The cost of the lack of rule of law for companies

From 2019 to 2022, Mexico has fallen in the 2022 Global Rule of Law Index of the World Justice Project (WJP). Does this have an effect on the operation of companies? The OECD has pointed out the role that a solid rule of law supposes for the emergence and strengthening of companies.

Our country occupies position 115 among 140 nations, with a score of 0.42 on a scale that goes from 0 to 1, where 1 means the maximum adherence to the rule of law. The country decreased the score of 0.43 that it obtained in the previous edition. In 2019 it registered 0.45, in 2020 it documented 0.44, in 2021 it was 0.43 and in 2022 it reflected 0.42. It seems that after his first announcements of attacking corruption in his six-year term, this fight has been losing strength in the AMLO government. The index highlights that the collection and analysis of data from 140 countries and jurisdictions show that adherence to the rule of law fell in 61% of the countries surveyed this year, including Mexico. The index comes after the World Global Forum Index, which dropped Mexico several places to 58th place in recent years out of 141 countries examined, where the evaluation of bureaucracy towards companies reaches one of its worst places, as well as the tourism and the gender gap is extremely low. At the current rate, it would take us 67 years to equalize the gender gaps in Mexico, when it has been recommended to increase the number of women on the board of directors of companies.

The WJP details that in Mexico among the trends is the decline in order and security, from 0.61 in 2016 to 0.52 in 2022. A deterioration of the civil justice system is also observed, from 0.44 in 2015 to 0.37 in 2018, and the weakening of non-governmental counterweights such as civil society and the press, from 0.58 in 2015 to 0.48 in 2022.

During 2021, 45.9% of large companies were victims of crime, 46.9% of medium-sized ones, 38.2% of small ones and 23.7% of micro ones. During 2021, 2.9 million crimes associated with 1.2 million victim companies were generated. This represents a concentration rate of 2.4 crimes for each one. In 2021, the total cost as a result of insecurity and crime in companies represented an amount of 120.2 billion pesos, that is, 0.67% of GDP. Preventive measures represented an estimated cost for them of 69.9 billion pesos. In the same year, the monetary loss due to victimization in companies, that is, those losses as a result of having been the victim of one or more crimes, was 50.3 billion pesos.

In addition, according to the WJP, there is a stagnation in anti-corruption matters, with 0.26 on the aforementioned scale. However, he states that the country shows strengths in terms of open government, in respect for the law in its transition of power, as well as in the integrity of its elections. These strengths will be tested in the change of courier to the next president’s team.

According to what Luis de la Calle argues in Economics of extortion, extortion is not just a stain on our system. It is our system. Or, at least, the worst possible travel companion: one that strips us at every step and plunges us into uncertainty. During 2021, extortion represented a rate of 1,744 extortions per 10,000 companies; that year, 829 thousand extortion crimes were committed, of which 67.6 thousand corresponded to extortion crimes on the street, in the establishment, or collection of flat. In 44.8% of the cases, the extortion was paid. Extortion has permeated virtually every layer of our society and today defines much of our economy and politics. Its impact is brutal and causes profound inequality, not only in income and opportunities, but also in access to the most basic rights. Mexico, today, cannot be understood without this scourge, if it is not eliminated, it will be impossible for us to fully take advantage of nearshoring. In other words, an environment of uncertainty inhibits the attraction of investment simply because it reduces the possibilities of business planning by increasing the expectations of costs for the future that often transcend the monetary by putting the lives of employees at risk.

The foregoing is aggravated if the bureaucratic requirements do little to help entrepreneurs. In limits to government power, the WJP rates Mexico with a score of 0.44, which reflects the existence of problems in obtaining permits, licenses, and various procedures that prevent companies from operating. This also refers to the controls over the press and the ineffectiveness of the agencies in charge of government oversight, which by acting weakly make the operation of the State more expensive, another additional cost for companies.