Conference given by Mr. Carlos Slim Helú at the Universidad Anáhuac
November 29, 2005
I am both pleased and honored to be with you here today. If it is alright with you, I would like to start off with a bit of history of the evolution of Mexico's economy and then go on to current events, so as to give you a broader perspective.Evolution of Mexico's economy
Owing to the difficult situation the country was undergoing as a result of recession, in 1931 Mexico arrived at an unprecedented agreement which was called Congress' Revolutionary Movement, made up of congressmen, as well as representatives of the Chamber of Commerce and the Chamber of Industry. This decision led to a campaign which was called the Nationalist Campaign, the slogan of which was “Buy what the country produces.” Whether this is a coincidence or not, I do not know, but this campaign marked the beginning of 50 years of growth in Mexico at a rate of 6.2%; fifty continuous years. This growth was also spurred by Mexico having gone from an agricultural and rural era into a much delayed urban and industrial stage.
The golden era of those 50 years was from 1958 to 1970, when Mr. Antonio Ortiz Mena worked for both the Ministry of Finance & Public Credit and Mexico's Central Bank; growth was accelerated, inflation was low, interest rates and financing were long term, etc.
This sustained growth not only allowed for Mexico to grow substantially, become industrialized and to no longer be a predominantly rural and agricultural country that mostly lived off of self-consumption (in other words, people lived practically with what they produced and used; and did not buy any other goods besides the necessary tools to work, but it also gave rise to an enormous population growth, which as we all know was more than 3% as the economy grew at a rate of 6.2%.
Mexico went from an agricultural and rural country to an industrial and urban country
During the 1930s, the country's population was about 17 million, perhaps 16 or 15 million, and by the 1940s, there were already 20 million. During those days there was a beer commercial (Corona, I believe) that went like this: “Twenty million people cannot be wrong”; anyway, I had not yet been born when that commercial was popular. The Chamber of Commerce, Mr. Cayetano Blanco Vigil—the father of Nieves Noriega—and my own father as a chamber member participated in that campaign; that was back in 1931.
Mexico was greatly strengthened by this transition from an agricultural and rural country to an industrial and urban country, because growth was reinforced by the construction of roads, housing, factories, factory jobs, and others.
In my opinion, this is the same process that China is undergoing at present. China has been growing at a rate of 9.5% in the last 20 years, and it is also a rural country depending on self-consumption and agriculture. However, it is going from a very primitive agriculture of self-consumption to no longer an industrial stage, but rather this new civilization that we are experiencing.
It is already a country that is giving its people a great deal of education. It is a country that is rapidly absorbing the technology of this new civilization and that is making substantial progress at a very fast pace, however with a very long-term vision. In other words, they are not thinking about the last 20 years or even the next 20 years, but rather about many years to come. Out of a population of 1.3 billion, 70% or 900 million people are still living in disadvantageous circumstances; however, there are 400 million Chinese who are already living in the urban world, are better educated, and who participate in a more modern and prepared society, and this is what creates the country's tremendous strength. It is to be expected, though, that China's process will still take many years.
In Mexico, this process was interrupted by the excesses of the administrations of the 1970s and 1980s, which experienced very high deficits in spite of growth. There were tax deficits, they spent the money borrowed from the well-known petrodollars. I am not sure if you have heard about those; there was an oil boom; the oil countries did not know what to do with their oil money, they gave it to the banks, the banks recycled it, lent it to countries and the countries spend it irresponsibly, just like the bankers lent it.
So, somewhere around 1981 and 1982, not only were they in debt, but interest rates jumped to 21%. Can you imagine paying interest rates of 21% or 22%? Countries fell into an enormous crisis; the large crisis of 1982 was a terrible one; it was a crisis of external debt that not only affected Mexico, but also many other countries and Latin America in general.
Adjustment programs followed that crisis. One of them was called the Washington Consensus, which gave rise to the well-known model that has been followed to a certain degree but in fact continues to be an adjustment program. So, for the last 23 years our per capita growth has been practically zero. In other words, we grow; the population is growing at a rate of 1,800,000 or 1,700,000. I believe that it is already growing arithmetically; in other words, the number of Mexicans each year grows by maybe 1,700,000 or 1,800,000 and the economy almost 2%. So the difference is very small between economic growth and population growth, and not only was growth small but also irregular: growth was suddenly good and then crises such as that of ‘95, ‘94, etc. occurred.
For 20-some odd years we have had no per capita growth. In other words, the economy has grown at a rate of 2% in 23 years, which is insufficient for countries like Mexico.
Fortunately—or rather fortunately and unfortunately—there has been a very important escape valve, namely that 400,000 or 500,000 Mexicans go to the United States each year in search of work.
Mexico has many regions and the inhabitants of the rural regions that used to be able to find work in the cities, now have to migrate to the United States to work; they send a great deal of money back to Mexico. So we are talking about maybe 10 million people who have left Mexico in recent years and who are sending back 18 to 20 billion dollars. These are very large figures and the positive effect is actually double, since half a million people find jobs on the other side of the border and are able to send remittances.
However, at the same time it is sad that we have been unable to generate employment here, retain our citizens and give them opportunities to come back and find local jobs. We already have a 23-year long serious problem of scarce growth since the crisis of ’82. During this period, there have been good years and bad years intermittently, with the country growing at about the same rate as its population, in spite of many Mexicans having left. If those half a million people would have stayed in Mexico, growth per inhabitant would have practically been negative.
This is the outline of those 23 years, which has lead to serious problems, since there are no job opportunities, there is no growth, people have to go elsewhere to find work and margination and lag have continued to worsen.
So, in our opinion, what we have to do is to go from adjustment plans to development plans, and reach agreements collectively as Mexicans. History has taught us that, when we have not been united, there have been many problems. For instance, after Mexico's Independence, for 55 or 56 years there were fratricide wars; then came the Revolution that was also fratricide, in which we destroyed, were invaded by other countries and lost half of our territory. The results have been fateful when we have been disunited.
For example, it is very important to have low inflation and having a zero or balanced tax deficit is equally important, although they are merely means and should not be seen as national objectives.
We know that problems are neither attacked nor solved with agreements or laws; actions need to be taken to solve them and here are some rough drafts. Meetings and seminars need to be held and specialists need to be consulted. In this regard, the universities can help us a great deal.
We know that Pemex is essential; it is the most important company of Mexico by far and of Latin America, although it operates within the public budget. Here we said that legislating was necessary so that state-owned companies can be run autonomously. This means that they would manage their operations independently, as large companies—which they are—without political interference, split off from the public budgets, that is to say they would not be part of the balanced budget in which revenues plus expenditures equals zero. So, what happens is that Pemex cannot make investments, nor can it be operated transparently by professional government organs, with a Board of Directors intent on maximizing national wealth, reinvesting profits and fostering the preservation and development of the company, with independent board members who appoint and remove the CEO, who make investment and compensation decisions, and that every time an investment has to be made they do not have to ask the budget or the public treasury for permission or are not allowed to make investments that are not within budget. And these investments are so important that it would be crazy not to make them. Pemex should operate with a Surveillance Committee and an Audit Committee, and should have the obligation to pay taxes as any other productive company, including production taxes, taxes on services and other dues that have to be paid.
The new civilization
What is happening in this new civilization? During the agricultural civilization—and I am going to discuss some religious topics here—Christian doctrine was very generous, very advanced and well ahead of its time, since 2000 years ago society required slaves, needed to exploit mankind, and needed to treat men like machines; the only interest then was to exploit mankind and the planet. This agricultural society needed hard-working people, who consumed little so that there would be as much as possible left over; this is why there were slaves. Slavery is inherent to an agricultural society; thus in those days it was very important to plan ahead, love others, contemplate and be charitable.
Nowadays, however, things are very different. Everything has changed and I have spoken about today for many years. What we have not realized very well, though, perhaps since World War II, is that there has been a very important change. Neither the economy nor society is interested in exploiting labor, exploiting mankind; the convenient thing to do now is to make sure that our neighbors, others, society, everyone is well and that they consume more. In other words, it is no longer important to have uneducated and strong people to exploit their physical work 12 or 15 hours a day. Now it is better for people to work with more knowledge, for them to be prepared, for them to work less time and for them to be able to have the satisfiers offered by civilization, to have time to become cultivated, to read, be entertained, do sports, travel, consume, etc.
The appealing and interesting aspect of this new civilization is that what used to be an ethical problem or a problem of social justice is now an economic need. Hence the progress of China, since it is increasingly incorporating its population into the economy, which in our case is why we have not grown. And lag and lack of growth prevail among us, because we have not incorporated a large portion of our marginated population into today’s modern society and economy.
Thus the fight against poverty is the best investment, from an economic point of view, incorporating this marginated population into society and into the economy, and for it to become part of today's modern economy, for there to be educated people, people who participate in the social productive apparatus and who can produce more for society in general.
Society benefits from those people having the capacity and time to buy things and pay for services, and I am not just talking about goods. And what are these services? For them to receive an education, higher learning, for them to enjoy entertainment, to go on vacation, to have a home of their own and to buy goods, because this fosters growth.
Growth is encouraged and sustained by the well-being of others; this is very important. In this new technological civilization (It is called technological, but is actually a service-oriented society. If you recall, the previous stage was the industrial society, in which most of the population was engaged in industry; before that was the primary sector, farmers, etc. We are currently in a service-oriented society, in which most of the people are engaged in services, since machines can easily produce goods and large numbers of people are no longer needed to work on the machines.), development is an accelerated process which takes place in very few years.
We no longer have to say: "We have to sacrifice this generation for the next ones or we have to sacrifice two generations." At present, this is an accelerated process which can take place in very few years and which feeds upon itself when shared; this is very important.
Mexico can and has to enter into this virtuous process, as other countries have already done, and it is here that we wish to underline other countries of diverse cultures and different continents. It is not that the Chinese or the Koreans are all working. This is also the case of Europe: the progress of Spain, Ireland, and others, as well as Central Europe, which had fallen behind. You remember this, don't you? Since 1989, with the fall of the Berlin Wall, in only 15 years many countries are rapidly joining this new civilization.
What matters here is that we can join this new civilization and we will not require many generations or years to achieve it, because it starts, it receives feedback and supports itself. It is not a matter of creating wealth and then spilling it; it is a matter of creating this wealth and what is distributed is not the wealth per se but rather the fruits of wealth, namely income.
If tomorrow wealth were to be handed out among the entire population, if—for instance—Pemex were to be distributed, people are not interested in having 1,000 Pemex shares or 10,000; what they want is the income. So what the population needs is income to have a better living standard and well-paid jobs.
There is something else you know: well-paid jobs brings families and society together, and if families and societies are united, governability becomes easier. However, the opposite also breaks up families and society and complicates governability.
So, from every point of view—whether social, political or economic—the fight against poverty is essential. How does this fight come about? I believe that aid and charity only alleviate poverty temporarily. What has to be done is to ensure health, nourishment, education and employment. In other words, the best way to fight poverty is by creating better sources of employment, and in order for these sources of employment to be better, education for the formation of human capital is paramount.
Civilization has been making progress for many years. However if we focus, let's say, on the last 8,000 to 10,000 years—from being hunters, nomads and gatherers, who discovered valleys rich in fauna and flora, to the Ice Age—it was then that civilization began to flourish at an accelerated pace.
Mankind, as it becomes civilized, progresses technologically to make its life more productive, more effective, and to make its existence on this Earth easier. At the same time, this also makes it possible for more people to live in society. Most likely 10,000 years ago, the total population was 8 million or perhaps 10 million. But to make things easier let's say there were 6 million. Now there are 6.5 billion, meaning that the population has increased a thousand times during those years. I think there were about 100 million people two thousand years ago, meaning that the population has grown 60 times since then, and towards the end of the 18th century there were 1 billion inhabitants.
Now there are 6.5 billion of us; this progress has allowed the Earth to sustain the life of 6.5 billion people and the story seems to be unending. Why? Because first fire was invented, then the wheel, irrigation, windmills and fertilizers; these were the great advances in agriculture. Then industry largely increased production capacity. Industrial development is what caused society to no longer be agricultural and to become industrial, to no longer be rural and become urban. It is during the industrial civilization that high-productivity machines began to be invented, allowing 10 people to do what it used to take 100 people to do, as a result of which the remaining 90 can do other things.
Nowadays, this is also a fact: now there are robots, equipment, fast machines and the like, allowing for goods to be produced easily and at great profits. Consequently, what has to be done is to lead society so that those workers who were displaced can perform different activities. Normally, what is happening in the world is that the people who used to produce goods, that is to say industry workers, are now engaged in the field of services.
If we watch movies from 50 years ago, almost everyone was linked to industrial work. At present, farm workers in the United States account for 2% of the economically active population. Out of 100% of the population 40% is considered active, I believe that about 10% works in the industry sector. Perhaps the construction industry occupies somewhat more, but the remaining 80% is engaged in business, education, health, federal employment, the financial sector, banking and entertainment. Why? Because a lot can be produced with very little.
What has to be done is to absorb this 25% of the population that lives in rural areas, that is still dependent on self-consumption, is marginated and has to migrate to the United States; make the fields more productive; find sources of employment for them not within the industry, but basically in the service field, for instance, tourists and infrastructure construction services. If we are really serious about this, health and education need to be fostered. Therefore, we will have a lot of fields in which we will be able to generate economic activity.
Directing the economy outwards is good in terms of generating currency, but it is not good if the economy's internal sector is neglected, that is to say the domestic economy.
Internal economy needs to be addressed with the development of human and physical capital, which would provide substantial help. And how? Well, 850,000 houses need to be built each year, many highways need to be constructed, a lot of ports need to be developed, drinking water needs to be properly managed as well as sanitized, the sewage system needs to be treated, and airports, schools and hospitals are also required. And, of course, substantial amounts should be invested in forming human capital and providing education in the fields of science, technology and development.
Finally, here is the budget and I wish to compare the year 2000 with 2005, December of 2000 and 2005. The need for a tax reform was discussed earlier to have resources to invest. However, during those years income from oil and the price hike in electrical power have accounted for 4.8% of Mexico's GDP, which is a lot of money. This 4.8% translates into US$110 billion. Financial expense also declined significantly, but since interest rates went down and the GDP grew, this is why it was said that there was a favorable downward trend in interest rates, another 0.8% of the GDP. In this regard, there has been an income of 4.8% and a 0.8% savings in financial expenses, accounting for a 5.6% increase in the Gross Domestic Product as a percentage of the GDP during those years, whereas investments only increased 0.7%. What you can see is that there are so many social and political pressures, the idea of a paternalist government, etc., that I think that some efforts, actually some great efforts, have to be made because social assistance is very important. However, this assistance should focus on employment and investments.
So, in spite of this increase, investments have only gone up 0.7%, which is not enough. More than any other reform, what we need to do is to combine public resources, public investment with private investment. With this, we feel that the cap and brake on investment possibilities and domestic growth will be removed.
Thank you very much.
Carlos Slim Helú
November 29, 2005