Monday, March 09, 2009

Mexico: A Collapse Update

I’ve been predicting the collapse of the Mexican Nation-State since 2006. It turns out that was a bit premature. But with violence flaring, the potential for collapse in Mexico is once again in the headlines. Oil production continues to fall, border violence is up, and the government is preparing for a showdown with the drug cartels. I’ll argue below that the government will keep the wheels on through 2009, but that the Mexican state will collapse shortly thereafter, ushering in the beginning of the end of the Nation-State.

It’s been difficult to read a paper or watch the news recently without hearing about the growing troubles in Mexico. The US military’s Joint Forces Command issued their Joint Operating Environment 2008 report recently that listed Mexico and Pakistan as the most likely states to collapse in the immediate future (PDF, see p.35 for analysis of Mexico). Even 60 minutes ran a segment about the rising drug violence.

Of course, readers are probably already aware that a root cause of the problems in Mexico is the precipitous decline of Mexican oil production and an even faster decline in the level of oil exports. Add to that declining remittance incomes being sent home by migrant workers in America, declining tourist revenues, and lower revenue per barrel of oil exported, and the Mexican state is experiencing a severe financial crunch.

While the fiscal stability of the Mexican state is impacted by continually declining oil production and oil exports that are declining even faster, this impact is mitigated to some extent because PEMEX hedged the majority of its oil production through 2009 at roughly $70/barrel. Depending on the price of oil in 2010, Mexican oil revenues stand to drop off a cliff as PEMEX loses hedge coverage.

Does this mean the Mexican state is finished? The current crack-down by the Mexican military and federal police is, I think, best seen as a last-ditch effort to save the state. But it is also evidence that, by the very existence of this pitched battle, the state retains enough viability to pose a threat, and therefore to be targeted.

In military theory, pitched battles are only consciously joined by both sides when both have an incentive to risk the main body of their force—-either because they think they can win a decisive victory or because they are running out of the political, logistical, or economic ability to sustain their army in the field and must seek a decisive action while they can.

Clearly the drug cartels smell blood—-and tactics like forcing the resignation of the Juarez police chief by killing one or more police officers every 48 hours demonstrate their desire for a decisive engagement. Additionally, the motivation behind a recent truce among rival drug cartels may be to facilitate a joint offensive against the government.

In my opinion, the Mexican government is seeking a pitched battle for the second reason—with their oil hedges only in place through 2009, and with oil production, remittance income, and tourism dollars poised to continue a sharp decline, the state may not have much more than a year of financial viability in which to cripple the drug cartels.

While a pitched battle may be politically expedient for the state, I think the cartels are too widespread and deeply ingrained to be defeated militarily. Salvation for the Mexican state will require regaining the long-term ability to compete with the cartels as a provider of social order and economic activity—-something that cannot be gained on the battlefield. At a minimum, in order to finance its ongoing viability, the state needs significantly higher oil prices to increase export revenue or a rapid recovery in the US to generate an increase in remittance income. Given the current economic climate, the occurrence of both of these seems highly unlikely—-there is simply no way of knowing where the tipping point lies, whether either one of these factors, or both, can save the Mexican state from eventual collapse. And without a renewed fiscal foundation, the eventual collapse of the Mexican state seems inevitable…

Impacts of Increasing Instability in Mexico

First, the increasing instability in Mexico will have a significant impact on PEMEX’s ability to maintain the necessary levels of investment to minimize production declines. This creates a positive feedback-loop: faster declines mean more financial difficulties, more instability, and less investment, precipitating even faster declines. In 2009, PEMEX plans capital expenditures of roughly $20 Billion. Traditionally, due to laws that prevent foreign ownership of many categories of natural resources, PEMEX has relied on debt to finance capital expenditures. More recently, PEMEX has also been pushing for a reform to the Mexican oil law that would allow foreign companies an ownership stake in Mexican projects in exchange for investment. Regardless of whether PEMEX pursues debt or equity financing, instability in Mexico’s property rights regime—-certainly including the potential for governmental collapse—-will seriously hamper these efforts.

Certainly the impact of disintegration in Mexico will have an impact north of the border. There is already a clear spill-over in criminal activity in border states. At some point, the national security threat to the United States will bring calls for intervention—but are there any effective options? The sprawling yet dense cities and mountainous rural terrain of Northern Mexico should give any military planners pause, especially in light of recent American experiences in Afghanistan and Iraq. Some commentators have even suggested that Mexico, not Iraq or Russia or Afghanistan, will be the defining national security challenge of the Obama administration.

The potential impact on Mexican oil production seems clear. More superficially, the situation in Mexico gives commentators of all stripes something to worry about. The spill-over of drug violence seems to preoccupy most mainstream talking-heads, but a few commentators have traced these problems back to their roots—and see a much more troubling threat. Specifically, the troubles in Mexico are an early sign of the failure of the Nation-State model. I’ve written about this extensively, and my intent here is not to re-hash my critique of the Nation-State system: if you’re interested, here’s an academic paper on the topic. The key is that the trends pulling Mexico apart at the seams are ubiquitous—-Mexico is merely facing this perfect storm first. As the Nation-State dominos begin to tumble next--Pakistan perhaps, then Iraq, then Russia, then Italy, then China, then Indonesia, etc.—-the pressure on the rest will grow. And many of the most threatened states are also the most critical to global oil exports.

While I don’t think Mexico—in its current form—has many years left, I hope I’m wrong. It’s a beautiful country (especially if you can get outside the Americanized hotel zones), with a vibrant culture. It may even prosper in a post-peak world under some different form of social and political organization. And a token state-shell may last for decades (another global trend, I suspect)—after all, the cartels will probably be happy to delegate parts of the social contract to the “sovereign.” But, for all practical purposes, the Mexican state won’t survive to see 2012.


Tom said...

Thanks, Jeff

Having just read Pat Buchanan's take ( on Mexico, it was good to read your insights.
Are you suggesting that the Mexican State could continue on in much the same way as the Russian State did shortly after the fall of the Berlin Wall? As I remember it, the State still functioned in some areas but the true control of Russia was in the hands of the Mafia.
I agree it will be a shame to have to write Mexico off the list of places to travel to, but it does seem to be inevitable.

piterburg said...

You are very pessimistic on Mexico.
Colombian state overcame its drug cartels, what makes you think Mexican state can't do the same?

Antonio said...

Pardon my english. I'll try my best.

How is the drug cartels to threaten the Mexican government? It's a war both sides cannot win fully. The drug dealers are never going to be able to defeat the military forces of a state ation -- we're talking about tanks, planes, choppers etc. And the government will never defeat the drug cartels -- too many innocents would have to be killed, making that a unpopular war. Besides, drug dealing always come back, some way or another.

You say "the national security threat to the United States will bring calls for intervention". National security threat? How? Could be more specifica about that?

There is no "national security threat" -- thus, tehe would be no "calls for intervention". Mexicans are not terrorists, they have no reason to hate USA as muslims do. And the drug cartels, why would they pose a threat do the american security? How can a organisation declare a open war or some form of hostility to it's biggest client?

There is no "national security threat". All US need to do is reinforce border security in case of a economical crisis in Mexico, so to avoid illegal imigrants.

So, your rhetoric creates a false problem -- a problem, that, of course, only America's military power would solve. To me, that doesn't sound like a political scientist trying to understand a situation. It sounds more like that old Republican way of setting ideological arguments to do politics.

Regards from Brasil,

Antonio Engelke

Jeff Vail said...

Hi Antonio,

I disagree that the drug cartels could never defeat the state--we've seen in Iraq and elsewhere that a properly run insurgency can impose a high cost on any state military. The cartels can't engage the state in clash of tank forces (a la Kursk) or in a pitched naval battle because that plays to the state's strengths. But they can undermine the ability of the state to field those forces, and can effectively control every point where the state has not massed its forces.

Bottom line, though, is that I don't see a pitched battle between the cartels and the state where cartels "win" and "take over" Mexico. Rather, I see a re-negotiated coexistence between the two poles. The state will pull back to a more narrow slice of time and space where it exerts "sovereignty," and the cartels will fill the resulting vacuum--effectively controlling most of the countryside and slums, and having unrestricted access to cities when they make that their focus.

This doesn't present a "national security" threat to the US in the sense that these cartels would then invade the US in a military sense. From the US politicians' perspective, it presents the situation where the unrestricted cartel operation in Mexico would further undermine the security of the US/Mexican border. This would increase the penetration of the cartels into US drug markets (well, it probably can't increase their market share, but it can increase their freedom to operate and to leverage control of drug markets into control of other black/grey industries). This is a serious threat to the traditional conception of sovereignty to the US politician, so they would likely react by militarizing the US border. As with any well-run military operation, the military advisors to the politicians would correctly advise that the best (military) tactic isn't to sit back and wait at the border, but to actively patrol inside Mexico, both with aerial surveillance and with choice ground patrols and airstrikes (essentially what we're doing now accross the Afghan/Pakistan border). So, while I don't see US Marines landing at Vera Cruz, I think it's entirely possible that we'll see Predators flying well within Mexican airspace, and potentially evn launching Hellfire missile strikes against cartel targets...


I don't think Colombia has overcome its drug cartels, but rather negotiated a separation of sovereignty with them--the cartels (and other political dissidents such as the FARC, which are somewhat interrelated with *some* cartels) still have de-facto control over parts of the country. This is highlighted by the existence of a demilitarized zone within Columbia that has been formally ceded to the FARC. Imagine if the Mexican government ceded Neuvo Leon and Sinaloa to the cartels! This just goes to show how far Mexico has to fall before it becomes as disfunctional as Columbia in the context of a "Nation-State." Finally, Columbia (the Nation-State) has the advantage that it can simply push production and trafficking opperations to its neighbors by imposing slightly higher costs on cartel operations within its state boundaries. This is not the case with Mexico--because Mexico and the US share a huge land border that is key to the cartels operation, they cartels won't simply re-locate to another base of operations out of convenience. They will fight out of much more necessity than happened in Colombia. Also, in Colombia, when some cartels were decapitated, they were replaced by new cartels (and new cartel leadership) that based out of neihboring nation-states, or that presented less of a threat to the Colombian state. However, if you decapitate Mexican cartels, the inevitable replacements still need to operate at the US/Mexican border, and still need to confront any state action that attempst to interdict that...

Anonymous said...

Too much analysis I think. Anything is possible in Mexico as well as the US is my opinion.

The US is going to stop being dominated by the northern Europeans demographically and culturally soon, and as the world changes, the nation-state may morph into a less centralized and powerful state.

Ryan said...

Well, I guess one question worth asking is what is the true root cause of this issue? The cartels can only make money while a demand exists for an illegal substance. Is there anything that the US can be doing, demand-side to combat the problem? A very obvious answer is drug legalization and establishment of a taxation system that is directly linked to drug rehabilitation programs.

Also, the number of illegal gun supplies from the US to Mexico have increased markedly. Is there anything the US can do to stem that flow?

Jeff Vail said...

I agree 100%--these superficial symptoms can be solved by legalization and gun control. However, what are the chances that we'll implement these politically? I think they fall into the broader category of "We can have world peace tomorrow if we all just stop fighting."

That said, I think we should stil push for these policies--if anything, the mess in Mexico might gain a few converts, and in some localities there could be success. But, as long as "drugs" are illegal in most places, and especially if we only legalize the low-level consumption (as has happened with marijuana in many places), but not the large-scale production and distribution, we won't take any wind out of the cartels...

Antonio said...

Thanks for your answer, Jeff.

It seems to me that the bottom line of your argument is: "let's not sit back and act only within our borders; let's defeat the enemy in his own homeland!"

One could say that's just classical imperialist thinking. But let's not turn this into a ideological issue. Let's be more pragmatic here.

Well, if the problem is the criminal activities of drug cartels, why not go directly to the root of the problem? Why not strike drug cartels at their very hearts in places like Colombia, Paraguay, Bolivia and Brasil, for instance?

Yes, you guys have already tried it in Colombia. And if I am not mistaken, it didn't achieve the desired effect. As far as I know, the production of cocaine and marijuana did not decreased, at least not in significant proportions, and their prices in the US market did not go up as a result. (Please correct me if I am wrong -- but in the end it seems that the operation Colombia cannot be called a "sucess").

It's funny, you talk about sovereignty. But the only sovereignty I see threatened here is Mexico's. And for what? Would the US be satisfied with a few air strikes in mexican territory, or would it grow impacient and think "hm, now that we're here..."?

(You know, to foreign people like me, it's almost incomprehensible -- America is by far the biggest and strongest guy in class, and yet lives in permanent fear, always scared, as if the skinniest and dumbest dude could kick it's ass anytime he wanted...)

Jeff Vail said...


Important distinction: what I was saying about taking the fight into Mexico is what I think military advisors will recommend based on how politicians describe the operational goals.

They are NOT what I think the US should do...

I agree with you that this is just more imperialism, which is exactly what I think will happen, just with more of a Market-State focus than a Nation-State focus.

felires said...
This comment has been removed by the author.
Antonio said...

In this case, I must apologize.

Maybe my reading was a little too fast.


ps - you have a new reader here, be sure about that.

Lauranimist said...

I have an idea - that wouldn't ever be implemented, but it's something that might work:

Legalize all the drugs that the drug cartels are getting rich and powerful from. Then Mexico once again has a commodity upon which to build economic robustness.

Of course, the C.I.A. would never tolerate such a thing - they need their cut in the deal - but at least it would end the battle between the Mexican government and the Mexican drug lords.

And that's how it's going to end up anyway, after the collapse: but there won't be any hope of the body politic taxing and profiting from the cocaine, heroin, etc.

There are millions of solutions... just no political or public will to implement any of them.

Ryan said...

Looks like others are jumping on the legalization bandwagon.

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