Introduction
Predicting the future is notoriously difficult, if not impossible. We live in a world where uncertainty is constant, and we are subject to unexpected events that can alter the anticipated outcome. While most individuals are risk-averse, some may pay a premium to protect themselves from potential negative events. However, no one can safeguard against all possible adverse events, making institutional arrangements crucial to establish clear rules of engagement and dispute resolution mechanisms.
The Importance of Efficient Institutions
Formal rules (laws and regulations) and dispute resolution mechanisms are necessary but not sufficient for optimal private and social results. These rules must also be efficient, creating appropriate incentives aligned with the goal of achieving near-optimal private and social outcomes. Key to this is ensuring that actors are not subject to arbitrary changes, as this introduces uncertainty and hinders achieving the desired outcome.
Recent Institutional Changes and Their Consequences
Under the current and previous administrations, institutional arrangements have deviated from these principles. Instead of enhancing efficiency to improve private and social outcomes, changes have increased uncertainty for private actors. These modifications have also reduced the quality and efficiency of rules, pushing results further from optimal levels both now and in the near future.
Impact on Private Investment
These institutional changes have lowered the private (and social) return rates for various investment projects across multiple sectors. With less efficient rules and private actors facing heightened uncertainty due to increased government discretion in rule-making, coupled with diminished legal defense options for individual rights (due to amendments in the Amparo Law), investors now demand a larger premium for investment. If market conditions and sector-specific factors do not support this higher premium, investment will either not occur or be limited in scope.
The Role of Dispute Resolution Mechanisms
Beyond rules, efficient, effective, independent, and impartial dispute resolution mechanisms for private actors are crucial. If the judiciary, as the primary mechanism, fails to meet these criteria, investor risk will increase further, reducing both investment and economic growth.
Conclusion
Given these factors, it is unsurprising that the economy may not grow as anticipated. The government’s actions have intentionally or unintentionally created an environment with higher risks and less favorable conditions for private investment, ultimately leading to slower economic growth.
Key Questions and Answers
- Q: Why are institutional changes important for investment? A: Institutional changes establish the rules of engagement and dispute resolution mechanisms, which must be efficient and aligned with attracting private investment to achieve optimal economic outcomes.
- Q: How do increased uncertainty and less efficient rules affect investment? A: Higher uncertainty and reduced rule efficiency discourage private investment, either by deterring it altogether or limiting the amount invested.
- Q: What role do dispute resolution mechanisms play in investment decisions? A: Efficient, effective, independent, and impartial dispute resolution mechanisms are crucial for reducing investor risk and encouraging investment.
- Q: Can we expect economic growth given these institutional changes? A: With higher risks and less favorable conditions for private investment, economic growth may be slower than anticipated.
