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Is the Mexican president truly conservative on fiscal policy?

Is the Mexican president truly conservative on fiscal policy?
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Many feared that Mexican President Andres Manuel Lopez Obrador, who had regularly railed against “neoliberalism” on the campaign trail, would inaugurate unsustainable spending and drain the private sector through greater taxation. But since taking office, Lopez Obrador appears to have adopted a stance that is more akin to that of a fiscal conservative than a typical Latin American populist. The story behind his economic policy is more complex, however, and his political motivations for austerity could leave damaging consequences for Mexico and the United States.

During his time in office, Lopez Obrador has set forth annual budgets that decrease funding for various government agencies and lower the salaries of government workers. His calls for a more efficient government and the end of waste and corruption resonate with the Mexican people, who have grown increasingly cynical about the political class over the years.

A more efficient government is certainly a desirable goal. Lopez Obrador has a preference for austerity that initially served to calm investor anxiety as he came into power as a populist in the second largest Latin American economy. However, his spending cuts underscore bitter infighting within the Mexican government, which has been hampering its response to the coronavirus pandemic as well as the battle against organized crime.

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There are some reasons for how Lopez Obrador approaches government budgets, including his personal rejection of ostentatious wealth. However, unlike traditional fiscal conservatives in the United States and elsewhere, his budget cuts are not motivated by the desire to minimize taxation and withdraw the government from activities done in the private sector.

Instead, the current austerity measures are mostly motivated by a rivalry between the Mexican president and the elite political class, which Lopez Obrador often derisively refers to as fifis. Fiscal austerity is used as a tool to punish and reorient what he and his supporters view as the ineffective and corrupt bureaucratic system which primarily benefits the elites.

Corruption and ineffective government spending are certainly prominent challenges in Mexico. But the rivalry behind such spending practices have led the government to make potentially dangerous choices. These include troubling cuts to the budgets of prosecutors, those agencies in charge of maintaining the rule of law, and even the public health system, along with eliminating a government body that promoted trade and investment.

This misapplication of austerity has resulted in a minimalist response for the coronavirus pandemic. As the health crisis and the economic impact forced countries across the world to adopt stimulus spending to support domestic industries and citizens, Lopez Obrador instead resisted calls for assistance. When he finally announced an emergency spending package, the $26 billion price tag was far below what analysts believe is necessary. Even then, the Mexican president promised to offset such new spending with more reductions for government agencies and other programs.

This fiscal restraint is selective, and Lopez Obrador has shown a desire to expand the role of the state in some industries. He has unveiled a plan to expand government presence with the financial sector by building 2,700 branches of a state bank in the next two years, more than any other bank in the country, at a cost of over $500 million. Lopez Obrador has sought to expand and prop up the state oil company partly by the questionable construction of an $8 billion oil refinery in his home state of Tabasco.

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The motivations behind the austerity of Lopez Obrador make this different from traditional austerity. Rather than maximizing government efficiency, removing bureaucratic red tape, and withdrawing from the industries and activities better suited to the private sector, his spending cuts are instead designed to punish government workers and shift spending to revamped programs that could ultimately become as ineffective and wasteful.

While his austerity could yield some positive results in the government, it brings new challenges to the ability of Mexico to weather the coronavirus pandemic, promote economic activity, and address other problems such as the rising violence tied to organized crime. As North America seeks to recover from the coronavirus pandemic, a strong Mexican economy will be key. However, the austerity of Lopez Obrador threatens to undermine the regional recovery and key opportunities for economic growth.

 Andres Martinez is a senior research associate at the American Enterprise Institute who focuses on Latin American government and economic issues.