Money / Politics

Is Mexico A Failed State?

Over the past several months, I have heard the question as to whether or not Mexico is a failed state raised a number of times.  As part of the “Mexico Series” I have been posting over the last year or so, it is time for me as an International Relations academic to address that question…

Mexico: Is It A Failed State?

The idea of Mexico being a failed state likely would have been scoffed at several years ago.  Now, however, with a raging insurgency fueled by drug cartels and serious economic problems, the idea is being seriously presented.  For example, the U.S. Joint Forces Command recommended that Mexico should be monitored alongside Pakistan as a “weak and failing” state that could crumble swiftly under relentless assault by violent drug cartels (Ellingwood, 2009).   Retired U.S. Army Gen. Barry R. McCaffrey, the former U.S. drug chief, said in a separate review of Mexico that the government “is not confronting dangerous criminality – it is fighting for its survival against narco-terrorism” and could lose effective control over large swaths near the U.S. border (Ellingwood, 2009).  Even the outgoing Central Intelligence Agency (CIA) director, Michael Hayden, placed Mexico with Iran as a possible top challenge for the new Obama administration. (Ellingwood, 2009).  It’s an intriguing argument.

First of all though, what exactly is a failed state?  For a broad-based and accepted definition of a “failed state,” I turned to the Fund for Peace, which publishes an annual list of “Failed States” and does extensive research on failed states .  Fund for Peace lists the following criteria for a failed state.

“In order to make the definition [of a failed state] more precise, the following attributes, proposed by the Fund for Peace, are used to characterize a failed state:

  • loss of physical control of its territory, or of the monopoly on the legitimate use of physical force therein,
  • erosion of legitimate authority to make collective decisions,
  • an inability to provide reasonable public services, and
  • an inability to interact with other states as a full member of the international community.

Common characteristics of a failing state include a central government so weak or ineffective that it has little practical control over much of its territory; non-provision of public services; widespread corruption and criminality; refugees and involuntary movement of populations; and sharp economic decline.” (Fund for Peace)

This seems like a fair definition of a failed state and it is the one I will work with as I attempt to answer the question of Mexico’s status.  On the 2008 “Failed States Index” published by Fund for Peace, Mexico ranked at number 105 with the number one slot being held by Somalia, followed by Sudan and Zimbabwe respectively.  At the very bottom of the list are the Nordic countries.  Given the events of the past 12 months, I expect that Mexico will be much higher up on the list than it was last year when the 2009 list is published.

The current “war”, as President Felipe Calderon (Malkin, 2009 ) describes it, between the drug cartels of Mexico and the Mexican government seems to dominate the headlines about Mexico these days.  In fact the Los Angeles Times has even been running a series entitled Mexico Under Siege now comprised of many scores of articles detailing the carnage and chaos in Mexico.  Given the high profile of this issue, I’ll address it first.

The conflict took center stage two years ago when newly elected President Calderon decided to take on the drug cartels and bring them to heel.  The conflict has been escalating ever since and “in 2008, almost 6,000 people were killed as Mexican drug gangs fought each other and President Felipe Calderon’s government.” (Ellingwood, 2009)

How did the drug cartels grow so powerful?  Stratfor, a private intelligence service based in the United States, provides a good overview :

“Traditionally, Mexican drug-trafficking organizations had focused largely on the transfer of narcotics through Mexico. Once the South American cartels encountered serious problems bringing narcotics directly into the United States, they began to focus more on transporting the narcotics to Mexico. From that point, the Mexican cartels transported them north and then handed them off to U.S. street gangs and other organizations, which handled much of the narcotics distribution inside the United States. In recent years, however, these Mexican groups have grown in power and have begun to take greater control of the entire narcotics-trafficking supply chain.

With greater control comes greater profitability as the percentages demanded by middlemen are cut out. The Mexican cartels have worked to have a greater presence in Central and South America, and now import from South America into Mexico an increasing percentage of the products they sell. They are also diversifying their routes and have gone global; they now even traffic their wares to Europe. At the same time, Mexican drug-trafficking organizations also have increased their distribution operations inside the United States to expand their profits even further. As these Mexican organizations continue to spread beyond the border areas, their profits and power will extend even further.” (Burton & Stewart, 2009)

The drug cartels are well-armed for the job.  As the Los Angeles Times explains in an article entitled Drug cartels’ new weaponry means war, the cartels are “evolving into a more militarized force prepared to take on Mexican army troops, deployed by the thousands, as well as to attack each other.  These groups appear to be taking advantage of a robust global black market and porous borders, especially between Mexico and Guatemala. Some of the weapons are left over from the wars that the United States helped fight in Central America.” (Ellingwood & Wilkinson, 2009)

Foreign Policy magazine offers more details about the type of military hardware the cartels are using: “The outgunned Mexican law enforcement authorities face armed criminal attacks from platoon-sized units employing night vision goggles, electronic intercept collection, encrypted communications, fairly sophisticated information operations, sea-going submersibles, helicopters and modern transport aviation, automatic weapons, RPG’s, Anti-Tank 66 mm rockets, mines and booby traps, heavy machine guns, 50 caliber sniper rifles, massive use of military hand grenades, and the most modern models of 40mm grenade machine guns.” (Quinones, 2009).

As if this were not serious enough, efforts to combat the drug cartels are severely hampered by rampant corruption.  Consider that Mexico itself has conceded that “cartel operatives had infiltrated Interpol, the U.S. Embassy in Mexico City and even DEA operations.” (Meyers, 2008).  Indeed, according to a different article, “many police officers, especially at the state and municipal levels, are paid by smuggling groups to actually provide protection services and tip them off to pending police actions.”  (Meyers, 2008).  And in just the time since Calderon begin trying to reign in the drug cartels, more than “11,500 public servants have been suspended or fined for corruption.”  (CNN).

However, this corruption does not just impact the world of law enforcement and the drug cartels, but also the broader economic world as well.  In fact, “38 percent of Mexican businesses surveyed said they tended to use relationships with friends or relatives to obtain public contracts, and 32 percent said they had bribed politicians and government workers”.  According to several studies, “more than 100 million acts of corruption are committed in the country each year, and the typical family spends the equivalent of 25 percent of its income on bribes”.  (CNN).  Mexico ranked number 72 by Transparency International (Transparency International).

And this staggering corruption couldn’t come at a worse time for Mexico.  China is continuing to chip away at Mexico as a source for low-cost labor and goods.  “After signing the North American Free Trade Agreement (NAFTA) in 1994 and gaining unrivalled access to the US, things initially looked good for Mexico. Then, in 2001 China entered the World Trade Organisation (WTO). Five years later, China became the United States’ second largest trading partner, supplying 17% of all US imports. Mexico came in third with a share of less than 10%.” (Gallagher, 2008).

A 2005 Inter-American Development Bank/Harvard University study found that of all Latin American countries, Mexico had the potential to be most hurt by China because Mexico’s “export basket” (the profile of the types of products it exports) was most similar to China’s.  (Gallagher, 2008). The same study showed that over half of all Mexican exports to the US are under “threat” from China.  In other words, export for export, Mexico is rapidly losing ground in the US market, and China is gaining. This is not a minor concern for Mexico given that 85% of its exports go to the United States.  (Gallagher, 2008).

Another problematic component of this economic predicament that Mexico finds itself in is that Mexico’s globalization strategy “came straight out of the Washington consensus handbook – they rapidly slashed tariffs and deregulated the state hoping to lure trade and investment.”  (Gallagher, 2008). China took a much more anti-free-trade, government-managed approach to globalization, and yet it is China that by all appearances is winning this economic battle.  It is difficult to see how this will not weaken the support of Mexico for free trade and globalization.

And if all of the above were not sufficient cause for hand-wringing, consider the current state of PEMEX, the state oil company that Mexico relies on to balance its budget.  PEMEX (its full name is Petróleos Mexicanos) revenues “accounted for almost 40 percent of the federal budget” last year. (Malkin, 2009).  However, output at PEMEX is down from its peak of 3.4 million barrels a day in 2004 to 2.9 million barrels a day in 2008.  At the same time, PEMEX’s proven oil and gas reserves have fallen to “only nine years worth” from 15.1 billion barrels at the end of 2002 (Malkin, 2009).  And “Mexico’s average oil exports will remain well below target all year and beneath last year’s levels due to lower crude production, the head of state oil monopoly Pemex said.” (Upstream Online)

The major factor impacting PEMEX’s prospects and hampering reform is government interference. Last year, sales at PEMEX reached $97 billion. But $79 billion of that went to the government. (Malkin, 2009).  This focus on extracting as much capital as possible for the government treasury has crippled PEMEX as it is difficult, if not impossible, in such conditions to make long-term investments in equipment or technical expertise or even to perform basic maintenance.  By law, “Mexico’s president and Congress must approve the company’s budget, its output, investments and exports each year” (Malkin, 2009).  And it is actually written into Mexico’s constitution that PEMEX is closed to any outside investment.  This provision might have sounded great at the time it was passed, but now has the effect of shutting PEMEX off from private capital and expertise when it needs it the most – preventing Mexico from following the path that most cash-starved national oil companies have used.

An example of this lack of technical expertise and the direct cost it has for Mexico is illustrated by how Mexico handles natural gas.  Natural gas is a normal discovery when drilling for oil.  Most companies collect both this oil and natural gas and sell both.  PEMEX, however, lacks the ability to collect this natural gas and so they just burn it off in a process known in the industry as “flaring”.  They are literally burning up billions of dollars worth of natural gas that they are unable to process.  Aside from the ecological effects, this is a tremendous waste of money. “It’s like lighting dollars on fire,” said Kenneth B. Medlock III, who is also at the Baker Center at Rice University” (Malkin, 2009)

Another factor impacting PEMEX’s prospects and hampering reform is the powerful union that controls PEMEX workers.  The former chief executive of PEMEX, Luis Ramírez Corzo, said recently, “The union is one of the key political complexities of what you have to deal with.” (Malkin, 2009).  He added that PEMEX could cut up to $2.5 billion from its annual operating costs and that “labor costs for workers who had not enough work to do or none at all cost the company almost $1 billion of that.”  (Malkin, 2009).  “PEMEX’s labor union has locked it into rigid work rules and siphoned off hundreds of millions of dollars for unexplained benefits. And that does not even touch on the widespread corruption and waste.” (Malkin, 2009).  (Again, the problem with corruption arises as an issue).  Meanwhile, PEMEX’s debt has climbed to about $53 billion and its rapidly increasing pension liabilities have reached another $40 billion (Malkin, 2009).  However, with some 100,000 of the company’s 148,000 employees members of the union, and with the union having five representatives on the board of PEMEX, change will not be coming from within PEMEX anytime soon.

Looking at the totality of the evidence presented above, it is difficult to be optimistic about Mexico.  However, when things look the worst in the investment markets, it is frequently a good time to buy.  I feel the case may be the same with Mexico.   Sure, Mexico has some serious problems, but these problems are a far cry from states such as Somalia, Haiti or the Democratic Republic of Congo, with their weak or non-existent central governments and massive internal conflicts.  “It’s a very bad analysis,” says Raul Benitez, an expert on security and U.S.-Mexico relations at the National Autonomous University of Mexico. “Mexico has some failed institutions inside the government, but not the whole state.” (Ellingwood, 2009)

“Few deny that lawlessness prevails in cities such as Ciudad Juarez and Tijuana, and that corruption has chewed deep into law enforcement agencies and the courts. Still, many analysts say, the government’s basic authority remains intact in most of the country, and the daily violence is nothing like that of a civil war.”  (Ellingwood, 2009).  They seem to have a point.  In a country with more than 100 million people, it is difficult to view the death of less than 7,500 people as a catastrophic event, threatening the very future of Mexico.

And this may sound surprising given Mexico’s financial history, but Mexico’s finances are in great shape at this time.  According to the CIA World Factbook’s analysis of Mexico’s 2008 federal budget, Mexico took in $256.7 billion dollars of revenue and had expenditures of $256.8 billion last year (CIA).  Yes, that was not a typo.  Mexico has a balanced budget.  Would that Mexico’s neighbor to the north exercised such fiscal restraint.  The good news for Mexico does not end there, however.  Mexico’s public debt is just 20.3% of gross domestic product (GDP).  Compare that to a country like the United States with public debt at 60.8% of GDP (2007 est.) (and this number is severely understated if the pension liabilities of the United States were to be taken into account or the deficit spending for “fiscal stimulus” were included or Japan at 170.4% of GDP (2008 est.) (CIA).  But, even that is not the limit on good news for Mexico.  Mexico’s inflation rate presently stands at only 6.2% (CIA).  That may sound a little high to those of us used to recent inflation numbers in our own countries in the low single digits, but for Mexico, that is a great number and even for more Western countries, that is a manageable number.

And what about PEMEX?  Yes, PEMEX has problems, but Mexico is still sitting on tens of billions of barrels of untapped oil reserves.  And there is universal agreement that if Mexico changes its laws to allow private partners in oil exploration and production, it will be able to ramp up output and even begin to tap its unexploited natural gas outputs.  In fact, Mexico is working as I write this to get a bill passed that would allow private investment in its oil industry.

Mexico still has NAFTA as well, which is an economic advantage that not even China has.  So, while China may be a lower-cost producer than Mexico, China is hit with tariffs of close to 6% on exports to the United States, while with NAFTA, Mexico faces virtually no tariffs on exports to the United States.  (Gallagher, 2008).  And there’s another advantage that Mexico enjoys over China as well – proximity to the United States.  It takes an average of 18 days to ship goods from China to the United States, but goods can be shipped from Mexico to the United States in less than a day.  (Gallagher, 2008).  I believe the recent plunge in energy prices is likely a temporary phenomenon and that higher energy prices will be a continuing reality of our future.  This will make shipping costs increasingly expensive as well.  In such an environment that difference in distance between Mexico and China will likely seem increasingly significant as well.  The difference in time is important also.  Consider how quickly fashion trends change.  Surely, retailers desperate to get the latest fashion out on the floor will be willing to pay a little more to purchase their supplies from Mexico to save them an 18-day wait?  And doesn’t the same hold true for electronics components and countless other goods as well?  The comparisons to China, in my mind, treat Mexico’s economy as if it is a static entity, incapable of changing and adapting to competition from China.  However, unlike China’s state-run economy, Mexico’s economy is free and seems quite capable of evolving to offer more value-added goods and services to its trading partners (such as the United States) as part of a move up the economic ladder and away from simply being a low-cost producer.  Such is the essence of capitalism.  Sometimes an economic transition is uncomfortable or a little messy, but ultimately, the country undergoing such a transformation is stronger in the end for having gone through that process.

In summary, while I concede that Mexico is not perfect, which country is?  I reject the extreme comments that have emerged comparing Mexico to a failed state.  And the good news I cited is just the good news that is already in place or is in the process of unfolding.  Suppose a long shot such as the United States legalizing narcotics were to come about?  Mexico’s problems with the cartels would disappear overnight.  “My years of experience as a federal agent tell me that legalizing and effectively regulating drugs will stop drug market crime and violence by putting major cartels and gangs out of business.” (Nelson, 2008).  And really, when aside from the libertarian arguments for legalization, there are the practical arguments advocating such policy moves coming from revered publications such as The Economist (Economist, 2009) and from veteran law enforcement officials, the idea of eventual legalization doesn’t seem quite so outlandish anymore.

The parallels between the Mexico of today and the Columbia of yesterday seem quite apparent to me.  Not only did drug cartels led by the likes of Pablo Escobar declare war against Columbia (as in Mexico), but Colombia also endured (and is still enduring) a massive internal insurgency in the form of the guerilla FARC movement.  However, Pablo Escobar is dead now and the infamous cocaine cartels in Colombia are a shadow of their former selves.  FARC itself is unraveling and is nowhere near the force it once was. The Colombian government continues to make significant progress against FARC rebels.  In many ways, Colombia’s challenges were even greater than Mexico’s and yet Columbia survived and today is thriving.  I expect the same will be true of Mexico.

Bibliography

Burton, Fred & Stewart, Scott, 2009. The Long Arm of the Lawless

STRATFOR, 25 February

Central Intelligence Agency. CIA World Factbook

Available at: https://www.cia.gov/library/publications/the-world-factbook/ [Accessed 14 March 2009].

CNN. Mexico’s corruption fight reaches civil workers

Available at: http://edition.cnn.com/2008/WORLD/americas/12/09/mexico.corruption/index.html

[Accessed 09 March 2009].

The Economist. How to stop the drug wars

Available at: http://www.economist.com/opinion/displayStory.cfm?story_id=13237193&source=hptextfeature

[Accessed 09 March 2009].

Ellingwood, Ken, 2009. Calderon seeks to dispel talk of ‘failing state’.

The Los Angeles Times, 25 January

Ellingwood, Ken & Wilkinson, Tracy, 2009. Drug cartels’ new weaponry means war.

The Los Angeles Times, 13 March

Fund for Peace.  Failed States Index

Available at: http://www.fundforpeace.org/web/ [Accessed 11 March 2009].

Gallagher, Kevin, 2008. Competing for America’s business. The Guardian, 03 September

Malkin, Elisabeth, 2009. Output Falling in Oil-Rich Mexico, and Politics Gets the Blame                         

The New York Times, 09 March

Meyer, Josh, 2008. Mistrust bedevils war on Mexican drug cartels

The Los Angeles Times, 31 December

Nelson, Terry, 2008. Strategies for Mexico’s drug war

The Los Angeles Times, 10 December

Quinones, Sam, 2009.  State of War. Foreign Policy March/April 2009

Transparency International. 2009 Corruption Perception Index

Available at: http://www.transparency.org/ [Accessed 10 March 2009].

Upstream Online.  Pemex output ‘to undershoot 2008 targets’

Available at: http://www.upstreamonline.com/live/article156331.ece [Accessed 10 March 2009].

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One thought on “Is Mexico A Failed State?

  1. Pingback: The Mexico Series: Mexican Drug Routes « The Velvet Rocket

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