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It’s time to address recovery after the Coronavirus

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The President of Mexico seems to have decided that some sort of Mexican New Deal might be the key to saving the economy. However, recent evidence rising from first-world countries points to a completely different problem. According to Jerome Powell, Chairman of the U.S. Federal Reserve, this crisis has had an impact on those least able to address the problem. This underlines what hasn’t been understood in Mexico: there’s talk of poverty and segments at risk, but what’s often overlooked is that local and state governments and even small business owners are not capable either.

Powell, following a path much different than what Mexico has done, pinpointed a structural problem with the strategy led by President Andrés Manuel López Obrador. Not only does the Federal Reserve have the power to increase spending and circulating money supply, but it can also step in as a bank guarantee to increase the amount of money in credit. It seems like the U.S. has understood that the coronavirus problem will not be solved with increased government spending. For AMLO, it should be apparent that the COVID-19 crisis will result in a multitude of deaths followed by an even greater number of layoffs. Some analysts place the loss of jobs at 1.5 million, although personally I believe it will be greater. The pillars upholding the Mexican economy are at risk: oil, tourism and construction have been shaken up. We won’t see a quick recovery in those sectors.

Consumer have an interest in spending but have lost the ability to do so as a result of reduced income, and in some cases, unemployment. Furthermore, fear is a crucial element that has paralyzed a substantial portion of overall economic activity. This suggests that no amount of government spending will be able to boost the economy of middle and lower classes hurt by the coronavirus. Powell points to a bigger issue: local governments in the U.S. are close to losing credit capacity, much like what is happening in Mexico. The dual shock to supply and demand experienced by the world economy won’t be resolved with greater spending, at least at the federal government level. Businesses and consumers must be empowered with lines of credit so that they can slowly replenish the 12 percent of yearly revenue they will lose due to the coronavirus.

The Mexican Social Security Institute, IMSS, announced a plan to defer taxes, a step in the right direction but that still comes at a very high price. Businesses that take advantage of this will spend the equivalent of a credit card credit, and it’s a desperate measure bound to end badly for some employers. In contrast, the Federal Reserve’s current priority has been to keep the North American market liquid. In Mexico, the strategy has been the opposite, requiring employers to maintain their current payroll and comply with tax requirements at all costs. They’ve transferred the credit to the providers, the cheapest credit available in Mexico. However, this generates a spiral of illiquidity; the chain reaction results in fewer people getting paid for their services. Once this process has begun, it’s hard to make it stop. The consequences are disastrous at the consumer level: not only will there be a shortage of products due to lack of company-to-company financing, but we’ll also witness price increases in an effort to pass along internal financing costs to the final consumer.

It would seem that a strategy of quantitative easing would not work. As a consequence, a plan in which the government directly offered cheap credit (not in a lost fund) could make a difference, and indicators in Mexico seem to prove that theory. The concessions made by banks by extending loans to consumers and small businesses and consumers for up to four months have been a lifeline for countless Mexican families. Extending 4-month terms at no cost is in itself a form of cheap credit. This last example should be enough to convince AMLO that consumers do not need public works at this time; it’s possible what they require the most is credit to carry on with their lives. The same is true for small business owners: a government-guaranteed line of credit is certainly cheaper than countless Mexicans with unemployment insurance. For this reason the best shot Mexican consumers have is access to cheap credit, with, of course, standards and responsibility. The challenge for AMLO is to overcome his aversion to lending money to anyone he doesn’t consider worthy. He must also recognize that there are differences between small business owners and large entrepreneurs. The former will not survive without his help, but the latter will do so with or without it.

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