If Mexican President Andrés Manuel López Obrador (AMLO) had been the captain of the Titanic, he would have held the rudder steady and crashed head-on into the iceberg, without braking. That was his route, period. AMLO would not understand why he needed to avoid a piece of ice that should have not been there.
Unlike the unpredictable nature of an earthquake that forces us to improvise, the first victims in China of the terrible pandemic were reported early in January. Mexico had months to prepare. The first reaction of President AMLO was, as always, a political one saying that the pandemic did not merit a response: it was only an attempt of “the conservatives” to undermine his presidency. The cost of his negligence will be counted in human lives.
On the economic side, AMLO still does not appreciate the magnitude of what is coming, nor does he understand the foolishness behind insisting on a route that has already proven to be wrong. The normalization of economic activity in the world will be much slower than expected. We will all be affected. The scope of the damage in each country will be inversely proportional on its capacity to adapt to an environment that has little to do with the past. With AMLO at the helm, we’re toast.
We are being exposed to irrefutable information about why it is a terrible idea to take Mexico back to a 1970’s style oil-based economic model. AMLO’s unconditional bailout of Pemex, the state-owned oil company, will ruin Mexico’s public finances. Pemex suffers from shady procurement practices of basic inputs that foster corruption, both in oil production and in refining activities. The company also suffers from wasteful maintenance procedures, where preventive maintenance is avoided in order to trigger the need for corrective maintenance, which can be assigned directly to cronies, bypassing tender regulations. Pemex suffers from critical downstream deficiencies (not nearly enough terminals and pipelines), because of its desire to shield extremely questionable and costly contracts with teamsters and transportation companies.
Injecting unlimited money into a company with so many structural shortcomings is equivalent to trying to solve a teenager’s drug addiction problem by increasing his weekly allowance. It is also clear that there could hardly be a worse time to build a new oil refinery –like Dos Bocas, AMLO’s pet project- when the demand for gasoline has fallen 70% and for jet fuel 90%. It’s also the worst time for AMLO’s insistence to commit public resources, which are urgently needed for other purposes, to expand oil production when every additional barrel of oil will be sold at a huge loss, and will demand ludicrous subsidies.
Mexico has changed for the better since President José López Portillo announced in 1977 that his job would be to administer Mexico’s oil “abundance”, after the country’s reserves grew tenfold. In the last three decades, Mexico managed to integrate into the global economy by becoming a major manufacturing producer. Mexico now exports more manufactured products than the rest of Latin America combined. Becoming a manufacturing powerhouse was not an end in itself, but it was a path that enabled Mexico to overcome its fiscal and commercial dependence to a commodity, avoiding being exposed its price volatility. It also protects Mexico against the fact that demand for fossil fuels is likely to gradually disappear in coming decades. In its current condition, Pemex is not viable. To be so, it would need to undergo a profound restructuring that AMLO will not pursue and that would take decades to bear fruit.
Many defend the Dos Bocas oil refinery for being a project that will generate jobs. However, it is timely to remember Milton Friedman’s remarks when he saw the construction of an Asian highway that, in order to generate jobs, was being built without machinery: “If you want jobs, then give these workers spoons instead of shovels!”. Making an “investment” of around US $8 billion in an oil refinery that is destined to lose money from day one is absurd anywhere, but more so in a poor country. There are many better uses for these resources, which could be invested in profitable projects that would create sustainable jobs. What is the rationale of squandering taxpayer money on a losing investment?
When one sees an iceberg from miles away, it is always better to maneuver in order to avoid it. There are a million alternative routes, and perhaps one could takes us to place that is better than our starting point. Today, Mexico is headed to the bottom of the ocean.
* Jorge Suárez-Vélez is an economic and political analyst He is the author of The Coming Downturn of the World Economy (Random House 2011). A Spanish version of this Op-Ed appeared first in Reforma’s newspaper print edition. Twitter: @jorgesuarezv