society that assumes the master principle of interdependence and that aspires to build an efficient, timely public system, producer of public goods, particularly those related to everyone’s health. It may be a—perhaps outright—mistake if we don’t undertake this construction seriously, since defeating COVID-19 completely may not be a reality anytime soon. As long as there is no fully tested vaccine or medication, we will have to live with it and adopt new habits. This can only be achieved with a real sense of—obviously modern—community, leveraging the great technological skills and capabilities that it can deploy. It will be difficult and it will require a lot of patience, but I think it’s doable.