President Andrés Manuel López Obrador (AMLO) says he is concerned about the situation of employment in Mexico. Last week, he said that the construction of a state-owned oil refinery in the Gulf coast port of Dos Bocas will continue to go ahead. In his own words: “It means jobs, work”. On the same day last week, AMLO also confirmed that his government will cancel the construction of a US brewery in the border city of Mexicali. This as a result of a plebiscite organized by his own government. The brewery would have generated several thousand jobs.
The Dos Bocas oil refinery is built with public money. It will hardly be profitable. If it’s finished, those jobs will be funded with government resources. Meanwhile, the brewery in Mexicali was built with private resources and would have paid taxes.
JP Morgan estimates a 7% contraction of the Mexican economy this year. If the AMLO government does not implement an ambitious plan to support the economy, we will see bankruptcies in many sectors this year, with subsequent job losses.
AMLO became a major opposition figure in Mexico after his rejection of the 1995 bail-out known as Fobaproa. The dilemma in 1995 was to prevent the bankruptcy of the Mexican banks and to guarantee the funds of Mexicans savers. Fobaproa was part of the response. The program had many problems. But it was not an option to sit and watch the Mexican financial system going bankrupt.
The dilemma now is how to protect employment and the source of tax revenue. This requires solvent private companies. AMLO thinks that the big and wealthy entrepreneurs should not be rescued. He wants and will try to support those the informal workers that are his voters, although the committed aid would be very modest for the size of the challenge.
Given that his oil bet failed, the only important public income AMLO has now are taxes paid by those in the formal economy. Those companies who fail will not only fire their employees, they will stop paying taxes. When the economy recovers the firms will no longer exist.
There are many ways to support Mexican companies and their workers amid this crisis. They all require helping those who generate those jobs not going bankrupt. All this will cost fiscal resources. How you allocate those resources not to subsidize incompetent entrepreneurs and how you collect from those who receive them is an issue that still must be refined. Former Inter-American Development Bank (IDB) vice president, Santiago Levy, has already presented some ideas.
In normal times, fiscal prudence is a good obsession. Now, it is a colossal mistake. AMLO runs the risk of ending up as President Herbert Hoover in the United States during the Great Depression: proudly orthodox in fiscal matters, while employment falls sharply.
* Carlos Elizondo Mayer-Serra is professor at the School of Government and Public Transformation at Tec de Monterrey, in Mexico City. A Spanish version of this Op-Ed appeared first in Reforma’s newspaper print edition. Twitter: @carloselizondom