The Power and the Money

Seven initial thoughts on the Mexican election

Wow. AMLO cleared an outright majority. That was impressive and a sign of just how fed-up Mexicans were with the status quo. I saw some signs of that last summer; now it is confirmed. 

Seven initial thoughts:

1. AMLO is not a left-wing version of Donald Trump. He is his own thing. His platform is frustratingly vague on most things, but he is a professional politician and a rather good one at that. And his idées fixes have to do with helping the downtrodden, not personal vendettas, foreign trade, or ethnic resentments.
2. AMLO is not a huge fan of the rule of law and he does not respect Mexico’s governing institutions. But neither did the outgoing PRI, which buried prosecutions and spied on its own population. Creeping dictatorship is unlikely and corruption will not get worse. That is sadly not saying very much. 
3. AMLO is not in a position to become Hugo Chávez, even if he wanted to. Chávez began by rewriting the constitution, faced down an old-fashioned military coup and rode a wave of oil money. That is not going to happen in Mexico.
4. AMLO is in a position to shepherd through substantial legislative changes. As we have said, he can pull off PRD and M.C. legislators. But he has another advantage, which is that federal legislators can now be re-elected. That makes them less beholden to their party leadership. Don’t expect radical change, but do expect him to pass what he wants to pass. 
5. The challenge is going to what it has been: can AMLO get a grip on violence and accelerate growth? I am skeptical but hope for the best. The real questions will come with events. AMLO will be tempted to respond to adversity with populist rage. That is my biggest worry. 
6. I do not expect AMLO to hold a referendum on his continuation in office in 2021. If he does, that would be a bad thing.  
7. The PRI is the cockroach of Mexican politics; I do not expect it to die.

I would be delighted to hear other reactions and predictions. 

In Mexico, like America, a Congressional majority is not enough to govern

Earlier we pointed out that Mexican presidents need an effective legislative majority of two-thirds to get much of anything done, since so much legislation requires constitutional amendments. Did AMLO’s coalition pass that threshold?

We won’t know for sure for a while, but the answer appears to be no. Preliminary data is here. Mexico elects its Senate by giving the plurality party two senators per state, the runner-up one senator, and allocating the rest by proportional representation in a national 32-senator district using the largest remainder method. That method gives AMLO’s coalition roughly 53% of the seats. 

In the lower house, the results look similar. Mexico elects 300 deputies in geographic winner-take-all (aka, FPTP) districts and allocates the remaining 200 via proportional representation. The calculation is more complicated than for the Senate, because the country is divided up into five 40-deputy districts for the purposes of allocating seats. There, my initial estimate is that AMLO’s coalition got about 63% of the seats.

AMLO’s coalition, of course, includes the crazy Social Encounter Party; I have no idea how many seats they will wind up with. It depends on the affliation of the senators and deputies who won under the coalition banner in the geographic districts. They may prove somewhat unreliable for the new President. So his actual majority will be a little less than the stated number.

That does not mean that President López won’t be able to govern! As mentioned, he can pick up votes from the two social democratic parties. The PRD and Citizen’s Movement won two senate seats each and picked up about 4% of the House; both parties will also get some seats from their weird left-right coalition with the PAN, up to a ceiling of 18 senate seats and another 8% of the House. If they meet the high-end of the above projection (which they won’t) then AMLO will have a governing majority. 

But he will still need their cooperation. And if the social democrats get less than 18 senate seats, then he will need the cooperation from other parties as well. (Like the Greens. Shudder.) 

Right now, attention should be moving to the state legislatures. In the Nuevo León congress, pictured below, the PRI-PAN coalition managed to hold on to about half the seats, down from 74% before the election. The result is that AMLO cannot count on N.L. to ratify constitutional changes despite his gains in the state. (In Nuevo León’s 42-seat congress, the PRI collapsed from 16 seats to three; the PAN seems to have gained, from 15 to 18 at last count. The AMLO coalition blew up, from two lone Labor Party state deputies before the election to 15.)

It is unlikely that AMLO won a majority of the state legislatures, since many are elected on off-years, but somebody should check what happened out in the provinces. 

None of this will leave us much wiser about what AMLO will try to do. But it does mean that whatever it turns out to be, it will have to be done judiciously and after political negotiations. Of course, there is a lot that the chief executive can do to wreck a country, even one with stronger institutions than Mexico.

But I would venture that most of that sort of wrecking has already occurred under President Peña. I am not particularly optimistic that President López  will do much to help that little girl in Iztapalapa that I mentioned back in 2012, but I also do not think that he can or will do much to weaken the country’s democratic and legal institutions, at least inasmuch as they have survived the last six years. 

Call it an extremely cautious optimism, if you must. 

Riots in Mexico

Mexico has been beset by widespread looting and demonstrations over the past five days. So far, there have been 987 arrests and two deaths. The incidents devolved into outright riots in Ixmiquilpan, Hidalgo, and Monterrey, N.L.; but stores have been sacked and roads blockaded all over the country. I heard about the looting from friends living in Ecatepec, Mexico State, a poor suburb of Mexico City, but it has now made its way into American news.

The trigger? The Peña administration decided to raise gasoline prices on January 1st. Prices rose to heretofore unseen levels in real terms. The below figure show the retail price per gallon for Magna gasoline in Mexico and the equivalent blend in the United States, measured in real pesos of November 2016. 

Why the rise? It was essentially a tax hike. As you can see, Mexican retail gasoline prices have been above American ones since the middle of 2014. U.S. prices have risen recently, but Mexican prices remained lower.

The hike was not about raising Mexican prices to equal American prices. Rather, the Mexican government wanted to raise prices now in advance of its plan to fully liberalize prices later this year. The higher prices are in advance of liberalization, the more room the government has to impose a high excise tax. Since the current administration has promised to freeze said tax once it is introduced, it wants to be able to set the initial tax as high as possible.

As policy, none of this is a bad idea. Price liberalization will save the government money and excise taxes should be high. But as politics, it is terrible. A more popular government facing a better economic situation could have gotten away with raising gasoline prices. But the Peña administration is not popular and the economic situation is not good. 

The latest blow to the Peña administration has been the recent re-emergence of the man behind Trump’s visit to Mexico during the presidential campaign. Trump, as you can imagine, is not popular south of the border. Public opinion was horrified that the Peña administration invited him to meet the Mexican president. There was some hope that President Peña intended to lure candidate Trump into a trap, but instead Peña allowed Trump to roll all over him in a joint press conference. (The rules were no questions, but Trump invited them anyway; then Peña neither shut Trump down nor called out the GOP candidate when he contradicted what Peña said had gone down in the meeting.) 

The meeting was such a disaster that President Peña felt he had no choice but to fire Luis Videgaray, the man who had planned it.

But now Videgaray is back as the new foreign minister ... precisely because Peña believes that Videgaray can curry favor with President Trump. So this government brings the man who sold them out to Donald Trump and then turns around to raise gasoline prices? 

The economic situation makes the situation worse for the Administration. The “gasolinazo” happened while Mexican inflation is rising. (See the below chart.) Why is inflation rising? Well, the value of the peso is collapsing, driving up the price of imports. Why is the peso collapsing? Well, in one word, Donald Trump. The fear that he will impose trade barriers on Mexico causes investors to sell pesos, and so drives down the exchange rate.

But Donald Trump is a man whom many Mexicans believe would never have won election had President Peña had the cojones to humiliate him in that press conference way back when.  

But Donald Trump is a man whom many Mexicans believe would never have won election had President Peña had the cojones to humiliate him in that press conference way back when. 

Let us add it up. The Peña administration curries favor with candidate Trump. Trump wins the election, indirectly causing inflation to accelerate in Mexico. The Peña administration then pours fuel on the inflationary fire by hiking gasoline prices while bringing back the sellout who arranged the Trump meeting in order to curry more favor with the U.S. president-elect. 

Result: rioting.

Andrés Manuel López Obrador cannot believe his luck. 

(Filed under “2016 American election” because Donald Trump is not yet president and the roots of the crisis date back to his campaign.)

The parties and the Bronco

 Election watching is fun, even when the elections are as inconsequential as these recent ones appear to have been. Let’s start with the party system. Below is a of the parties, put in “more-or-less” left-right order. I say more of less because some of these parties are really not easy to categorize.

From left to right:

Morena: The name is an acronym for the Movimiento de Regeneración Nacional. The party is Andrés Manuel López Obrador’s (AMLO) pet vehicle. AMLO  ran for president in 2006 on the PRD ticket with a moderately left-wing platform. He lost to Felipe Calderón by a hair. Instead of accepting defeat, however, he mobilized mass demonstrations, denounced the new government as illegitimate, and organized a government-in-exile. The low came when López Obrador shouted “To hell with your institutions!” AMLO nonetheless took another tilt at the windmill in 2012, still with the PRD ... he lost with a respectable 31.6% of the total vote. After the election, for reasons which remain unclear, AMLO left the PRD and formed his own party.

PRD: What I’m calling the PRD is actually a coalition between the PRD and the Labor Party, but Labor is very much a junior partner so you don’t lose much by ignoring it. The PRD got shellacked by AMLO’s decision to form a new party. It also got wounded by the fact that it governed the state of Guerrero when the 43 student activists were kidnapped and killed. Add those two blows to the fact that the party currently has no natural leader, and a shellacking was to be expected. But there was also a third, the continuing strength of the ...

Citizens’ Movement: This party got started in 1999 as a sort of Mexican version of the Liberal Democrats: lefty but not too lefty. That did not last. The party followed López Obrador into the wilds of the post-2006 government-in-exile, but refused to join Morena in 2012. This did not please AMLO. The Movimiento Ciudadano has gained oxygen from Marcelo Ebrard’s decision to switch from the PRD. Ebrard was a popular mayor of Mexico City (although the Line 12 fiasco has dented his reputation) and many believe that he could have won the presidency in 2012 had the PRD nominated him instead of AMLO. 

In short, the left is split between López Obrador’s pet vehicle, the remnants of the PRD, and a social democratic party that appears to be trying to take on the mantle of the center-left. It is a mess.

Continuing to the right we have:

Humanist Party: I’m at a bit of a loss with these guys. It’s a new party formed by rural politicians from both the PRI and the PAN. It seems to be basically an agricultural interest group party ... and does not seem to be too long for this world since it did not clear the 3% election threshold needed to keep its official standing. 

PRI: This is big centrist gorilla of Mexican politics, an amorphous non-ideological blob descended directly from the old dictatorial ruling party. 

Green Party: Oh boy. The Green Party is not a green party. It supports the death penalty for kidnapping, which would shock other green parties, and it’s remarkably wobbly on LGBT issues. So green it is not. Nor is it much of a party. Rather, it seems to be more of a family business run by its founder, Jorge González. (His son now heads the party.) The Greens collect election subsidies, get involved in a remarkable number of corruption scandals, and seems to care little about environmental issues. It went into coalition with the PAN in 2000 and now works with the PRI ... and keeps managing to win votes.

Panal: This party was the wholly-owned subsidiary of the teachers’ union run by Esther Gordillo. We discussed it here. President Peña arrested her in February 2013 on corruption charges — in interviews, former president Calderón seems a little defensive that he didn’t move against her during his term. Gordillo’s daughter and a grandson are still in the party; she may be gone, but the party still lives on a manifestation of the union’s power.

PAN: This is center-right grouping that beat the PRI in 2000. The PAN is internally divided. The divisions are mostly personal, but there is also a vague ideological split between social conservatives and economic conservatives ... with the latter further split between moderates and radicals. That said, the economic center of gravity of the PAN is somewhat to the left of the U.S. Republicans.

Encuentro Social: Mexico has experienced social change at blinding speed over the last two decades; same-sex marriage is legal in the D.F., Coahuila, and Quintana Roo. The D.F. has legalized abortion up to 12 weeks. Divorce rates are rising and sexual mores have flipped in what seems like an eyeblink. And so, we bring you the reaction! The Social Encounter Party is dedicated to stopping the scourge of same-sex marriage and abortion.

And there you have the basic panorama for the Congressional parties. 

There are also the state elections. There, el Bronco in Nuevo León has gotten all the attention as the first independent to win a Mexican state election. (That is because independent candidates were not allowed until this election.) I could not write this post without mentioning him, of course.

Monterrey is not an American city

 Alejandro Hope suggests that low population density may be a cause of police troubles in northern Mexico. Hope uses Monterrey as an example. I am here to say that said hypothesis is almost certainly incorrect, simply because Monterrey, Nuevo León, is rather densely populated. Monterrey is underpoliced, but the problem is not the city’s land area.

It is fairly common for both Mexicans and Americans to comment about the Americanness of the city of Monterrey. And in some ways, they’re correct. Until sometime in the 1990s Monterrey was more culturally American than the country’s other major cities. (The rest of the country liberalized, dramatically; Monterrey did not become more conservative.) It was also much more prosperous, and its infrastructure was rather better developed. It also had less violent crime, certainly less than Mexico City. Other than the crime and the culture — Monterrey is today much more violent and much more old-fashioned than Mexico City — these differences still hold, albeit rather less markedly.

That said, Monterrey is not in Texas. The the city sprawls much less than any American equivalent. This might not be immediately obvious to the casual visitor. Public transportation at the airport can be called inconvenient at best, and the suburbs of Apodaca sprawl, with big box stores and parking lots. Nonetheless, it is true. The houses are much smaller. The informal settlements are densely-packed. The freeway network is extremely sparse, and prone to congestion. Car ownership has risen dramatically, but is still low by American standards.  

In short, metropolitan Monterrey has a fairly high population density: 4,334 people per square kilometer, spread out over only 894 square kilometers. The 6,680 square-kilometer number used by Hope is based on county boundaries, not the actual built-up area. The same applies to Mexico City and Guadalajara, both of which are much more densely populated than county boundaries would suggest.

Of course, the same also applies to most American metro areas: by county boundary, Los Angeles stretches all the way to the Nevada border and is mostly empty desert. There is a lot of empty space out there.

When you rework Hope’s numbers, you get the following:

	Population	Area	Density	Police	Police per 1,000	Police per km
Monterrey	3,875,000	894	4,334	8,717	2.2	9.8
Mexico	19,460,000	2,020	9,634	141,261	7.3	69.9
Guadalajara	4,400,000	699	6,295	11,574	2.6	16.6
New York	8,175,133	783	10,441	36,000	4.4	46.0
Chicago	2,853,114	589	4,844	12,244	4.3	20.8
Boston	617,594	125	4,925	2,056	3.3	16.3
Los Angeles	3,792,621	1,214	3,124	9,925	2.6	8.2
San Antonio	1,327,407	1,067	1,244	2,000	1.5	1.9

(Note: the above chart does the same apples-to-oranges as Hope, by comparing Mexican built-up areas with American central cities. Since San Antonio and to-a-lesser-extent Los Angeles have large swathes of empty space within their municipal boundaries, the comparison makes them look less dense than they actually are.)

Monterrey still looks underpoliced compared to New York and Chicago, but not compared to most American cities. It has a per capita coverage somewhere between L.A. and San Antonio, and a geographic coverage between L.A. and Boston. If one makes the assumption that what Monterrey needs is as many police per area as New York City, you would need to hire an additional 32,386 officers. That is a big number, but it is quite doable, and much less than the 307,280 implied by the county boundaries.

This all assumes, of course, that one thinks that more police officers is part of the solution to Mexico’s crime problem. I am not convinced, although I doubt that it would hurt ... but that it a much longer discussion.

Vaqueros contra llaneros

Longtime readers of TPTM (all three of you) will note that Cemex has attracted some small controversy in these great United States as well as Venezuela.  But since Puerto Rico seems to have reconciled itself to vasty plumes of tire smoke floating across its southern shore, Venezuela is where the Cemex action is at these days.

So, how much are Cemex's assets in Venezuela worth?  Priceless, if this publicity still from El Economista is to be believed:

More seriously, according to today's El Economista, Venezuelan operations generated about 4% of Cemex's earnings before interest, taxes, depreciation and amortization.  In 2007, Cemex earned US$ 4.6 billion before interest, taxes, depreciation and amortization.    Four percent of that number is US$ 183 million. 

Cemex as a whole earned US$ 3.22 per ADR.  It's price/earnings ratio varied between 8 and 13 over the course of 2007; it's 12-month P/E is currently down to 6.2.

In other words, a simply back-of-the-envelope calculation puts the value of Cemex's operations in Venezuela between 183m × 6.2 = US$ 1.14 billion, and 183m × 13 = US$ 2.38 billion.

Since that 6.2 measure already embodies market belief in rising political risk and the recent run-up in input costs, I'd have to say that the US$ 1.3 billion value claimed by Cemex sounds pretty conservative.

Caracas probably shouldn't have taken on Monterrey so cavalierly.  Nobody should take on Monterrey so cavalierly.  Monterrey is a tough town, and businesses from Monterrey are tough businesses.  They've seen this sort of thing before, and they've come out ahead.

In this particular fight between the cowboys of the northern deserts and the cowboys of the southern plains, my money is on the regiomontanos of the northern desert.