BUSINESSWEEK ONLINE : JULY 24, 2000 ISSUE
INTERNATIONAL BUSINESS Q&A with Mexico's Luis Ernesto Derbez President-elect Fox's economic adviser on the new Administration's plans to remake the country's economy Luis Ernesto Derbez, 52, spent 14 years at the World Bank helping restructure economies from Africa to Central America. He heads the economic transition team for Vicente Fox, the former governor of Mexico's Guanajuato state, who on July 2, won the presidential election. Derbez, who holds a doctorate in economics from Iowa State University at Ames, was for a time a professor at the Technological Institute of Monterrey, where he taught Eduardo Sojo, one of Fox's closest advisers. Four years ago, Sojo introduced Fox to Derbez, who 1 1/2 years ago left the World Bank and formed a think tank in Monterrey, where he and a team of economists have been drafting a six-year development plan for Fox's Dec. 1, 2000-06 term in office. Just five days after Fox's election, Derbez met with Business Week's Mexico City Bureau Chief Geri Smith to discuss Fox's plans to reshape the Mexican economy. Edited excerpts from the wide-ranging interview follow: Q: Why kind of economic policy is Fox going to implement? Is he a supply-sider? A: What you will see in Mr. Fox is what he said: Stability is the most important question that we have to preserve in the economy. So what we will see is very prudent fiscal management...that will support the monetary policy of the central bank, so that we can have two targets that are very clear to us: One, reach an inflation rate of about 3% toward 2003-04, which is the objective of the central bank, and second, interest rates coming down in real terms so they will be not higher than five real points. We want to make the economy competitive on the financial side and the only way to do that is through a fiscal policy that, in combination with a monetary policy, will be such that the congruence and coherence will bring you to these two targets. You can expect that from a Fox Administration. That implies that we'll have to look at fiscal reform, at the usefulness of certain expenditures, so we can really zero in on those aspects that are important for the long-term development of Mexico. The second thing you will see is stability, then human development. This is tandem -- they go hand in hand.... As President of Mexico, what [Fox] wants is to provide opportunities for those 40 million people who are now living in poverty. In order to do that, we have to put together programs that will set out very clearly what are the investment requirements in education and health. So the question will be, am I going to be able to increase revenues and create the independence of those revenues from oil prices? That's important, so I can have this investment in human development, in opportunities for people, that will bring not only growth to the economy but also a better distribution of wealth to society. That's not what supply-side economics is, and we do not anticipate becoming supply-siders. The other thing you can expect from Mr. Fox is a complete adherence to the globalization process. As an entrepreneur himself, he is fully convinced that the way Mexico can grow, and grow fast, is by taking advantage of these international opportunities. So, Secofi [Mexico's Commerce and Industry Secretariat] will be more of a promoter of Mexican products. They will go and look for foreign investment to be brought into Mexico, and foreign markets to be opened to Mexico. It will be a coordinating agency in a way, providing the opportunities for Mexican producers to export, not one-shot exports, but a continual flow that will make their enterprises grow. He has proven that in Guanajuato: He created warehouses in Texas and California, where the state of Guanjuato created the warehouse but it was managed and administered by the small and medium entrepreneurs of Guanajuato as a showcase for their products and as the means of creating business in the U.S. By putting this together...he gave a tremendous impulse to small entrepreneurs, linking them to international economy. In addition, he traveled [overseas] and won investment for Guanajuato. But the key to his success was how he was able to bring in all these small and medium enterprises aboard the globalization [process]. Q: Mexico has become the world's 13th-largest exporter. But only 2% of the components in maquiladora products are provided by Mexican companies. How do you increase that percentage without engaging in "import substitution," which was in vogue when Mexico's economy was tightly shut in the 1950s through 1970s? A: If you think about what import substitution means, what comes to mind is the...policies of the '50s and '60s. Import substitution in a global economy is simply providing the working conditions to companies in Mexico to have a level playing field with international companies. So even though people use it as a bad word, an import-substitution policy today [means asking], "What are the requirements for my companies so they can efficiently compete with international companies, so that Mexican companies can compete internationally without any distortions or barriers being imposed by the government?" We did a study on why maquiladoras only use 2% Mexican components. The maquiladoras tell us, "I ask my suppliers to provide me with quality and just-in-time delivery, and of course the lowest possible price." They say they wouldn't hesitate to use local suppliers. But I'll give you an example of how difficult that is today. I spoke to a gentleman from a medium-size Mexican company who wanted to provide inputs for Sony in Mexicali. He showed Sony that he could produce this component with the right quality standards. Sony was happy, because it was [also] lower-cost, and said, "Fine, I need 7,000." So the guy said, "O.K., I'll start delivering to you as of tomorrow so we can have the 7,000 at the end of the month." And Sony said, "No, I'm talking about 7,000 a DAY -- can you do that?" And he said, "No, I can only produce 7,000 a month." The local manufacturer couldn't do it because he couldn't get credit [to expand his operations]. Q: So what's the solution? A: You have excellent macroeconomists in our government, but terrible microeconomists. We need microeconomists, people who have been working in business who understand these issues. What's necessary in Mexico today is to provide [a way] for these credits to reach these people and link them [to buyers]. It could be done through a commercial [banking] institution and the government could provide a guarantee, and this gentleman could get the required investment so he can produce what he needs to. The loans would not be at subsidized rates. Q: Do you have any targets for increasing percentage of inputs in maquiladora industry? A: We talked to the maquiladora industry and to people that could become suppliers to them, and if you do it right, towards the end of the Administration we hope to have 20% value added. Q: Previous governments have failed to reach these people with this kind of help? A: The past three governments, I would say, yes [have failed]. If you look at the programs which exist today, they look impressive on paper. The only problem is, they haven't applied those programs. They have no money assigned. You cannot make these programs work if you don't put any money into them. The biggest problem we're facing today in Mexico is what they call industrial policy -- we want to call it "entrepreneurial policy." We have to go beyond industry, to commerce, tourism, agriculture and everything else. As we do this, you will start seeing more and more how these companies integrate into the globalization process. As [that happens,] you see more and more acceptance of globalism by the Mexican population -- if I'm reaping the rewards of globalization myself, I'll believe in globalization. Right now, there's heavy criticism of globalization in Mexico because people say that only a few people get anything out of it, the majority don't get anything out of it. So we have to reverse that. Q: The same is true of NAFTA, not everyone benefits? A: Yes, but we also have to understand one thing. NAFTA has permitted Mexico to grow. And yes, those large companies benefited, but the people working in those companies have also been rewarded. When people talk about increasing salaries, just look at what the maquiladoras did in increasing salaries. The best salary levels, the best benefits for workers, are in those companies, because they have markets, they can pay well, can grow, can expand, and can provide jobs. So even though it's true that the majority of benefits have gone to large companies, it's also true that without them, we would be in even deeper trouble than we were in 1995. So what you need to do, whatever has happened to the large companies, find a way that it also happens with the medium and small companies.... Q: Now that the excitement of Fox's victory has passed, analysts are starting to say they're worried about an overheating of the Mexican economy. A: We have an economy that has grown tremendously because of the favorable external circumstances. In that regard, the equivalent of overheating will be that you may end up in a balance of payments crisis. The numbers so far show that the balance of payments is not a major concern and should not be a major concern. The economy is growing faster than everybody expected. It's important, true, that we now somehow visualize the possibility...of a slowdown in the U.S. economy, and then prepare ourselves for that soft landing. Towards the end of the year, [we may see] a weakening of the growth of our exports because of the weakening of the U.S. market, which represents 85% to 88% of our total market.... Therefore I think we should be looking at the conditions under which we, the Fox Administration...should have a fiscal policy that will be extremely prudent for next year. You can expect this concern to be reflected in the elaboration of the budget. [We should] define as a clear objective a public-sector deficit of 1/2% of GDP. Why? Because that will send everybody a clear message that we are ready for a slowdown of the U.S. economy and even a drop in oil prices. The budget should provide the guarantee to everybody that we're ready...by slowly bringing the economy into a slowdown to a rate of about 4% to 4.5% for next year. Q: Should the current Administration be sending out a message by clamping down on fiscal expenditures now? A: We cannot say what the present Administration will be doing. We will be in conversations with them as we work together. As you know, there's an agreement now between President Zedillo and President-elect Fox that a team on our side, which I'm going to be in charge of, will be working with the current Administration in elaborating this 2001 budget. Q: Have you spoken to Finance Secretary Jose Angel Gurria? A: No, I have spoken with [central bank head Guillermo] Ortiz and the five vice-governors [on July 6]. We had breakfast for about two hours. I've known Guillermo Ortiz for almost 30 years, we studied together at the University of Colorado at Boulder. Q: So do you see eye-to-eye with Ortiz on monetary policy? A: Yes. If anything, I may be more restrictive than he is. (laughing) It was an excellent conversation with all of them. [We gave them] very clear ideas of what we have as a program. You'd have to ask them if they were pleased with the conversation or not -- I was very pleased. We have a very good rapport with all of the vice governors and the governor, and I've known two of them personally for over 30 years.... Q: The last time Business Week spoke with Ortiz, about six months ago, he said that he was waiting for the election of the next Administration so that he could coordinate with them, that he wanted to implement inflation targeting but wanted it to be a shared goal with the incoming President. Do you anticipate inflation-targeting being a goal of the Fox Administration? A: Absolutely. It's written in documents that we provided during the campaign. First, we fully respect the autonomy of the central bank in terms of monetary policy, Two, we fully agree with the targets provided by the central bank, of having an inflation rate of between 2% and 3% by the year 2003. Those two will be supported by our fiscal policy, because we have to be coherent between what we do on the fiscal and monetary sides, so we can reach those targets and real interest rates of no more than five points [above inflation]. Q: In order to do that, you'll have to have more revenue. How quickly can you implement fiscal reform, given the defeat of the PRI, which may mean the sidelining of PRI technocrats who had pushed through fiscal initiatives? You could have a tough battle ahead of you. A: Well, we might, or we might have an easy one. Who knows? The style of government of the Fox Administration will be completely different from the one that you are used to. What is means is, we will discuss things, we will go to congress to lobby, which is what normally you do in any democracy in the world. [Previous PRI governments] never did that -- they simply sent the documents to congress and asked them to approve them as they were. I haven't seen a country where I have worked in my life, except dictatorships, where you do that. In any working democracy, you would go to congress and start discussing [your objectives] with them from the beginning. And you would reach a consensus as to why it makes sense to do it.... Q: Can you give some specific examples of what you'll do on the tax side? A: I can't really, at this time, because we already are receiving a lot of fiscal-reform proposals.... So what we want to do now is look at all the different approaches, examine them, and come to a conclusion. There are three things we know for sure: First, you have to increase the taxpayer base.... You have to take administrative measures so that you reduce evasion and you have to clean up the system to reduce erosion. The question is, are you going to be hitting people in low income brackets on that? Well, it depends how you do the reform. We have to review the people that would be affected, and if we find it's truly necessary, then we can provide a counterpart through the expenditure side, with some limits so that it's very transparent and controllable. We have to find out why [numerous corporate tax] exemptions were provided. Maybe people don't understand why they were provided. Maybe in the past they were necessary, but not today it's not clear they are necessary. Q: One of the things under consideration is adding food and medicine to the value-added tax list. Isn't that going to be wildly unpopular? A: Everything is under consideration. But one thing that has been made clear by President Fox, we will not touch those areas where we would be affecting the poorest of the poor.... Q: About 40% to 50% of the economy is the informal economy. How do you bring in these people? A: Let me give you three examples: The first: You go to these people and ask them, "When do you expect to be old?" And let's see what the answer is. You'll probably find out that they'll become old when they're 60 or 65. So the next question you ask them is, "Do you have a pension for old age?" My guess is that 80% to 90% will say they have no basis for income after their productive years are over. So we'll say to them, "O.K., let's bring you into the formal sector so I can provide you with some form of bonus that will go into the pension fund so that in old age you have something to live on." That's an incentive we can offer. What kind of health care are you receiving? I'll bring them health-care centers.... And the third thing is credit. Who lends you money? The loan shark on the corner, he's charging you 80% interest rates. O.K., I'll provide you with 30% -- come to the formal sector. If you have a tax structure that implies that up to certain levels of income people don't pay -- progressivity -- then you can bring them in so that, even if at the beginning they don't pay, you bring them into the formal system and they will be registered.... Q: What is your timetable for increasing tax collection? A: In the next four years, just by administrative measures, and making [the federal tax agency] more efficient, you will be able to bring in about two points of GDP. [You can do that] by using modern technology to do cross-checks on people. So we're looking for another four points. Fiscal reform will take place in 2001 and will start having an impact in 2002. We're figuring a 1% of GDP increase [in tax collection] per year, [for a total of] 6% of GDP in four years. That's pretty conservative, because in most countries it has been faster than that. At same time, we'll do the same on the expenditure side, not by creating bureaucracy but by creating programs that will be transferring resources to specific activities in the private sector, particularly small- and medium-size firms...so you can have a true entrepreneurial revival in the economy at the small and medium businesses, which is where business generates employment. We need to do that to reach the goal of 1.35 million jobs which we've set as our target. Q: And your goal is to reach that level of job creation by the 4th year of the government? A: Our goal is to do it as soon as possible, but we are very conservative in our projections, and we know that the economy is finally reaching the target of [creating] 1 million jobs a year. Taking that as the basis of growth, we're saying we have to grow 350,000 jobs. Through measures such as providing credit lines to small enterprises, we think we can create between 50,000 and 75,000 new jobs, if not more, per year. So we'll be reaching 1.35 million jobs per year by the end of 4th year. The optimistic side of Mr. Derbez says, maybe it will happen sooner, because I've seen it happen sooner in many countries. If you do things right, if you really wake up the entrepreneurial spirit, you'd be surprised how quickly it can happen.... Q: But that's also assuming that if the U.S. economy slows down, your targets could be smashed a bit. A: It depends. [If the U.S. economy slows down,] if we provide medium-size enterprises with credit, and if they can provide [components] at a lower cost, maquiladoras will turn around and use them for a competitive edge. That will allow them to penetrate the U.S. market at a lower cost than before. So even if exports don't grow as fast, you will maintain more or less the level of exports that we have and a better linkage to the intermediate parts of the economy. [In addition to offering credit,] we will help with training programs. There are a lot of training programs that are being wasted now in Mexico because of lack of coordination. Then you have to give access to working capital, because it allows them to have inventory that will permit them to be just in time. Q: Returning to the question of overheating, former President Carlos Salinas always said that developing countries have to have large current-account deficits, because they need to import components for the export industry and to develop. A: No, he was wrong. The traditional theory of development is that developing countries need to have a current-account deficit. It says, we are not exporters of capital, we should be importers of capital, and so we need to be sure that we are importing capital so that we can grow faster than with our own savings. But the best growth will come from strengthening with your own savings and then taking [additional] savings from outside. But what the financial markets have shown is that emerging economies are severely judged on two grounds: What's the level of the current-account deficit that you have in proportion to your GDP, and secondly, what reforms are you doing to your economy that are allowing you to bring foreign direct investment as the majority of the financing of that current account deficit? During the Salinas Administration, he didn't respect either one of these two rules. He may have been right, if he had been able to bring foreign direct investment -- I'm not talking about foreign capital flows -- at the level the Zedillo Administration is doing right now, which covers 75% or 80% of that deficit. Then, what he [Salinas] was saying would have been true. What we're saying is, look, we're growing fast. And if we want to grow fast, we need to carry out sectorial reforms that will show people that the efficiency gains of investment in Mexico will be high, so they will be willing to bring in their investments to Mexico and Mexicans will be willing to re-invest in Mexico. As that happens, you'll be increasing national savings. That's where we're heading. The $20 billion to $22 billion that we have in our assumptions as annual foreign direct investment [by the end of Fox's term] comes from the fact that we expect the economy to expand continuously for the next six years. And that $20 billion to $22 billion will represent 80% to 90% of the current-account deficit, and that will be more or less between 3% and 4% of GDP. Our target is to never be beyond the target of 4%, and hopefully below 3%. This is the boundary we're planning. Q: A number of analysts are worried that, given the current signs of overheating, the current-account deficit could be 4.5% next year. Does Gurria have to crack down on the fiscal side during the next five months? Can you afford to wait till you take office? A: I think Gurria needs to do his part, yes. But even if Gurria were not ready to do his part, we're already working on a contingency program that would simply imply that we will control the economy next year so that our current account deficit doesn't go beyond 3% to 3.5% of GDP. We have to be very careful to bring down the growth of the economy and continue with [better income] distribution than before, so that the pain is not inflicted only on poor people. But at the same time, we need to recognize that the financial markets may be scared if a new Administration has more than 4% GDP deficit. I have discussed that with people in the international capital markets, and they simply say, "If you're doing the sectorial reforms that you saying you'll be doing, then the markets will not be unwilling to finance a 4% deficit." Why? Because 75% of that will be financed by foreign direct investment and only 1% is really capital flows. Q: What are the main reforms you need to carry out? A: We have to do something on electricity, petrochemicals, and fiscal reform. Q: Also better regulation of such areas as telecommunications? A: Yes, but those are minor reforms, those are easy to implement because they are [executive-branch] prerogatives. We don't have to go to congress for that. Q: When Mexico grows a lot it tends to import a lot of intermediate goods, more consumer goods. Fox is promising 7% annual growth. But the faster Mexico grows, the faster its current-account deficit seems to grow. A: When I was a student in the '70s, this was the discussion -- of the need for structural reforms in the economy. Every time we grew over 5% we had a balance of payments crisis. And it's incredible that 30 years later, we're discussing exactly the same thing. I can't believe it. It means we haven't done our work in the structural reforms. Privatization is just the first step in making the economy more efficient. The second step is that you have to have competitive markets. So regulation of those markets so they will be truly competitive will start changing the rules of investment and therefore of growth and productivity in those sectors, making them less dependent on imports. Secondly, if you finalize those structural reforms in areas that are key to the economy, and I just mentioned a few of them, then you can have a tremendous change in the structural capacity of this economy to have a balance between exports and imports. Why don't we have [that balance]? One, is the distribution of income. Our consumption pattern is geared to bringing in imported products from the U.S. and Europe for the high-income classes, and I include myself in that group. We want those products because they have the highest quality and lowest cost. Why is it that our products have such a high cost and low quality? Because there are tremendous distortions in the economy, either because we have oligopolies, lack of competition, or in the public sector we have created distortions either by subsidies or by imposing [more restrictions] than we should in certain areas.... Q: Salaries finally appear to be improving above inflation, but that could contribute to overheating. A: As long as your salary increases are a result of productivity increases, that's not bad. And as long as you eliminate the distortions so you can have the supply [of goods] that these people will demand, there will be no overheating of prices. Most of the people you're talking about tend to consume more national items than [imported ones]. Take a guy who has been losing 45% of his purchasing power in the past 18 years. What do you think he's going to spend it on? Food, clothing, housing. Most of those products are national. Q: How about productivity increases due to companies' investment in technology, not due to workers becoming more competitive or better trained? A: That's good because it will increase the competitiveness of the economy, which will in turn bring more demand for jobs. I have this new technology, do I have the workers for that? If I don't, the market will tell you that you have to pay a higher price [in wages]. And that means you should train people to do that. Our educational system is wrong. We should respond to that so we can have the right balance between salaries and capital return. Q: What's the timetable for doubling the educational budget? A: We're going to go step by step. As we get more revenues, we will go into the expenditures. Fiscal discipline is the overriding factor. We know that equilibrium in the economy is the most important thing. Mr. Fox is talking about [taking education spending] to 8% of GDP. The federal budget has 4% of GDP in education and the state governments have another 1%.... The other thing is quality of education and something he has strongly pushed for is...adult education and training. Q: How has 15 years in the World Bank prepared you to actually run Mexico's economy? It's one thing to pontificate and quite another thing to actually implement reforms in a political setting. A: Some analysts have said recently that I'm a very pragmatic person who will listen and try to put together the best program, and then will defend it very strongly. What the World Bank has taught me is that you really have to look at the problem first before thinking that you have a solution for it. You may have a preconceived solution that makes sense. You want to come with that, otherwise you'll come naked to the table.... Q: How about what some analysts say, that perhaps you'll be named Finance Minister six months into the Fox Administration, so that markets don't worry at the outset about a possible crisis because you aren't as well known as another minister might be? A: That's for the markets to decide. And that's for President Fox to decide. If you ask, would you like to be [Minister], of course, it would be an honor if President Fox were to ask me to be Minister. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Tax Reform: Mexico's Fox Is Pushing the Case TABLE: How Mexico Could Boost Tax Revenues ONLINE ORIGINAL: Q&A with Mexico's Luis Ernesto Derbez INTERACT E-Mail to Business Week Online

Copyright 2000-2009, by The McGraw-Hill Companies Inc. All rights reserved. Terms of Use   Privacy Notice