Speech of Mr. Felipe Calderón Hinojosa, President of the United States of Mexico, during the 18th Plenary Session of the Montevideo Circle Foundation in Mexico City.
July 26 and 27, 2012. Mexico City.
Hello, good morning friends. I salute wholeheartedly and with much admiration Mr. Julio Maria Sanguinetti, President of the Montevideo Circle; Mr. Carlos Slim, Business President and host of Mexico’s meeting of the Montevideo Circle Foundation; I thank Mr. Jose Miguel Insulza, Secretary General of the Organization of American States; I welcome Mr. Enrique Iglesias, Ibero- American Secretary General; Ms. Rebeca Grynspan, Under Secretary General of the United Nations as well as former presidents Belisario Bentancur, Felipe González and Ricardo Lagos. I salute, of course, all Mexican governors present here this morning. I am glad to see such an important gathering: Mr. Carlos Lozano, Marco Antonio Adame, Javier Duarte, Ivonne Ortega and others. I also welcome the elected governors, Graco Ramírez and Arturo Nuñez, the President of the Chamber of Deputies and the Presidents of the Political Parties, Mr. Pedro Joaquín Coldwell as well as senators and members of the lower chamber of Congress. Business people, friends, ladies and gentlemen, I am very pleased to be with you here today at the 18th Plenary Meeting of the Montevideo Circle Foundation. Congratulations to the organizers for this valuable initiative, which I had the opportunity to know a few years ago before I became President of Mexico.
I extend, as always, my admiration and respect to the founder and current President of the Montevideo Circle, Mr. Julio Maria Sanguinetti, former President of Uruguay and of course, my thankfulness to our host, Mr. Carlos Slim, for organizing this meeting.
For more than 15 years this Foundation has been a privileged space to analyze and find innovative solutions to the challenges of the global economy and development goals. All its analysis is made from a comprehensive Ibero American perspective. The Foundation is comprised of an array of personalities from the political, the academic and the private sectors. This combination of experiences is useful for all of us and is thus very welcome. Those visiting us from abroad can feel at home in Mexico, this is your home. You are all welcome.
I find the main topic of this meeting quite interesting and pertinent: “A world in transit: after globalization and economic crisis, are directions clear?” This is the main question and many reflections can be made around it. The main question is undoubtedly about the direction that needs to be taken. This is way we need efforts in the intellectual, academic and government fields to allow us to elucidate our strategies.
I am not sure that we can talk about a post-global crisis. I agree that the topic is interesting but we cannot talk of a post-global world yet. In fact, globalization is here to stay. This was an early finding of the Montevideo Circle several years ago.
However, globalization is the consequence of a massive and fascinating transformation of humankind over the past decades. It is linked to several phenomena that have brought people closer than ever, particularly through the Internet and telecommunications. More than ever, McLuhan’s global village is present today.
While information in the ancient world took several months to travel, even after the arrival of Europeans in America, today, in this precise instant, in a fraction of a second, one can precisely know what is happening in any part of the world and in any topic. This has notoriously brought humankind closer together and accelerated our perception of time decreasing communication processes. This has turned our world into a globe; this is globalization.
Our challenge today is to define which are the correct strategies for public and private action in government, business and consumers in the context of this globalization.
On the other hand, perhaps we should neither speak of a post crisis era, because we are still submerged in this crisis. Today’s context is worrisome and it demands all our attention. We are experiencing the worst economic crisis one can remember, the worst global crisis since it started in 2008. We often hear that this crisis is worse than the 1929 Great Depression. If anyone here remembers the 1929 crisis please raise your hand. We are witnessing the worst crisis ever, the worst we can remember. This is the worst economic crisis at global scale, a long crisis in several chapters.
Firstly, this crisis is a consequence of an explosion and an implosion of a failing financial system, of excessive abuses in the derivatives market and of the atomization of responsibilities over the inherent risks of the market. All this resulted in a total collapse, particularly in the USA, which later affected Mexico. The United States is at the epicenter of the world’s greatest economic crisis ever. This great elephant collapsed right on top of Mexico. In 2009 we suffered one of our deepest economic recessions, and with no doubt the first one clearly generated by external factors.
In 2009, the Mexican economy fell by 10% during 1st and 2nd quarters although the year average was of 6.1% and 6.2% of GDP.
Once the financial markets had relatively recovered, several countries had to deactivate a series of measures they had taken to counterbalance the effects of the crisis. There were different strategies but most countries had to apply counter-cyclic policies to offset the enormous social damage created by the financial downfall. In Mexico, for the first time in the context of such a big crisis, we were able to maintain and even increase investments, notably in infrastructure. We also succeeded in fostering public programs in credit and housing, as well as temporary employment schemes.
Furthermore, we implemented an interesting program for technical job suspensions (“Paros Técnicos” in Spanish) so as to avoid unemployment to over half a million workers in the Mexican exporting sector. We reached an agreement with the workers’ unions and their companies. Under this scheme companies paid one-third of the workers’ salaries instead of firing them. The employee agreed to earn one third less of his/her salary instead of losing his/her job. The Federal Government proposed to pay the remaining third. This helped us preserve our industries.
We also decided to recover our archeological zones. For instance, we were able to preserve 15 of them in the past 4 years, compared to an average of two during previous governments. We did this by offering temporary jobs.
Evidently, all this had a cost. Mexico’s public deficit soared, like it did in many other places, to reach 3 to almost 4% in 2009.
Nevertheless, the crisis reached a turning point when the main financial issues in the US were solved. At this point we had to come back to normality. And as we all know public deficits can only be triggered once. If a State wants to recur to public deficits more than once, it first has to reload its capacity to do so. This is not a permanent solution, and when deficits are too big the price is too great to pay. Many countries incurred in this big mistake. Whoever wants to use the instrument of public deficits must act as a scuba diver does before entering a cave. He must know precisely how much oxygen he can count on. Once inside the cave, the diver must perfectly know the way back out.
Many countries in Europe and Latin America and other regions have incurred in public deficits. Today, they are paying the hardships, difficulties and strains of not being able to cut these deficits. Financial markets are no longer providing support for these deficits. One can finance the first years of a public deficit, but the difficulties arise later.
This is the case of Spain, Italy and of course Greece, Ireland, Portugal and Iceland.
So what can we do to fight this crisis? The world needs to react faster and policymakers have not been able to respond on a timely manner making things worse. One should act on the structural issues but also on the present-day problems. What should we do to address the structural challenges? We should avoid banking and financial disorders that provoke new crises in the near future. Here, in Mexico, we learned the lesson some years ago from a severe banking crisis. We imposed stern regulatory and financial measures to organize our markets. In the midst of the crisis, the Mexican banking system stood at 16% capitalization in respect to liabilities, more than double what is recommend by the Basel Accords.
By means of these actions, Mexican banks were not only part of the problem, but also part of the solution as they continued granting loans to small and medium businesses. The world urgently needs a new legal framework for finance, a more orderly regulation. This was one of the issues discussed during the recent meeting of the G-20.
We are also concerned by short-term problems. It is urgent to distinguish between economies that have liquidity problems and cannot cover their expenditures and those that are economically solvent but cannot comfortably pay them in the short run.
For example, if the Greek debt reaches 200% of its GDP, the country will not be able to pay it. This is an insolvency problem that can only be solved through negotiations with national and international public and private creditors.
But if countries with larger economic capacity like Spain or Italy are in the same situation, then the international community should help them solve their liquidity problems to avoid insolvency. This is exactly what has not happened in Europe or in any other part of the world.
For instance, the Italian debt amounts to 120 or 130% of GDP, or perhaps 100%. If Italy pays its debt at a 2% interest rate, as it used to happen, there will be no solvency or liquidity problems. However, if the interest rates increase by one point, the Italian Government will have to raise that additional point from taxes in order to continue paying its debt. In the context of an interest rate increase to almost 6%, as is the case today, the Italian government has to come up with an additional 4% this year. And if no action is taken, this will turn into a liquidity problem, which is what is currently happening in Spain.
This situation calls urgently on decision makers, notably in Europe, to respond rapidly and strongly with real solutions and not palliative measures. The lack of credibility and payment capacities in most governments is a dangerous virus that must be fought with a powerful antibiotic. Small doses only make things worse. This has already happened and the virus turns itself even more potent.
This is the first part of the problem we need to solve. This was discussed during the meetings of the G-20 and we succeeded in reaching an agreement. We solved certain issues that have now been lost again in Europe. We strengthened the IMF as never before and without the contributions of several important countries like the US and Canada. In an unprecedented manner the IMF financed the crisis with up to 450 billion dollars, thus proving its capacity to face the crisis. We can therefore affirm that our priority is to address the immediate problems, but this has not been done.
Our second priority is to address the structural issues. We should understand which is the way to economic growth and which measures one must adopt in order to mitigate, as Mr. Slim just mentioned, the devastating social effects of the crisis.
In terms of the economy, ladies and gentlemen, I believe that one should focus on very basic things, and these are so basic that severe differences arise when we try to address them. One key element for economic growth since the beginning of humankind has been trade. Today, more than ever, the economy is global and it needs free trade. This is the way for the economic development of our countries. Trade brings benefits to all. There are indeed winners and losers, depending on the levels of competition. But global trade brings growth to all economies and generates net profits to all: producers, consumers, exporters and importers.
This is why I always insist that trade is indispensable for global growth. I believe we need more trade and not less. This is a clear bet for commercially oriented countries and their consumers. More trade and more competition. More trade in goods and more trade in services. We need more competition in all markets and in all sectors.
This is why I am quite concerned by the recent rise in strong protectionist policies that can negatively affect the capacity of the world economy to recuperate.
Paradoxically, during the first meetings of the G-20 we were all speaking about economic growth and about our strong opposition against protectionist measures. The next day, 15 out of 20 participants were applying protectionist measures, new tariffs and new barriers. Mexico reacted likewise, and we were strongly criticized. I have listened carefully to the constant appeals I have received from the Mexican Congress asking us to no longer engage in Free Trade Agreements, as well as criticisms against the decrease in tariffs.
In the midst of the crisis we decreased tariffs from an average of 11% to 4%. This did not destroy the Mexican industry; on the contrary, we became even more competitive. This happened because in a global economy trade does not only imply finished goods. 70% of global trade is made in intermediary goods, the so-called middle products. Trade in middle products is what generates final growth.
This is why Mexico now manufactures 65% of BlackBerrys worldwide. This is why we are one of the world’s leading exporters of intelligent cellular phones. This is why when I became President of Mexico we were the world’s ninth exporter of automobiles and we are now number four, ahead even of the United States. We have an open economy that has been competitive at world scale. Mexico’s economy grew by 15% from June 2009 to June 2012. Most part of this growth is due to trade and investment. The reason behind this is that telephone producers can import chips, screens and keyboards. Anything can be imported from anywhere in the world with no tariffs. We can therefore manufacture in Mexico the best cellular phone. This is also true for automobile manufacturers like Nissan, Volkswagen, Ford and General Motors.
I am worried to see that in our Latin American region there is a growing trend towards protectionism and against free trade. This is why we have been insisting in new agreements and new initiatives to foster growth and development in Mexico.
Over the next decade the economy will grow in the Pacific Region, between Asia and Latin America. We have to foster trade in this region in order to attain growth. That is the reason behind our signing of the Framework Agreement for the Pacific Alliance with Chile, Colombia and Peru. This agreement accounts for higher trade and more exports than MERCOSUR or any other regional organization.
This is why I announced in Los Cabos, during the G-20 meetings, Mexico’s accession to the Transpacific Strategic Economic Partnership. This alliance can trigger growth even further than the North American Free Trade Agreement did in the 90s.
Finally, I will address our options for growth, development and protectionism, and by doing so I will be ready to conclude.
Humankind faces a structural problem today. As Julio Maria Sanguinetti mentioned, in addition to the recessive economic crisis there is a price increase in commodities and basic goods. Some countries like Uruguay, Argentina and Brazil managed to become important producers of commodities like grains, soybeans and oil. Price increases in commodities allowed for growth in some of these highly commodity-concentrated economies. This, however, had several consequences. Firstly, nothing lasts forever, and we witnessed a drop in the commodities market last year and this year too, bringing about the collapse of certain economies. This explains why Mexico will grow, for a second year in a row, more than Brazil.
Consumers have also been negatively affected in the context of one of the most severe social crises lived in the past 30 years. This happened because food prices have more than doubled in the last 5 years. I was extremely captivated, like most of you, watching the news and the Internet about what was happening in the Arab Spring. We witnessed how the population came out to the streets to overthrow 40-year-old dictatorships in Northern Africa.
Some said this was a consequence of the appearance of Facebook and Twitter. Probably, since it is now easier to communicate by these means. However, I would like to respectfully express my opinion. I believe that what happened in the Arab Spring was triggered by a six-fold increase in the price of wheat and bread in the Mediterranean region. This happened six months before the outburst of the Arab Spring that sent the population out to the streets. Another factor was the increase in gasoline prices in the Mediterranean region, South Europe and Northern Africa to the equivalent of 30 pesos per liter. This situation caused an unprecedented damage to income in most economies. It also meant an increase in poverty.
According to several indicators (FAO, IDB or World Bank) a person living in extreme poverty earns a dollar or less per day. If this person spends 1 or 1.5 dollars a day and half of this income is spent in food products, then we can understand how a two-fold increase in food prices can bring about an abysmal increase in world poverty. Once again, we witnessed some episodes we thought we would never live again: famine in Somalia and the African Horn. In a precise manner, the impoverishing of large segments of the world population is due to increases in the prices of food.
What can we do to confront this? This is part of what was discussed in the recent G-20 meetings. On the one hand, we have to attack the volatility of food prices. Part of this problem is related to China and India’s increasing purchasing powers. In India, poverty meant that people could only eat once a day. Now, they can have two meals, meaning a two-fold increase in demand. This is good.
But there are also plenty of things that must be rectified in the financial markets. Generally speaking, during the 90s we could affirm that food companies like Cargill worldwide or MASECA in Mexico accounted for almost 90% of food operations and transactions. Financial companies like Morgan Stanley and Company accounted for 8 to 10% of these transactions. By 2012, more than 40% of food transactions were made by financial companies. This means we have to look into detail at what’s happening with commodities and certain specific food products that are quoted in the derivatives markets and whose prices have a direct impact in the real levels of poverty of thousands or millions of people around the world. I am not saying this is the most important factor because I do not believe so, but I think this is something we have to observe.
Another element is our need to massively increase the production of food in the same surfaces. Food production thus requires an authentic technological revolution, a green revolution, like the one Mexico paradoxically experienced in the 70s. Our aim is to apply policies that avoid the social consequences of economic crises, recessions and food price increases negatively impacting the poorest sectors of the population. Public policies must satisfy the lack of goods thus reducing shortages.
This is why the methodologies that measure poverty are so important. We used to measure this by monitoring the prices of basic food products. But this showed very important monthly variations. If our denominator changes as dramatically as commodity prices change today, we come up with very strong variations that do not necessarily reflect the real levels of prosperity in the population.
The methodology applied in Mexico for some years now is the one established by the Social Development Law that focuses on family shortages. This method measures if a family has or does not have a house, and if it has access to education or health services. Another factor measured is income. In Mexico we have concentrated in reducing these shortages. During the past 5 years we have built one out of every four houses existing in Mexico. We are now reaching 7 million housing projects, either through subsidies or credit, all over the country.
We have also concentrated in reducing our shortcomings in health services. This is one of the most dramatic expenditures a family must bear when a relative falls ill or suffers an accident. In several occasions we increased our health budget constructing more than 1,200 new hospitals and clinics, attaining universal health insurance. There are indeed some problems, but we now have a health insurance that protects families from dramatic costs while curing children. For example, 7 out of 10 children attained from Leukemia used to die. Today 7 out of 10 survive.
We have also focused on education and have finally reached universal coverage. Every child under 12 is guaranteed a place in primary school. We are about to reach universal coverage in secondary school. We have constructed 110 new universities and almost 70 new campuses for pre-existing universities. Today, every year almost 120 thousand engineers are finishing their studies. These engineers are indispensable for our competitiveness in the electronics, aeronautic, and automotive sectors.
Dear friends, I believe this is the way. We have to correct immediately the terrible disease that arises from a lack of decisions, and a lack of firmness in financial backing for countries in trouble. In the medium term, we have to correct the chronic institutional flaws of the financial systems. We should engage in clear strategies to foster economic growth through trade, investments in private and public infrastructures, green projects and green economies for the future.
I do not wish to go any further. The environment is another issue that we cannot omit and that must be addressed later. We are now living one of the worst droughts in history. But in Mexico we have been fortunate and there has been plenty of rainfall in some places. But Central USA is suffering from a severe drought affecting maize and wheat. This is provoking a food shortage that, once again, brings about more misery. We now witness hurricanes in mid Manhattan and tornados in Massachusetts. This happens because we are dramatically altering the world climate and this also needs a clearer strategy, a stronger stance against climate change.
I would like to thank Mr. Julio [Sanguinetti] and Mr. Carlos [Slim] for their kind invitation. I wish you the best of success in your meeting in Mexico. We will be attentive to your findings as Presidents, former presidents, congressmen, advisors, and business people. We trust your directions and ideas will help us make Mexico and the world a better place to live.
Thank you very much. At 10:20 am on the 26th of July 2012 I hereby formally declare the official opening of the 18th Plenary Meeting of the Montevideo Circle.
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