Spanish – Pandemic times have set off health and economic alarms in every country on the planet. The ravages of the health crisis and the impending global recession leave 2020 as one of the most tragic years of the last decade. In this regard, the governments of the world are in the spotlight because their policies can diminish the impending impact. Therefore, the PanAm Post spoke with economist Guillermo Barba, who has a Master’s degree in Economics from the Austrian School and is a specialist in the gold market, to analyze the economic panorama of Mexico and the administration of Mexican President AMLO.
Barba is blunt: Mexico may have a six-year recession. He claims that the country led by López Obrador will be not only one of the most affected in terms of health but also one of the hardest hit in economic terms. The best predictions speak of reductions between 8% and 10%, but the economist has already warned that the contraction could be between 10% and 12%.
Bad policies of the Mexican government, along with the COVID-19 pandemic and its consequences, are a deadly cocktail for an economy that was already coming out of recession in 2019. We have also seen that AMLO’s administration was squandering money on lost causes such as Pemex and refusing to tackle the problem of the fiscal deficit caused by large public spending. Furthermore, the quarantine does not help the economy in the least to recover, and the opening up of the economy is inefficient and insufficient.
I have read that the forecasts for Mexico are very bad. The best forecasts predict a drop in GDP of between 8.4 % and 9.2%. The pandemic obviously has an impact, but what is the responsibility of the economic measures implemented by the government of López Obrador?
He bears all the responsibility in the world. While it is true that we are in a pandemic and that this will be the first time since the great recession of 2009 that we will have a drop in global Gross Domestic Product, the reality is that the manner of dealing with these vicissitudes of the pandemic is local. In other words, each country is responsible for how it deals with the outbreak of COVID-19 and the economic consequences.
In this regard, the Mexican authorities made extremely poor decisions, both in health and economic terms. And the results are visible. If you notice, Mexico has not reached the famous peak of the pandemic in terms of the number of cases and deaths, so there will still be infections and deaths. So the strategy that the government initially adopted, which was “nothing happens,” has not worked.
There are many videos on YouTube and Twitter where you can see that sub-secretary López Gatell said things such as the pandemic was nothing serious, we should not have any problem, we were prepared, etc. Mexico did not take the pandemic very seriously at first, and the result was that health measures, including maintaining social distancing and using face masks, were not adopted from the beginning. In fact, the sub-secretary said that there was no need to use masks. In short, the consequences of the pandemic were disregarded. On the other hand, on the economic side, the big mistake was to appoint people such as sub-secretary López Gatell who do not know about the economy.
I believe that no person in the world will allow an economist to treat them in a hospital emergency, or accept a medical diagnosis, or a prescription for a disease. In fact, I wouldn’t take that job. It would be irresponsible on my part to try to cure someone with the knowledge I don’t have. However, that is exactly what was done, but in reverse, with the economy. Economic decisions were handed over to people with no knowledge of economics.
In Mexico, economic decisions were placed in the hands of doctors and people who do not understand economics – starting with President López Obrador. Guillermo Barba.
The Mexican economy was suddenly shut down, all activities except the so-called “essential” ones, identified at the discretion of the rulers and the empowered doctors, were suspended. This resulted in a brutal economic shock, a dry spell for the entire economy, which should not have happened and could have been avoided. And this was too early. The economy was stopped in its tracks when the numbers of infections and deaths were just beginning to appear. So there was a double mistake: in the health sphere, the government acted too late, and in the economic arena, it acted all at once and too early.
Right now, we are seeing thousands of deaths and infections. Perhaps, it would have been more sensible to increase the restrictions now, not to close the economy. That is a serious mistake. However, they are reopening the economy after destroying it for three months. However, they are doing so with extremely absurd restrictions. Here, in Mexico City, for example, restaurants are allowed to open freely until late, but shopping malls and retail stores have to close at 5:00 p.m. It is ridiculous. What is the rationale? As if the contagion has a timetable. It is good that the economy is opening up a bit, but these absurd restrictions are a consequence of leaving economic decisions in the hands of people who do not understand economics.
Sorry for going on too long, but this context was necessary to say the following: the Mexican economy is going through a terrible shock and will be one of the worst off in the world. While some countries will face a fall in GDP of between 5% and 6%, in Mexico, we will face a slump that could be double- between 10% and 12%.
And if this wasn’t enough, on the health front, Mexico could become one of the top three countries in the world in terms concerning the number of COVID-1cases and deaths. In fact, we are already in fourth place, having passed Italy, which is logical because we have a larger population. However, there is no mention of the fact that countries with the same or similar population do not have as many deaths or infections. Therefore, we will be one of the worst-affected countries both economically and in terms of health.
Do you think that after this, AMLO will lead the Mexican economy, one of the most important ones in Latin America, into a debacle similar to that of Venezuela or Argentina?
The truth is that it would be difficult to reach those levels. It requires an extreme level of ignorance and economic stupidity to get to where Argentina is, or Venezuela, which is even worse. I don’t expect that of even López Obrador. Relatively speaking, that tells us how bad things have been in Argentina.
But, it is not impossible to reach that point, of course, it is possible. I just think it is unlikely, not at this time, not in these circumstances. We have to take into account that by reviving the economy and passing through the pandemic, Mexico could recover by the end of the six-year period even though we are going to suffer such a terrible blow.
Mexico also faces other problems that predate AMLO’s presidency, and he has made them worse rather than better. I am specifically referring to the problem of Pemex, which is the great Achilles’ heel of the Mexican economy, I would even say it is a complete Achilles’ foot because Pemex is broken; there is no way to rescue it, and the president is determined to save it by injecting billions of dollars. And it will be impossible. So, as we say in Mexico, only good money is being thrown to the bad.
The president is burning money unnecessarily while there are tremendous shortages in hospitals and the social field. He is devoting money to try to save an insurmountable company, especially given recent oil prices. It’s only a matter of time, and not much time, before the degradation of the Mexican debt also ends up being classified—like the Pemex debt—as rubbish. This compromises public finances and financing. It implies higher costs, higher interest rates to pay the government, and then you have the worst-case scenario: a shattered economy, which is collecting less tax money when it needs to collect more because credit will become more expensive. This is going to lead to very serious economic problems, and that will determine both the rise in the exchange rate and higher inflation and interest rates. So we cannot talk about a quick recovery because there won’t be one in Mexico with López Obrador.
I think we are far from suffering what people are going through in Argentina or Venezuela, but that is no consolation. We want to create jobs to improve the quality of people and get them out of poverty, and the opposite is going to happen with AMLO. In fact, poverty is increasing. The number of new-extreme-poor is ten million Mexicans because of the pandemic alone. And we must not forget that Mexico had already entered a recession before COVID-19. So if we continue like this, we will have a six-year recession.
I am curious about the issue of taxes. You said that Mexico should collect more taxes. Elaborate on that. Should it increase taxes or rather free up the tax burden for businesses?
Look, Mexico has a relatively low tax burden when compared to other countries, especially developed countries, such as those in the OECD, which is the group to which we belong. So, the problem is that Mexico is inefficient at collecting taxes. It does it badly, receives little; moreover, the Mexican treasury is very cost-intensive. However, the problem is not just the poor collection because there are resources, nor is it on the revenue side. Instead, the problem is the expenditure. It would be a mistake to increase taxes or to create new ones if you have an economy that is significantly affected and falling apart due to the pandemic and the government’s misguided decisions, such as the cancellation of the airport project.
So the Mexican economy cannot support the increase or the creation of new taxes because, as I keep going back to the topic of Pemex’s degradation. All investors know that Mexico is heading in that direction, and it will be less attractive for investment. Now, we are left to face the following situation: you cannot lower taxes because you have compromised public finances. You cannot raise them because that would discourage more investment. So the sensible approach would be to maintain the current taxes, collect revenue with these taxes, avoid leakage and evasion, be more efficient in collecting taxes, and, most importantly, reduce public expenditure.
Mexico has a giant public spending problem, then.
Spending is out of control. All Mexican governments, since Zedillo, have failed to maintain a surplus or balance in public finances. All governments, year after year, are increasing the fiscal deficit. This means that every year, they spend more, increase the debt, and always have a permanent and growing imbalance between what they spend and what they earn. And this government of López Obrador is not going to reduce or control spending. It is a prevarication that AMLO calls “austerity.” There is no austerity; it would imply that you stop spending in general and that your accounts are balanced, that you do not spend more than you earn, and López Obrador is only punishing public officials with lower salaries.
Some departments already have problems paying for water, the use of computers on the premises is being restricted, workers are now being asked to bring their own computers or buy them for themselves because there is no money left to pay for these needs.
Bureaucracy and hospitals are being punished to maintain the president’s electoral whims, such as scholarships and everything that involves giving money away.
The famous subsidy.
Exactly, subsidies and transfers for the people that López Obrador is interested in preserving as voters for the elections. So there is no austerity. You spend more, and you spend worse.
The other day I read a statement by Trump about AMLO: “He’s a good president for the Mexicans” at a dinner with American and Mexican businessmen. What do you think about this statement? I think it’s dangerous.
Trump and AMLO decided to get together to praise each other. Trump’s mannerisms are very exaggerated, and once again, he is exaggerating. You don’t have to take him too seriously. You have to take him for what it is: political discourse. Political praise for making a good impression on AMLO so that he would return the favor.
Mexican entrepreneurs know this: AMLO is not a good president for Mexico, nor is he a good president for the business community. They will not say so in public, but they will say it in private. AMLO is an enemy of the entrepreneurial class, which he sees as a necessary evil to invest, generate more jobs—he is sure he will generate jobs by himself, which is also a fallacy—but he does not see them as allies and cooperators. So in Mexico, there is no good president for entrepreneurs.
Finally, what does Mexico need in the short and medium-term to try to improve the situation?
In the immediate future, the government must stop this nonsense. This depends more on local governments—cities, municipalities, and states—than on the federal one. But the general call for all governments at all levels is to open up the economy as soon as possible. The government should not impose arbitrary restrictions such as allowing only some industries that they decide are necessary and essential to operate. Industries such as entertainment are being punished even though they could continue to operate with the same corresponding sanitary measures implemented by restaurants, department stores, and shopping centers. All the sectors can function with the same measures.
Because in the end, we are unnecessarily damaging the economy and causing it to recover even more slowly than it should. Measures such as one way in and one way out are resulting in crowding. So we have to open up the economy as much as possible in the short term with health restrictions across the country.
In the medium term, the government has to control its spending, stop trying to save Pemex. We can’t just burn money unnecessarily for that bankrupt company and rescue the little that can be salvaged from it. Nothing more. That is what could save Mexico from falling into a credit crunch that will continue to affect the economy in the very long term.