For Mexico, Drugs And Crime Erasing Free Trade Gains – Forbes

Remember when Nafta was supposed to lift Mexicans up out of poverty?

Free trade was going to give them all jobs in factories that were either relocating there from the U.S. and Canada, or witness the setting up of subsidiaries to make Mexico an essential part of the North American supply chain. More jobs. More money. Que bueno!

Crime, drugs and government corruption have thrown buckets of cold water on that story now for at least 10 years.

Populist president, Andres Manuel Lopez Obrador, aka AMLO, promised to tackle all those things. He’d be better than the neoliberal free trading cronies of drug lords and corporations. But AMLO faces the staunch reality of a country that’s gone one step forward, one step back. What can he really do?

Businesses there are already nervous about AMLO’s policies. Very little new investments are being made there. The rich are pulling money out and parking it in U.S. Treasury bonds, preserving their capital.

“When you promise to the people that you will shrink the gap between the wealthy and the poor, but you do it be making the wealthy poorer, it is not the solution,” says Luis Maziel of LM Capital Group in San Diego, a private wealth manager. “We are not buying Mexican bonds. My clients are not bullish on Mexico. The global scenario doesn’t help AMLO, either.”

AMLO was elected last summer and took office in December. He is not yet a year into his presidency. He may prove to be Mexico’s Sisyphus.

AMLO took over a country ravaged by the drug trade, a trade that grew exponentially after the collapse of Cali and Medellin drug cartels in Colombia. Mexico has been Latin America’s drug hub ever since. It’s stunted growth and compromised politicians just as it did Colombia throughout the 80s and 90s.

Mexico: Crime, Drugs, Poverty

AMLO inherited a societal and political mess.

Despite a relatively traditional, conservative economic policy, and a reliable central bank that Wall Street loves, real problems of real life get in the way of investing in Mexico.

People are murdered there daily. Border towns are some of the worst, according to a 2018 report by Justice in Mexico.

Throughout the Presidency of Felipe Calderón, Mexico’s National Institute of Statistics, Geography, and Information reported 121,669 homicides, an average of over 20,000 people per year, more than 55 people per day, or just over two people every hour. Over that six-year period ending 2012, no other country in the Western Hemisphere had such a high murder rate.

Then it got worse.

President Enrique Peña Nieto, like AMLO, pledged that violence would decline dramatically within the first year of his administration. There was an average of 23,293 homicides per year during the first five years of Peña Nieto’s term, nearly 4,000 more per year than Calderón’s first five years in office before declining in Neto’s final year. It was almost as if he gave authorities the greenlight to get tougher on crime, in order to weaken AMLO’s argument that crime was still rising.

AMLO has to tackle this. He’s their Batman.

On Monday, AMLO admitted that his customs system was “very rotten” and had been “taken over” by criminals and corrupt officials who live off bribes. He said this week that he would clean up the mess at at least two ports where he says customs officials are turning a blind eye against chemicals used to make crystal meth and guns, heading for the States.

That’s the criminal setting of AMLO’s Mexico.

Then there’s the Mexican poorhouse setting.

Based on the 2018 measurement of poverty by the National Council for the Evaluation of Social Development Policy (Coneval), Mexico’s anti-poverty programs have underperformed. Close to half the country is still in poverty. The promise of free trade has failed them. This is not a good look for globalization, and the Davos Man whose been selling people on this for at least 20 years.

Faced with the fact that free trade has not taken Mexicans out of poverty, at least not like it did in an authoritarian, closed, Communist-run China, AMLO has his work cut out for him. As an aside, he may not even see a free trade deal with the U.S. as being in his country’s interest anyway.

Some 41.9% of Mexicans are living in poverty, though that is down from 44.4%…10 long years ago.

Based on head count, however, there was an increase to 52.4 million versus 49.5 million in 2008.

Only slightly better results can be seen when measuring for extreme poverty. That number fell to 7.4% of the population, or 9.3 million, down from 11% (12.3 million) in 2008.

Extreme poverty in income terms was 16.8% of the population, identical to where it was in 2008, but higher in terms of head count.

“Obrador’s harsh critiques of his ‘neoliberal’ predecessors will come back to haunt him if the poverty figures fail to improve during his term,” says Mark Keller, an analyst at The Economist Intelligence Unit.

If AMLO can’t do it, who can?

Giving the stagnant poverty numbers and the rising crime numbers, once can assume that a drop in crime and drug-related corruption with the government may be one way AMLO can tackle this problem. Free trade isn’t going to do it.

Mexico already has what Keller calls a “bewildering array of welfare programs”. Some estimates put the total at more than 5,000 federal, state and local programs designed to subsidize low income Mexicans.

In many cases, these programs are basically get-out-the-vote programs for the parties that run them. They have done little to make people more self-reliant, to ween them from these income supporting services.

Moreover, Mexico’s sluggish growth rate over the past 20 years has also made the fight against poverty even tougher.

Roughly 13% of Mexico’s GDP comes from tax revenue, which gives AMLO little capital to increase social spending without increasing taxes on the economy or on the wealthy.

In a global financial system where money moves freer than people, higher taxes mean wealthy Mexicans put money in Panama and Miami. Corporations, instead of setting up a blue collar job producing factory in central Mexico, set up shop elsewhere or keep wages low if they have to be domestic.

In the meantime…

“AMLO has no money for all the social programs he wants to do to reduce poverty, and help people through education. He will have to settle for less or print more money, which will be problematic for inflation,” says Maziel. “But AMLO has to do something. Fasten your seat belts.”