In Mexico, a New Approach to Crime Produces the Same Old Results

Mexico’s president has promised to improve security, but progress has been slow.

By Allison Fedirka

 

Six months after Andres Manuel Lopez Obrador took office promising to restore security in Mexico, violence remains a huge problem in the country. According to Mexican authorities, there were 11,221 homicides between Jan. 1 and April 30, a 7 percent increase from the same period in 2018, a year in which homicides reached a record high. Lopez Obrador has said the problem can’t be solved overnight, and he’s right, but the lack of tangible results thus far has sparked concerns over his new approach to an old problem.

 


At a press conference earlier this month, Lopez Obrador said he would combat crime and violence through a series of measures that fall into six broader components: address the root causes of crime by investing in development and welfare programs; protect public security, mainly by developing a new National Guard; invest in youth education and employment; ask the U.S. to boost efforts to reduce youth drug consumption within the United States; address drug consumption within Mexico, possibly by legalizing certain substances; and develop a national peace agreement that would include multiple segments of Mexican society, even potentially members of organized crime groups. Details on each of these initiatives, especially the last two, are still murky, but it’s worth examining the progress, or lack thereof, so far – and what’s impeding it.
 
Progress and Setbacks
The first step in Lopez Obrador’s plan to improve security in Mexico is to reorient efforts away from traditional security institutions (and violence associated with them) and focus on social and economic development. Under the president’s strategy, security authorities would play a supporting role rather than serve as the driver. The strategy is still in the early stages, but projects to address youth addiction have recently been launched and more complex programs related to youth education and employment are being discussed. Still, the programs that have been initiated have limited reach, and funding is a major barrier to implementing a nationwide strategy.

More progress has been made on establishing the new National Guard, a civilian-controlled national security force made up of federal police and soldiers. The government has already passed the legal framework for the body, though supporting legislation is still under consideration; only time will tell how long it will take before the National Guard is up and running. The government estimated that it would take three years in total, but addressing public concerns over its composition and appropriate use of force might require more time.

The fourth component in Lopez Obrador’s strategy requires cooperation from the United States to reduce drug consumption in the U.S. However, the United States’ historical approach to fighting organized crime has focused on targeting drug production and transport and financing of criminal groups. In other words, the U.S. prefers to target activities taking place in other countries rather than its own contributions to the drug trade, including high levels of consumption and arms supplies.

In addition, Washington has been preoccupied with border security rather than regional development in the countries in which drugs are being produced and through which they’re transited. Lopez Obrador wants the U.S. to focus on development projects instead of providing funding and logistical support to fight organized crime for two reasons. First, Mexico’s current administration genuinely believes that economic and social development will, over time, help improve security in Mexico and Central America’s Northern Triangle countries (Guatemala, Honduras, and El Salvador). The U.N. recently backed some Mexican-driven development projects involving Mexico and the Northern Triangle, but these projects are too limited to bring about a real transformation in the region. Such a transformation will require the support of a wealthy partner like the United States. Mexican officials have estimated that an investment of $20 billion to $30 billion is necessary, and the U.S. is one of the few countries in the world that could singularly make this level of investment.

The second reason the president wants the U.S. to focus on development is that Mexico has had a complicated security relationship with the U.S. in the past. One of the main frameworks for cooperation on organized crime and law enforcement between the two countries is the Merida Initiative, which supports security efforts in Mexico using U.S. funds. It’s much weaker and smaller than Plan Colombia, the U.S. program to help combat the FARC, and for a reason. Mexico is willing to accept only certain types of assistance from the U.S. because it doesn’t want any U.S. incursions into Mexican territory. In 1848, Mexico lost large swaths of territory to the U.S. after the Mexican-American War. And just over 100 years ago, U.S. troops marched into northern Mexico and occupied the Mexican port of Veracruz for six months during the Mexican Revolution. Such an incursion today would be entirely untenable for Mexico. Lopez Obrador has thus said he wants to end the Merida Initiative and divert U.S. funds to development projects. The U.S., however, has no intention of suspending the program. U.S. Embassy officials even told Mexico’s Foreign Relations Commission that Washington will support the implementation of the National Guard though the Merida Initiative.

The most controversial parts of Lopez Obrador’s security plan are his proposals to legalize consumption of certain substances and introduce a national peace agreement. It’s still unclear, however, whether these proposals will come to fruition. The government hasn’t said what substances would be legalized, though marijuana has been the most discussed option. The national peace agreement would offer amnesty to members of organized crime groups, but the government doesn’t have a lot of leverage over criminal groups to force them to the negotiating table, and there are no indications that talks behind the scenes have even begun.

Indeed, Lopez Obrador still talks of the two measures as possibilities rather than realities. And despite significant public backlash, he seems insistent on going ahead with them. Last August, Lopez Obrador started holding town halls across the country to discuss his security strategy, and since then citizens have been voicing their concerns. Last August, participants reportedly criticized the then-government-elect’s lack of organization, respect and protocol. Attendees in cities like Ciudad Juarez objected to the possibility of granting amnesty to criminals. Subsequent meetings were either restricted or canceled due to concerns over clashes involving civil society, and possibly criminal, groups. The town halls ended two weeks early and skipped some of the country’s most violent states like Veracruz, Sinaloa, Tabasco, Morelos and Tamaulipas. Since then, the backlash against Lopez Obrador has grown and protests have erupted, the largest of which took place on May 5, when demonstrators called for the president’s resignation.


 


 
 

The Corruption Problem
 
One issue that’s noticeably absent from Lopez Obrador’s strategy is corruption, a problem he promised to tackle during his campaign. Succeeding in this area will be instrumental to his broader security agenda; development projects may be the cornerstone of Lopez Obrador’s plan, but they require lots of government funding, which has been misused in the past. Lopez Obrador has himself said that the barrier to executing development plans isn’t a lack of funds but rather corruption. This rings particularly true when it comes to law enforcement and state security officials. Organized crime groups have deep pockets that can persuade police, judges and other government officials to turn a blind eye to illicit activities. Improved vetting and monitoring of officials as well as increases in salaries can help, but such measures are costly and the government has limited financial resources at its disposal.

Progress on this front, therefore, has been minimal. The most notable achievement thus far is the creation of the “Institute to Return to the People What Has Been Stolen From Them,” a project funded by auctioned luxury items confiscated from organized crime groups. The problem, however, is that it’s impossible to know how much money these auctions will raise. Lopez Obrador said they will also help fund the National Strategy to Prevent Addictions, so both programs will be competing for funds from the same source. It’s likely, then, that the government will also need to pitch in, and its ability to do so is questionable at this point.

Lopez Obrador’s anti-corruption efforts have been limited and focused on two main targets. The first is international companies and investment. Lopez Obrador has postponed auctions for major projects like oil and gas development due to corruption concerns. However, whether corruption is being rooted out is still in question given that, in the first quarter of 2019, more than 70 percent of contracts were awarded without a competitive bidding process, according to the nonprofit Mexicans Against Corruption and Impunity. Many in Mexico see this as evidence that the government isn’t serious about tackling corruption. Lopez Obrador has also targeted past presidents for their alleged involvement in corruption. He has proposed a public consultation on whether to investigate past presidents over corruption allegations, an idea that has been fiercely debated by both politicians and civil society groups. It has been put on hold, purportedly because supporting legislation must be implemented first.

Lopez Obrador said he would follow a new and novel approach to fighting crime in Mexico. Past administrations had made little progress, and he promised to be different. But while his approach is certainly different, its results have been more of the same. Constraints, including lack of funding, corruption and insufficient support from other parties, make the viability of his strategy even more questionable. It could also strain U.S.-Mexico relations, as U.S. cooperation will be critical to addressing Mexico’s security problem.

Iran Calls Trump’s Bluff

The President is caught between hawkish goals and dovish means.

By The Editorial Board


Photo: jim lo scalzo/Shutterstock


President Trump called off a military strike against Iran in mid-mission Thursday, and his supporters and even some of his critics are hailing it as an act of restraint and courage. The question for American interests is whether Iran and other adversaries will see it instead as a sign of weakness and indecision.

“We were cocked & loaded to retaliate last night on 3 different sights when I asked, how many will die. 150 people, sir, was the answer from a General. 10 minutes before the strike I stopped it, not proportionate to shooting down an unmanned drone,” Mr. Trump tweeted Friday morning.

It’s important to understand how extraordinary this is. The Commander in Chief ordered ships and planes into battle but recalled them because he hadn’t asked in advance what the damage and casualties might be? While the planes were in the air, he asked, oh, by the way? This is hard to take at face value.

More likely, he changed his mind because he had second thoughts about the military and political consequences of engaging in a conflict he promised as a candidate to avoid. Mr. Trump may have saved Iranian lives now, but his indecision and professed fear of casualties may be risking more American lives later.

Squeezed by the U.S. “maximum pressure” campaign, Iran’s rulers are trying to pressure Mr. Trump in return. In recent weeks they have attacked oil pipelines, mined oil tankers, and this week brazenly shot down a $130 million U.S. drone monitoring shipping lanes over international waters. Iran’s bet is that Mr. Trump is so averse to military confrontation that he will ease U.S. sanctions. On the evidence of the aborted mission, they may be right.

The damage from Mr. Trump’s stand-down depends in part on how Iran’s leaders respond. If they agree to talks to revise the 2015 nuclear agreement, the restraint might pay off. Yet Iran’s leaders have shown no interest in talking as long as U.S. sanctions are in place. If Mr. Trump eases sanctions to get Iran to the bargaining table, he is back to the Obama nuclear deal.

On the other hand if the Iranians escalate again, Mr. Trump’s restraint will look misguided and weak. If Americans are now killed by Iranian proxies, his failure to use force to deter attacks will deserve some of the blame.

Laying out these potential stakes isn’t “war mongering,” as the new isolationists on the right claim. This is the reality of geopolitics in which credibility is crucial to deterrence. The more that adversaries think Mr. Trump’s threats of force aren’t credible, the more they will seek to exploit that knowledge.

After Barack Obama failed to enforce his “red line” in Syria in 2013, adversaries soon took advantage. Vladimir Putin snatched Crimea from Ukraine and moved into Syria, China pushed further into the South China Sea, and Iran expanded its proxy wars in the Middle East. Will they draw similar license now from Mr. Trump’s stand-down?

The great weakness of Donald Trump’s foreign policy is its volatility. He is unpredictable to a fault. He has doubted his own Venezuela policy from the first week he signed off on it. He called Kim Jong Un crazy but now says he’s a swell guy. He signed a trade deal with Mexico then threatened it with new tariffs.

On Iran he has adopted a policy goal favored by hawkish Sen. Lindsey Graham but wants to use only the means of isolationist Sen. Rand Paul to achieve it. He warned that “if Iran wants to fight, that will be the official end of Iran,” but he lets Iran shoot down a drone and interfere with international shipping.

If Mr. Trump’s real policy is Mr. Paul’s, then he should be honest with Americans and return to the Obama nuclear deal. In the meantime, Iran appears to be calling Mr. Trump’s bluff.

Gold Decisively Breaches Major 2013 Overhead Resistance Wall

by: Gordon Long
Summary
 
- The $1,360/oz price level has acted as an invisible "Maginot Line" since 2013. The wall was decisively breached this week.

- The blow to the wall was decisive and a retreat by the Bullion Banks to a new higher resistance zone of $1,470/oz looks likely.

- Both the fundamentals and technicals suggest that there is just too much force to be held back for the $1,470 and $1,650 levels not to be tested in 2019.

 
The $1,360/oz price level has acted as an invisible "Maginot Line" since 2013. The wall was decisively breached this week as both Chairman Powell and ECB President Draghi signaled monetary easing was ahead. This was sufficient confirmation to the gold market that currency debasement was again soon to be ignited.
 
 
 
The gold market delivered a crushing blow to once impenetrable wall. However, those that trade gold know only too well that gold is a manipulated market and will be looking for another "fat finger": billions of dollars of notional value of gold; in the middle of the night; offshore; executed in seconds; and sell order - thereby crushing price (once quadruple-witch is in the rear view mirror)! Where is the SEC?
 
However, the blow to the wall was decisive and a retreat to a new resistance zone is likely. $1,470/oz looks likely...
 
 
 
 
...but momentum may force the troops to select $1,650.
 
 
Both the fundamentals and technicals suggest that there is just too much force to be held back for these levels not to be tested.
 
FUNDAMENTALS: De-Dollarization is a core driver (See June 15th Seeking Alpha post: Gold Likely To Soon Be Lifted By Rising De-Dollarization Surge)
 
TECHNICALS: We have gold technicals which haven't looked stronger in a long time:
  • A Bullish "Ascending Triangle"

  • A Completed "Cup & Handle"

  • An "Inverse Head & Shoulders"

 
 
 
The International Man, Nick Giambruno, lays out eight reasons in a multi-article analysis why a huge Gold-Mania is about to begin:
  • No. 1: Basel III Moves Gold Closer to Officially Being Money Again

  • No. 2: Central Banks Are Buying Record Amounts of Gold

  • No. 3: Oil for Gold - China's Golden Alternative

  • No. 4: The Fed's Dramatic Capitulation

  • No. 5: Takeover Frenzy in the Gold Mining Industry

  • No. 6: President Trump Is Pro-Gold

  • No. 7: Socialism Is on the Rise

  • No. 8: Gold-Backed Cryptos - A Monetary Revolution
 
We may have a perfect storm which the Bullion banks are ill prepared to combat!

How Inflation Could Return

After years of low inflation, investors and policymakers have settled into a cyclical mindset that assumes advanced economies are simply suffering from insufficient aggregate demand. But they are ignoring structural factors at their peril.

Mohamed A. El-Erian

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NEW YORK – Debates about inflation in advanced economies have changed remarkably over the past decades. Setting aside (mis)measurement issues, concerns about debilitatingly high inflation and the excessive power of bond markets are long gone, and the worry now is that excessively low inflation may hamper growth.

Moreover, while persistently subdued – and, on nearly $11 trillion of global bonds, negative – interest rates may be causing resource misallocations and undercutting long-term financial security for households, elevated asset prices have heightened the risk of future financial instability. Also, investors have become highly (and happily) dependent on central banks, when they should be prudently more fearful of them.

In search of new ways to produce higher inflation, the major central banks have tended to favor a cyclical mindset, making frequent references to insufficient aggregate demand. But what if that is the wrong lens through which to view current conditions, and we are actually in the middle of a multi-stage process in which strong disinflationary supply-side forces eventually give way to the return of higher inflation? In that case, monetary policymakers and market participants would need to consider quite a different opportunity-risk paradigm than the one currently being pursued.

To be sure, after coming close to central banks’ 2% target in 2018, core inflation rates in Europe and the United States have since been declining. The conventional measure of market expectations for inflation – the break-even rate on five-year US Treasuries – remains stubbornly below target, even though the six-month moving average pace of job creation is almost 50% above the historical level needed to absorb new labor-market entrants so deep in the economic cycle. Though the US unemployment rate (3.6%) is at its lowest level in around five decades, the labor-force participation rate (62.8%) also remains relatively low.

Owing to the persistence of low inflation, monetary policies have remained ultra-loose for an unusually long time, raising concerns that the US or Europe may succumb to “Japanification” as consumers postpone purchases and companies reduce investment outlays. So far, that risk has led to protractedly low or negative (in the case of the European Central Bank) policy rates and bloated central-bank balance sheets, despite the potentially deleterious effects of such policies on the integrity of the financial system.

In fact, some economic observers favor the ECB not just maintaining negative interest rates, but also restarting asset purchases under its quantitative-easing (QE) program. Likewise, there are those who want the US Federal Reserve to implement an “insurance cut,” despite indicators suggesting that this will be another year of solid economic growth and job creation. Meanwhile, central banks have begun to look beyond their existing toolkits (traditional and unconventional) for new ways to spur economy-wide price increases, such as by raising the inflation target, either directly or by pursuing an average and allowing for deviations over time.

But today’s surprisingly low inflation also appears to be linked to larger structural forces, which means that it’s not rooted only in insufficient aggregate demand. Technological innovations – particularly those related to artificial intelligence, big data, and mobility – have ushered in a more generalized breakdown of traditional economic relationships and an erosion of pricing power.

Taken together, I call these structural forces the Amazon/Google/Uber effect. While the Amazon model pushes down prices by allowing consumers to bypass more expensive intermediaries, Google undercuts companies’ pricing power by reducing search costs, and Uber brings existing assets into the marketplace, further eroding established firms’ pricing power.

The Amazon/Google/Uber effect has turbocharged a disinflationary process that began with the acceleration of globalization, bringing far more low-cost production online and reducing the power of organized labor in advanced economies (as has the gig economy more recently). But while these trends will most continue for now, they are likely to confront countervailing inflationary influences that have yet to reach critical mass: the slack in the labor market is diminishing every month, and increased industrial concentration is giving some companies, especially in the technology sector, far greater pricing power.

Now, consider those trends in the context of today’s changing political landscape. Fueled by understandable anger over inequality (of income, wealth, and opportunity), more politicians are embracing populism, with promises of more active fiscal management and measures to curb the power of capital in favor of labor. At the same time, there is growing political pressure on central banks to bypass the asset channel (that is, QE bond purchases) and inject liquidity directly into the economy.

Economic anxieties are also driving anti-globalization politics. The weaponization of economic-policy tools such as tariffs and other trade measures is risking a fragmentation of global economic and financial relationships, favoring higher prices, and compelling a greater degree of more costly self-insurance by companies and consumers. At the same time, as expectations of continued low inflation become more entrenched, an upward price shock could expose vulnerabilities and increase the risk of policy mistakes and market accidents.

Considering how these competing forces are likely to play out over time, policymakers and investors should not rule out a return of inflation over time. Looking ahead, we will likely continue experiencing an initial stage in which the Amazon/Google/Uber effect remains dominant. But that may well be followed by a second stage in which tight labor markets, populist nationalism, and industry concentration begin to offset the one-time structural effects of new technologies being widely adopted. And in a third stage, the possible onset of higher inflation may catch policymakers and investors by surprise, producing excessive reactions that make a bad situation worse.

As with most paradigm shifts, there can be little certainty regarding the timing of this scenario. But, either way, policymakers in advanced economies must recognize that their inflation outlook is subject to a wider range of dynamic possibilities than they have considered so far. Focusing too much on the cyclical, rather than the structural, could pose serious risks to future economic wellbeing and financial stability. The longer we wait to broaden the prevailing mindset, the more likely we are to advance to the next stages of an inflationary process in which the impact of an exciting one-and-done technological event gives way to some old and more familiar tendencies.


Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers in 2009, 2010, 2011, and 2012. He is the author, most recently, of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

Can the Belt and Road Become a Trap for China?

Through its Belt and Road Initiative, China is building ties to some of the world’s most authoritarian, financially opaque, and economically backward countries. Rather than exposing itself to massive political, economic, and default risks, Chinese policymakers should instead seek to repair relations with the West.

Yasheng Huang


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CAMBRIDGE – Critics often claim that China is using its massive “Belt and Road Initiative” as a form of coercive “debt-trap diplomacy” to exert control over the countries that join its transnational infrastructure investment scheme. This risk, as Deborah Brautigam of John Hopkins University recently noted, is often exaggerated by the media. In fact, the BRI may hold a different kind of risk – for China itself.

At the recent BRI summit in Beijing, Chinese President Xi Jinping seemed to acknowledge the “debt-trap” criticism. In his address, Xi said that “building high-quality, sustainable, risk-resistant, reasonably priced, and inclusive infrastructure will help countries to utilize fully their resource endowments.”

This is an encouraging signal, as it shows that China has become more aware of the debt implications of BRI. A study by the Center for Global Development concluded that eight of the 63 countries participating in the BRI are at risk of “debt distress.”

But as John Maynard Keynes memorably put it, “If you owe your bank a hundred pounds, you have a problem. But if you owe your bank a million pounds, it has.” In the context of the BRI, China may turn out to be the banker who is owed a million pounds.

In particular, China may fall victim to the “obsolescing bargain model,” which states that a foreign investor loses bargaining power as it invests more in a host country. Infrastructure projects like those under the BRI are a classic example, because they are bulky, bolted to the ground, and have zero economic value if left incomplete.

Unsurprisingly, some BRI partner countries are now demanding to renegotiate terms, and typically after the projects have started. China may be forced to offer ever more favorable concessions in order to keep the projects on track. In mid-April, for example, Malaysia announced that a major BRI rail project, put on hold by the government after last year’s election, would now go ahead “after renegotiation.” According to media reports, the costs of construction were reduced by as much as one-third. Other BRI countries will probably also ask for debt forgiveness and write-offs, the costs of which will ultimately be borne by Chinese savers.

The BRI may well have additional hidden costs for China down the road. For starters, it is extraordinarily difficult to make money on infrastructure projects. There is a widespread belief that infrastructure investment powers economic growth, but the evidence for this is weak. In fact, China itself built much of its current infrastructure after its growth had taken off. In the 1980s and 1990s, for example, China grew much faster than India despite having a shorter railway network. According to the World Bank, in 1996 China had 56,678 kilometers (35,218 miles) of rail lines, and India had 62,915 kilometers. Chinese growth was not jump-started by infrastructure, but by reforms and human capital investments. If growth fails to materialize in BRI countries, Chinese companies may end up bearing the costs.

Furthermore, many of China’s BRI partner countries are risky – including Pakistan, a major recipient of investments under the scheme. In addition to its high political, economic, and default risks, the country also scores poorly on education indicators. According to one report, Pakistan ranked 180th among 221 countries in literacy. This is a potential red flag for Chinese investments in Pakistan, because research suggests that investments in physical infrastructure promote growth only in countries with high levels of human capital. China itself benefited from its infrastructural investments because it had also invested heavily in education.

Nor should the BRI be compared to the Marshall Plan, the US aid program to help rebuild Western Europe after World War II, as an example of how large-scale investment projects can boost growth. The Marshall Plan was so successful – and at a fraction of the BRI’s cost – because it helped generally well-governed countries that had been temporarily disrupted by war. Aid acted as a stimulus that triggered growth. Several of the BRI countries, by contrast, are plagued by economic and governance problems and lack basic requirements for growth. Simply building up their infrastructure will not be enough.

Finally, the BRI will probably further strengthen China’s state sector, thereby increasing one of the long-term threats to its economy. According to a study by the American Enterprise Institute, private firms accounted for only 28% of BRI investments in the first half of 2018 (the latest data available), down by 12 percentage points from the same period of 2017.

The BRI’s massive scale, coupled with the lack of profitability of China’s state sector, means that projects under the scheme may need substantial support from Chinese banks. BRI investments would then inevitably compete for funds – and increasingly precious foreign-exchange resources – with China’s domestic private sector, which is already facing a high tax burden and the strains of the trade war with the US.

Moreover, Western firms, an important component of China’s private sector, are retreating from the country. Several US companies, including Amazon, Oracle, Seagate, and Uber – as well as South Korea’s Samsung and SK Hynix, and Toshiba, Mitsubishi, and Sony from Japan – have either scaled down their China operations or decided to leave altogether. Partly as a result, US foreign direct investment in China in 2017 was $2.6 billion, compared to $5.4 billion in 2002.

This is a worrisome development. Through the BRI, China is building ties to some of the world’s most authoritarian, financially opaque, and economically backward countries. At the same time, a trade war, an ever-stronger state sector, and protectionism are distancing China from the West.

China has grown and developed the capacity to undertake BRI projects precisely because it opened its economy to globalization, and to Western technology and knowhow. Compared to its engagements with the West, the BRI may entail risks and uncertainties that could become problematic for the Chinese economy. As the Chinese economy slows down, and its export prospects are increasingly clouded by geopolitical factors, it is worth rethinking the pace, scope, and scale of the BRI.


Yasheng Huang is International Program Professor in Chinese Economy and Business and Professor of Global Economics and Management at the MIT Sloan School of Management.