A CONTRACT WITH MEXICO

A new vision to exploit our potential

Andrs Manuel Lpez Obradors Economic Program
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PROLOGUE
This proposal focuses on the main constraints that inhibit investment and employment. Other topics, probably as important as this, but not directly related to the economy, are being analyzed in different forums. We assume a scenario with moderate world growth in 2012, included a weak growth in US (1 to 2%) and Europe (0.5% - 0.8%), with China growing at 8%. We assume oil prices will remain the same as those predicted by the Government's budget of 2011. The execution of this proposal is possible with decisions and actions taken by the Executive Branch, therefore we consider that no Structural Reforms are needed and indispensable to achieve the goals that we propose.

Mexico, Japan and Brazil were international examples on growth.

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BACKGROUND

MEXICOS FAST ECONOMIC GROWTH STOPPED IN 1980

GDP growth - Mexico
100%

92%

91%

80% GDP accumulated growth 60% GDP per capita accumulated growth

40%

40%

43%

41%

20%

20%

20% -3%

19%

14%

0% 1961 - 1970 -20% 1971 - 1980

1981 - 1990

1991- 2000

2001 - 2010

Source: World Bank, CONAPO, INEGI

Mexico, Japan and Brazil were international examples on growth.

4

RULING PARTIES PRI AND PAN HAVE NOT ACHIEVED ECONOMIC GROWTH
GDP average rate growth by term
8% 6% 4% 2%

6.5% 3.9%

3.4% 2.3% 0.8%

0.2%
0% Jos Lpez Portillo Miguel de la Madrid Carlos Salinas Ernesto Zedillo Vicente Fox

Felipe Caldern*

* 2007 - 2010 Source: World Bank & INEGI

Five presidential terms applying the wrong recipe

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NO INVESTMENT MEANS NO GROWTH

Average growth GDP & Investment - Mexico
10% 8% 9.0% 6.7% 6.7% 8.6%

GDP Investment

Rate growth

6% 4% 2% 0% 60s 70's 80s 90's 00's 1.8% 0.2% 3.5% 3.8% 1.8% 0.4%

Source: Data from World Bank

They dont understand that investment is essential for employment.

BAD ECONOMIC POLICIES CAUSE A DROP IN BUSINESS CREATION

Employers registered in Social Security - IMSS
(As a share of Labor Force)
2.1% 2.0% 1.9% 1.8% 1.7% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: With data from INEGI

Thus reducing employment and consumption

DIRECT EFFECT: INSUFFICIENT JOBS

Causing emigration, unemployment and underemployment.

INDIRECT EFFECT: LOWER WAGES

Minimum Wage - daily real pesos
$180 $160 $140

$170

Real pesos base=2002

$120 $100 $80 $60 $40 $20 $0

$41

19 75

19 77

19 79

19 81

19 83

19 85

19 87

19 89

19 91

19 93

19 95

19 97

19 99

20 01

20 03

20 05

20 07

Source: Crdenas, Mauro Ernesto. SALARIO MNIMO EN MXICO. http://www.insyde.org.mx/images/salario_minimo_en_mexico.pdf & INEGI

In the last 35 years, the minimum wage it has lost 76% of its real value

20 11 /0 6

20 09

THUS, INCREASING INEQUALITY

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PLUS: NO CONTROL IN GOVERNMENT SPENDING

In 15 years, the real expenditure has duplicated
Real growth Public Income & Expenditures vs GDP
2.0 1.8
Income

Index 1994 = 1

1.6 1.4 1.2 1.0 0.8 1994 1996 1998 2000 2002 2004 2006 2008

Expenditures GDP

2010

Source: Secretara de Hacienda y Crdito Pblico (SHCP)

Weak GDP, Public Spending Flourished.

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RESULT: THE WORST ECONOMIC PERFORMANCE OF LATIN AMERICA

GDP - Average rate growth 2007 - 2010
10%

8.1%
8%

6.3%
6%

7.0%

4.5%
4%

4.6%

2.5%
2% 0%

3.0%

3.2%

3.6%

0.8%

tin a

ez ue la

Ch ile

Co st a Ri ca La tin A m er ica Co lo m bi a

Br as il

ico

Pe r

Source: Estimated with data from World Bank for 2007 - 2009. For 2010 form official sources of each Country.

Ve n

One of the worst performances worldwide

Ar ge n

Pa na m

M x

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CAUSING POVERTY IN THE MAJORITY OF THE POPULATION

Percentage of Poverty - Mexico
70

Percentage of population in poverty

60 50 40 30 20 10 0 1992 1994 1996 1998 2000 2002 2004 2005 2006

Patrimony
51.3

Capacity
26.7 18.8

Nourishing

2008

2010

Source: Consejo Nacional de Evaluacin de la Poltica de Desarrollo Social (CONEVAL)

A situation than has worsened in the last 5 years.

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PRICES OF NON-TRADABLE GOODS HAVE ALMOST DOUBLED WHEN COMPARED TO TRADABLE GOODS
Price index Tradable & Non Tradable Goods
1000 965

800

% Accumulate growth

Non Tradable Goods Tradable Goods

600 581

400

200

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

Source: Estimated with data from Producer Price Index (INPP) - INEGI TG = Sector Industria manufacturera; A limentos, bebidas y tabaco - Textiles, prendas de vestir e industria del cuero - Industria de la madera y sus productos - Papel y sus productos, imprentas y editoriales - Productos metlicos, maquinaria y equipo NTG= A gropecuario, silvicultura y pesca - Construccin - Industrias qumicas, de petrleo, caucho y plstico - Electricidad y gas

Monopolies reduce the return of investment.

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CAUSES OF MEXICOS WEAK GROWTH

The unbalance of relative prices reduces the return of investment for the national producer. This lack of profitability in open sectors eliminates the stimulus for investing for the majority of businessmen. This weakened investment causes insufficient new business and jobs. Consequence: Weak economic growth

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THE CAUSE OF THIS UNBALANCE OF RELATIVE PRICES

The state monopolies (mainly energy) abuse act as indirect tax collectors to increase government revenues and spending. Lack of internal competition in key sectors Use of monetary policy and exchange rates to control inflation

Actions and omissions of State increase the problem

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THERE IS A CORRELATION BETWEEN UNBALANCED PRICES AND LOWER INVESTMENTS

Three decades of such unbalance have stagnated investment

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RESULT 57 millions citizens in poverty 20 millions of unemployed & underemployed 13 millions in extreme poverty Violence, crime and insecurity Loss of national standing and confidence.

Not the best scenario for doing business

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PROPOSAL

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What we need to do?

A shift in strategic direction: Macroeconomic policies aimed at developing the national productive sector.

A policy for the 99%.

New strategic direction

1. 2. 3.

Macroeconomic equilibrium Austere and efficient Government Competitive Energy prices similar to countries with high GDP growth Better competition in sectors with high market concentration (Internal prices reduction) New small business financing schemes (similar to SBA in US) Select national projects of infrastructure to detonate regional development
An improved scenario for doing business
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4.

5. 6.

2012 - 2018 GOALS

16% growth in total investment: private and public Generation of 7 million new jobs Economic growth above 6% Improving 30% the minimum real wage Reduction of poverty in 13 million people, eradicating extreme poverty.

Return to the path of accelerated growth

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ONLY GROWTH BRINGS NEW EMPLOYMENT, INCREASED WAGES AND A BETTER QUALITY OF LIFE

Scenery in sex year Annual Economic Growth Accumulate GDP growth Accumulate GDP per capita growth GDP per capita USD (base 9,400 Usd) Accumulate rate reduction Poverty* Poverty as a share of population absolute poverty (millions of people) New formal employees (millions)** Decrease of informal employees (millions) ***
Source: Estimated with data from INEGI & CONAPO
* Assume a d ecrease of 6% in poverty with a 8 % of economic growth ** Estimated with regression -> Employees = c + B*Ec.Growth *** Gap between n ew formal employees & Labor Force

2% 12.6% 2.4% 9,624 9.3% 47% 59 4.3 -0.9

6% 41.9% 29.0% 12,123 30.2% 36% 45 7.5 2.3

8% 58.7% 44.3% 13,562 41.9% 30% 38 8.6 3.4

Economic Growth = More employment.

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INVESTMENT REQUIREMENTS
If we aim to grow at a rate of 6% we need to increase the investment rate to 16% or higher

To revert this tendency of weak investment we need deep changes

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ACTUAL INVESTMENT TENDENCY IS INVERSE TO THE REQUIRED

Ec.growth= C + B*Inv

The bad economic policies have slowed the investment needed for sustained growth

25

The Asian lesson is clear: in the three dragons with low investment in the 1960s (South Korea, Taiwan, Singapore): Their government supported the process of capital accumulation by stimulating private investment Saving rates rose as better opportunities of investment were present
The New Global Economy and Developing Countries: Making Openess Work. Rodrik, Dani. Overseas Development Council, Washington, D.C. 1999

Good investment opportunities bring higher savings

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3/4 OF THE TOTAL INVESTMENT IS PRIVATE (DOMESTIC)

Investment - 2011*
Public Sector 20% Private Foreign 5%

Private domestic 75%

Source: Estimated with data from INEGI & Bank of Mexico
* Second quarter 2011

We need to stimulate 6 Million business people in Mexico

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1. Macroeconomic equilibrium

Collaborative Economic program: 1. No deficit 2. No inflation 3. No external imbalance AM has no commitments, he can liberate the economic pressures that maintain stagnation He has been a responsible governor Responsible Financial management Outstanding rule of law Undisputed results.

Keep the books balanced. Never sacrifice growth.

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2. Austere and efficient Government

Reduction of bureaucracy spending (austere) - 300mmp Fight corruption in all government levels Saving 10% of budget - 370mmp No tax increments Redirect spending to investment (efficient) Eliminate special privileges in taxes and increase tax revenue 350mmp Eliminate IETU Tax
Government doesnt need to increase taxes, it needs to eliminate unnecessary spending.

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3. Competitive Energy prices similar to countries with high GDP growth

Increase investment in exploration, extraction, refining and technology Optimize operational cost of PEMEX and CFE Reduce corruption Modify/revise transfer prices and subsidies accounting Fix prices to guarantee competitiveness Reduce waste and theft in energy sector

Use it as leverage for National growth

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4. Better competition in sectors with high market concentration (Internal prices reduction)
International competitive energy prices Reduce or eliminate regulations and privileges that reduce competition Use the Governments buying power to reduce prices and anticompetitive practices
Promote new businesses in key sectors (promote competition) Reduce regulations that diminish competition Open up markets and sectors with high concentration Promote full autonomy in legal, fiscal, administrative and policies of competition regulating bodies Promote transparency and coordination between the different regulating bodies Avoid the control of the regulated over the regulators

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4. Better competition in sectors with high market concentration (Internal prices reduction)
Efficient law enforcement (anti trust law) Build strong local banking to promote competition in the financial sector

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5. NEW SMALL BUSINESS FINANCING SCHEMES

Create the Corporation of Insurance and Promotion of Credit . Stimulate commercial banks to meet their role of funding the productive sector Limit the current excessive charges on commissions Establish funding goals Macroeconomic policy oriented to favor competitive interest rates Limit the flow of speculative capital Public sector without deficit Propose to Congress a new mandate for Banco de Mxico to include stability with economic growth (Similar to Federal Reserve in U.S.)
Banking that really supports the productive sector
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6. SELECT NATIONAL PROJECTS OF INFRASTRUCTURE TO DETONATE REGIONAL DEVELOPMENT.

Projects
Tizayuca Airport Trans Isthmus Salina Cruz Coatzacoalcos Corridor Rapid Trains in the North and South Consolidate basin management for the Grijalva, Usumacinta and Papaloapan rivers South-eastern reforestation. New highways, specially in the south-east

The funding may come from a variety of sources: public, private, international. But it is the State that should be the promoter

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Conclusion
Collaborative effort with Andrs Manuels team and independent businessmen Unique program Long term vision A possible, viable and necessary plan Profitable for businessmen: +IRR Focusing on investment as a platform for employment Strategy of proved success
www.despiertamexico.org/empresarios
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New strategic direction

1. 2. 3.

Macroeconomic equilibrium Austere and efficient Government Competitive Energy prices similar to countries with high GDP growth Better competition in sectors with high market concentration (Internal prices reduction) New small business financing schemes (similar to SBA in US) Select national projects of infrastructure to detonate regional development
An improved scenario for doing business
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4.

5. 6.