The Five-O in Mexico

The police have a bad reputation in Mexico. I've heard stories from residents about bribery during traffic stops and collusion with organized crime. In fact, I haven't met a single person with a positive thing to say about the Mexican police, whether it's the federal, state or local forces.

I do not question the seriousness of the problem. In my own experiences in Mexico City, however, I've found the police to be helpful. As a newcomer to the city, I am regularly walking around in search of my destination, whether that's a subway station, a museum or the national cinema. Police officers are a ubiquitous presence in nearly all neighborhoods and so I've found that they are also great guides.

The first few times I approached a police officer I was hesitant, not sure how they would react to my request for directions. But each instance, after asking, 'para el Metro, donde esta,' I've found them pleasant and willing to lend their knowledge to an adrift visitor.

Blood Marijuana

This week was particularly bloody as organized criminal groups massacred people in Tijuana, Ciudad Juarez and Tepic. These are the same groups who import drugs into the US and, consequently, are funded by US drug consumers. Let me repeat that, they are funded by US drug consumers.

Currently, there is a debate over what percentage of drug trafficking revenue comes from marijuana. Some say it is as high as 60% others counter that it is closer to 25%. Both of those numbers, however, are significant.

For those that use marijuana, learn where it comes from. Better yet, get to know your grower. Buy local. Do what you can to make sure the herb you smoke does not come from across the border. If you don't, you are complicit in the atrocities committed by the narco-trafficking groups. Just like blood diamonds that come from West Africa, there is blood marijuana.

Cocaine, heroine, and methamphetamine account for the remainder of the drug revenue. Unfortunately, I don't believe an appeal to users of these drugs would do much good.



* On a related note I watched a video the other day of a discussion put on by the Council on Foreign Relations about Mexico's problem with organized crime. It's wonkish but also contains an informative and spirited debate. I recommend it for anyone interested in learning about proposed solutions to this problem.

Mexican Leaders in Denial

Mexico's Secretary of Treasury, Ernesto Cordero, said this week corruption in Mexico does not affect foreign investment. I was astonished to read this but it reinforces my perception that most of Mexico's top leaders are in willful denial.

Now, it's difficult to say how many dollars, euros, or yuan would flow to Mexico if corruption was not on the rise but it is clear that corruption raises the cost of doing business and, perhaps more importantly, creates uncertainty about costs. Any wise business owner is going to take this into account when deciding where to put their money. Between two similar opportunities, investors will take the one with the fewest unknowns.

Mr Cordero's announcement comes on the heels of a similarly obtuse statement he made three weeks ago. He said violence from organized crime hasn't had an affect on economic growth.

So the disastrous drop in tourism has no connection to the reports of violence that potential travelers are watching on the news, huh?

Mexico faces many challenges including organized crime, a stark divide between rich and poor, and system of government that structurally resists change. To effectively confront these problems, the first thing Mexican leaders need to be is forthright. Otherwise the high-levels of cynicism amongst the public will continue and nothing will improve.

Back in Mexico!

I'll be updating this blog again with my thoughts about anything in Mexico from economy to sports to simple particularities and eccentricities of the people. To kick things off, I'll start with a quick perception about food vendors on the street.

It's hard to find a better lunch deal than tacos for 3 pesos(25 cents) or sopes for 6 pesos and, for me, finding a cheap and hearty meal is akin to Warren Buffett finding his next million dollar investment.

But here's the interesting part. Every taco vendor I've encountered has been a guy while every sope vendor was a woman. I can't see any inherent reason for this other than it being cultural. Tacos and sopes are not that different. Nevertheless, it's an incredibly stark contrast.

I'll post more if I gain any insight into this.

The Drug War

In Mexico, drug violence is the topic most reported on by the international media. In my travels, however, I have not witnessed any of this bloodshed – thankfully. The only experience I have with these events is from the random roadblocks set up by the Mexican army.

On many of the smaller highways the army sections off short detours. Cars are directed off the main road and through a lane of traffic cones and sandbags toward awaiting soldiers. As you approach, one of these soldiers either waves you by or tells you to stop for questioning and a possible search of your vehicle.

I was nervous the first time I drove up to one these checkpoints. I heard all the stories about Mexican law enforcement extorting money from tourists and I was ready to go into a diatribe about corruption and the rule of law. But these soldiers turned out to be both professional and courteous. They asked where we were headed and where we had come from, and then said, “buen dia” and waved us by. Every subsequent encounter has only reaffirmed this impression. These guys are serious about their mission of finding drug traffickers and have no interest in bullying the random citizen or tourist.

I am not well enough informed on this issue to say whether this battle is a wise idea or if it’s being carried out properly. I can say, however, that an overwhelming majority of people that I have spoken with are not in favor of president Felipe Calderon or how he is carrying out this fight. This is understandable considering the frequent bloodshed suffered by innocent civilians especially in the city of Juarez. The recent massacre of sixteen teenagers there is one of the most dreadful examples.

Recently in Mexico City, citizens have displayed signs saying “todos somos Juarez,” or “we all are Juarez.” This show of unity is powerful and I think it is necessary for everyone in the country to take this problem on as their own. But there also an international element to this conflict. Americans, for example, should understand that the demand for drugs is what’s funding this battle. One that is currently concentrated in Mexico but could easily spill over the border.

A "todos somos Juarez" campaign amongst those in the United States would change the perception of this conflict from a foreign event to a domestic one. Let me be clear, however, I am not in favor of militarizing the US border. I would prefer to see local efforts to combat this problem.

For example, anyone who uses marijuana should find out the origin of their drug and boycott any that comes from south of the border. I think a buy local campaign with marijuana could work and, consequently, make a significant dent in the revenues of those who are committing these atrocities in Juarez and elsewhere.

Quick snippet about Walmart of Mexico

In the US, we know Walmart for its Supercenters and Sam’s Clubs. In Mexico, not only can you find these big box stores but also Walmart banks, restaurants, grocery stores and mini marts.

Like in the US, these Walmart stores earn market share because they are big enough to set the price of production. They are not one actor amongst many following the direction of the invisible hand. Rather as they drive out smaller businesses they become the invisible hand and wages, for example, are set arbitrarily low rather than by market forces. Up until 2008, many employees were even paid in store credit, similar to the coal miners in early 20th century West Virginia. Thankfully, the Mexican Supreme Court declared this practice unconstitutional a year and a half ago.

The Surprising Peso

In the United States, most of us don’t worry about currency crises. Politicians rarely talk about the stability of the dollar because it is a world currency. Global demand keeps its value relatively stable and allows us to focus on other topics.

Mexican policy makers, on the other hand, continually keep an eye on the movement of their currency because the peso has endured a number of rapid freefalls throughout its modern history. The cause is often a sudden drop in exports, which causes businesses to exchange fewer dollars for pesos. This puts a downward pressure on the value of the peso and generates unease amongst investors. Afraid of a rapid drop, these investors pull their money out of the country, consequently exacerbating the very drop they were afraid of.

In the fall of 2008, as the US financial crises was causing severe loses at the New York Stock Exchange, Stephen Jen, the chief currency strategist at Morgan Stanley, predicted that nations like Mexico would soon face currency and financial shocks. He said, “the US financial sector has been the epicenter of the global crisis. I fear that a hard landing in emerging market assets and economies will become the second epicenter in the coming months.” If you look at the history of developing economies this was a pretty safe prediction.

But in Mexico, Jen’s forecast has proven incorrect. Despite an adjustment in the price of the peso in early 2009, there was never a freefall. Why is this? Why has the Peso shown resilience in the face of a severe recession? Why hadn’t investors pulled their money out of the country at the first sign of turbulence like they had in the past? I had been asking myself these questions since I arrived in Mexico in November, and I presented them to just about anyone that wanted to listen. I also searched the web to see if anyone else was discussing it.

The best answer I found was in an academic paper covering this very topic, written by American University professor of economics Arturo C. Porzecanski. I encourage everyone to read it. Porzecanski stated that a number of factors contributed to Mexico’s – and most of Latin America’s – hardiness during this crisis. He also contrasted Latin America with Eastern Europe, which have suffered considerably during the crisis.

One factor is the debt that Mexico incurred prior to the crisis was primarily denominated in pesos, as opposed dollars. This was the result of a growth in the domestic bond markets for both the Mexican government and large Mexican corporations. In the past, Mexico’s credit channels were typically in dollars, which meant that if the peso dropped Mexican debt grew proportionally.

Porzecanski also explained that the current banking system is more locally self-sufficient than in the past. In other words, money for loans was earned in the same markets where these loans were distributed. Finally, he stated that at the beginning of the crisis, the level of both public and private debt in Mexico was relatively low. This added a layer of credibility to finances and kept investors fears at bay.

I think Mexico has taken a crucial step over the past 10 years and, perhaps, the peso is no longer a particularly volatile currency. This story, however, isn’t over. Recent troubles in Venezuela and Argentina can spill into Mexico despite the improvements in its financial stability. Also there are still real problems in the Mexican government, from corruption to economic policies that hinder productivity.

These problems can slow growth and with the recession not over yet, investors may still get scared away. In emerging economies, policy makers really have two sets of constituents – their citizens, and international investors. If they don’t keep both confident and happy, they will face problems.

Options in the Car Market

Let’s say you’re in the market for a new car. You’re looking for a reliable and fuel-efficient sedan but you don’t have $25,000 for a new Prius or diesel Jetta. You also shy away from those second-rate car companies, like Hyundai or Saturn. If this is you, I would recommend the 2010 Nissan Tsuru. It has a sticker price of $8700 and gets 39-47 miles per gallon.

Or maybe you’re looking for a small utility truck. You need a vehicle that will fit into the cramped curbside parking spots outside your house but still be able to haul those bags of concrete for your backyard projects. Again, you are looking for fuel-efficiency, a carmaker with a proven track record, and you have a budget of about $10,000.

The Ford Courier would be a good choice. With a regular Ford truck suspension, this 95 horsepower vehicle can carry 1500 pounds. And for a price of $10,680 it is accessible for many.

However there’s just one problem. If you live in the United States you won’t be able to find either of these cars at the dealership. They are just two examples of car models that I have seen in Mexico that do not exist in the US.

And from what I’ve observed, those cars that are absent in the US are generally fuel-efficient and inexpensive. A combination that is difficult to find in the second biggest car market in the world. The Tsuru, for example, is similar to the Sentra from the 1990’s but with some simpler components such as manual steering and non anti-lock brakes. The Ford Courier is one of various “mini” trucks found throughout much of the world.

It is a common practice for car companies to target certain markets with particular models that they believe will be profitable. However, in a time when money is tight and gas prices are expected to rise, I'm puzzled why we don't see cars like the Tsuru in the US. Perhaps Nissan is afraid the Tsuru would crowd out their more expensive cars and the higher profit margins that come with them. But, nevertheless, I think there is a golden opportunity for a car company to capitalize on this niche market of fuel-efficient $10,000 cars.

In Mexico you can find anything from the Hummer H2 to the diminutive Ford Ka, and perhaps, in the automobile sector, the US's southern neighbor is the land where freedom of choice reigns.

Small Businesses and the Informal Economy

With my first entry I going to jump right into it and talk about the informal economy here in Mexico. But first, a definition: The informal economy generally refers to individually owned and operated small businesses that exist outside of the tax system and lack reliable access to credit. These businesses are usually run out of a home, on the street, or in an open air market, and can include just about any consumer good or service imaginable, from homemade tamales to t-shirts made in China.

During an economic crisis, as workers are laid off and jobs become scarce, this sector grows. When a worker loses their job in the United States they apply for unemployment insurance. In Mexico, the recently unemployed often start a business. This spirit of entrepreneurship is inspiring but it also shows the disenfranchisement of a significant amount of the community. By some estimates, 40% of the goods sold in Mexico are from the informal economy.

For many, days are long and there is little chance of seeing their business grow because they lack the necessary credit. I was at a cafe the other day in the center of Mexico City when an older man with a bucket of soap and water walked in and approached the barista. With my struggling comprehension of Spanish, I thought I overheard him ask if they needed their door cleaned. The barista nodded "yes" and the man went to work. It turns out he asked if they needed the tracks on their main garage-type sliding door cleaned. He worked for about a half an hour cleaning out the dirt and rust from these tracks and when he finished I watched the barista hand him 10 pesos (85 cents). The man then went on his way to find his next customer.

Not all people working informally, however, receive such little compensation. In some cases, they may be doing better than those with "regular" jobs. A friend of mine in Guadalajara, for example, is a French teacher. She has a bachelor's degree and worked as a teacher in France for a year. Her salary, however, is quite modest. In contrast, her sister, who did not go to college, works in a market selling pirated DVD's. With the money from her job she drives a nice car, wears fashionable clothes and has an apartment in her city of Atlacomulco.

The informal economy appears to function as both a safety net for those out of work and as an alternative for those who do not want the constraints of a formal sector job. It seems to me, however, that the Mexican government should try to "formalize" these businesses by opening up channels for credit and also taxing their profits. This is certainly a tall order and it would be difficult to construct an accurate and fair tax regime. But, by allowing these businesses to plug in, I believe it will create a more fertile atmosphere for innovations to prosper. Consequently, this would create more home grown jobs in Mexico and generally make the people better off.



Also, here's an interesting podcast from NPR's Planet Money, which talks about the benefits of legitimizing Jamaica's informal businesses. http://www.npr.org/blogs/money/2010/04/the_friday_podcast_fear_and_ta.html