Economic Variables, Facts and Misrepresentations

Variables Económicas y su Función como Indicadores
20 de Apr, 2018

Nowadays, and specifically during elections, social media posts about economic variables are very common. They are given the subjective interpretation depending on the user posting or sharing it. Often times with the goal of making certain government administration look good or bad, even when this means misrepresentating reality.

This frequently happens with the performance of the USD vis à vis the mexican peso, arguing that the mexican state fails every time the USD rises. This perception is justified by history, where for a number of years the currency value was fixed by the mexican state. But after facing volatility and changes in the market, the situation became unsustainable and led to the appearance of a great crisis during the 80’s. Altogether, it made fixed currency rates disappear to bring a free floating regime for the currency. Today, Bank of Mexico (Banxico) does not protect the currency rates by itself, it only adjusts the effects to prevent possible inflation triggered by volatility in the markets.

What does it mean when the dollar rises or lowers? As any other asset quoted on the stock market, it means that supply has risen or the offer lowered, or vice-versa. When the mexican economy faces favorable growth expectations, it is common to see the supply of mexican peso rise, or in the midst o threats to see confidence to invest go down (possible NAFTA termination), which generates capital flight, and along with it goes the weakening of the currency in relation with others.
There are a number of theories to understand the real value of a currency. One of the best known is the Fisher Law, which arrives to conclusion using the country’s inflation and interest rates.

Another indicator is the gas price. It would be relevant to mention that the energy reform has been taking a lot of the media blame after the rise of prices in 2017. But state isn’t either the one controlling the price, which comes as a result of a liberation of prices to compete with the international market (depends on the dollar), the tax charges (IVA and IEPSI, administrative costs, and profit rate. Therefore, taxes are the only variables that could be directly lowered, although not advisable because Mexico occupies in tax-income the very bottom of the countries that belong to the OECD in the tax-income index. As welll because fuel taxation is easy to collect; they’re progressive, the wealthier, the higher rate; and, they’re eco-friendly because they inhibit the excessive use of vehicules. 

The third indicator, we use it daily on social media to refer to poverty, that is the Minimum Wage. Among the aforementioned, this last indicator is the only one that relies on the state through the National Comission for Minimum Wages (CONASAMI), a decentralized agency. Why is the minimum wage so low? Because of historic reasons. During the 80’s, mexican economy was a disaster lurching from crisis to crisis due to an inflationary spiral that limited the increase of the anual minimum wage. For a number of years locks to prevent this increase were implemented, such as fines and credits from the National Workers Housing Fund Institute (INFONAVIT). This fines and credits were index-linked to the minimum wage before the UMA, a new measure used for purposes other than determining minimum hourly wages and making a substantial MW increase possible, arguing that salary emerges from the basic principle of the workers productivity. All of this, considering an economy such as Mexico’s where half of the labor force works in informality and taking into account that informal economy is half as productive as the formal one, drags wages to the ground.
Nonetheless, minimum wages don’t reflect the condition of a great proportion of workers. In 2016 only 9,587 workers were register with the Mexican Social Security Institute (IMSS) under this terms. Therefore, an increase of minimum wages would not in be fact rapidly beneficial to a large group of the vulnerable working class. Consequently, it can be concluded that the average salary registered to IMSS would be a far more better indicator to perceive real labor conditions in Mexico.

These variables can be perfeclty used as measures, however they are usually manipulated to distort public opinion. This reflects the need to ensure that population understands basic principles of domestic economy, and perhaps more importantly to know the concepts when referring to them. Otherwise, it would only contribute to a chain of misrepresentations that would unavoidably end up distorting the truth.

David Abraham Ruiz Ruiz
BA in Finance from de University of Sonora

Twitter: @Ruiz4D

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