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Column 052305 Conroy

May 23, 2005

 

Mercantilism is alive and well in Mexico

 

By Nancy Conroy

 

Observers, essayists, bloggers and analysts often have a difficult time describing Mexico’s economy.  Some say that the North American Free Trade Agreement (NAFTA) gave Mexico an experiment in free-market capitalism.  Others say that Mexico is fundamentally a socialist or social democratic economic model.

 

These labels are based on the commonly held belief that, in the 20th century, most countries use one of three basic economic models: capitalism, socialism or communism.  Thus, the economic system in Mexico must be some version of one of these models.

 

The problem with this theory is that it ignores the impact of one of the most important economic models of the last several centuries: mercantilism.

 

Mercantilism was the dominant economic system that ruled Europe from the 15th to 18th century.  Both the Spanish and French Revolutions were uprisings against abuses, poverty, inequality, and market failures created by mercantilism.  Replaced by modern notions such as laissez-faire economics and the ideas of Adam Smith, mercantilism has faded out of the public consciousness.  Hence, observers try to describe Mexico’s economy using artificial labels such as capitalism or socialism.

 

In reality, Mexico is a modern day mercantilist economy.

 

The Spanish and the French brought the ideas behind mercantilism to the New World while both were in heydays of the practice, during their periods of Mexican occupation.  Once the European powers left Mexico, the rest of the world moved on to economic models influenced by the Industrial Revolution and laissez-faire principles.  In Mexico however, mercantilism continued and flourished.

 

Mercantilism is a many-dimensioned economic system, but the most important component of the doctrine is state control over business.  European farmers, traders or textile manufactures had to obtain special government permits, called “charters,” in order to operate their businesses.  The charters, that were given out during parliamentary sessions, carried the force of law, and anyone lucky enough to obtain one immediately enjoyed a business monopoly and benefited from a privileged relationship with the government.

 

The major disadvantage of this system was that it created dreadful economic inefficiency.  Instead of focusing on creating quality goods at lowered prices, businesses were forced to spend their money and time courting governmental favors.

 

They hired lobbyists, attorneys, and party-givers to influence government ministers.  They wined and dined politicians, gave lavish parties, paid bribes, and engaged in blatant influence buying.  Business survival depended not on producing quality goods, but rather on staying in the good graces of the State.

 

And Mexico continues to practice a modernized version of those Old World practices.

 

An excellent example of 21st century mercantilism is Telmex, the quasi-official Mexican telephone company.  The 1990 privatization of Telmex was essentially a state grant of a telephone monopoly to a private individual, just like a business charter of old granted by the crown.

 

Telmex today enjoys a monopoly, and therefore there is no motivation to improve its service.  Telmex does however reinvest profits in its business, just not in the expected way.

 

Telmex spends millions of dollars each year lobbying politicians, controlling regulatory bodies, proposing favorable laws, destroying possible competitors, and generally opposing progress.  The results are poor telephone service, high prices, and angry consumers.

 

Another example of mercantilism in action is the foreign owned liquefied natural gas companies that are going into operation in Baja California.  Even though foreign investment in oil and gas is technically illegal in Mexico, these companies apparently are obtaining all needed approvals and permits from the various Mexican agencies.

 

Continuing this illustration, the US$7 million “Cultural Endowment Fund” that San Diego based Sempra Energy gave to the city of Ensenada probably helped quite a bit in securing political support.   In order to continue building, the LNG plants will have to constantly lobby to stay in political good graces, for if just one bureaucrat in one agency denies just one permit they will be out of business.

 

The Casa by the Sea fiasco is another example.  In that case a team of government agents raided and shutdown a juvenile rehabilitation facility in Ensenada, on the pretext the business was violating some obscure “sanitary” regulations.  What really happened was that Casa by the Sea was making a lot of money, and the foreign operators had failed to reinvest in a government lobbying effort.

 

There are innumerable other examples of mercantilism in practice here in Mexico, which by extension means that if you are in good standing with the powers-that-be a minor infraction will be overlooked.  Otherwise, just like in 17th century Europe, a minor technical violation can get your business shutdown.

 

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Nancy Conroy, Publisher of northern Baja California’s biweekly Gringo Gazette North, is also a columnist with MexiData.info.  She can be reached via e-mail at nancy@gringogazettenorth.com.