AMLO’s Rail Nationalization Threatens to Derail Privatization Progress

In 2019, the Mexican president described his country’s free market revolution as a “calamity.” Today, his anti-market crusade threatens the private property rights of indigenous Mexicans and the supply chain of the entire continent.

With local elections passed and presidential elections looming on the horizon, the Mexican government’s stream of illiberal and populist economic interventions continues unabated. On May 19th, Mexico’s military announced a “temporary” seizure of the Tehuantepec Railway in the country’s south linking Coatzacoalcos’ Atlantic shores to Oaxaca’s Pacific coast. Looking to shore up support for President Andrés Manuel López Obrador’s (AMLO) Movimiento Regeneración Nacional party (MORENA), Mexico City’s occupation of the railway to create the fabled “Inter-oceanic Corridor” is just the latest example of white elephant public works projects that have much more to do with political patronage than delivering economic prosperity for the Mexican people.

The rail line was formerly operated by Grupo Mexico’s Ferrosur, which over the past two decades has invested billions in private capital into developing its rail lines. Since privatization nearly three decades ago, the Mexican rail network has transformed from a foundering state appendage hemorrhaging cash into a modern standard for freight transport. Benefiting from the economic headwinds of nearshoring and free trade through the then North America Free Trade Agreement (NAFTA), the amount of freight carried on Mexican rail grew at an average annual rate of 4.1% each year largely through dramatic increases in automobile exports. Prior to the López Obrador presidency, Mexican rail defied expectations to emerge resurgent, from transporting 20% of Mexico’s total cargo shipments in 1997 to achieving 26% in 2013.

When private rail companies refused to sign-on to AMLO’s uneconomical public-private partnerships to develop new rail lines, however, the Mexican government retaliated — repeatedly showing a disregard to both property rights and the basic rule of law. Under Article 56 of the Railway Service Regulatory Law, the Mexican government reserves the right to intervene in the operations of any railroad in the case of “natural disaster, war, serious disturbance of public order, or when some imminent danger to national security, domestic peace in the country, or the national economy is foreseen.” Although the government had previously occupied a nearby rail crossing due to the presence of local banditry, AMLO’s political gamble to create a transisthmian rail line to rival the Panama Canal has everything to do with creating jobs and eye-catching headlines to win elections, and little to do with national security.

In the process of creating the Inter-oceanic Corridor, the updated rail line and adjacent infrastructure projects have directly displaced indigenous communities that have resided in Oaxaca for generations. Carlos Beas Torres, head of the Union of Indigenous Communities of the Northern Isthmus explained his opposition to international media. “The Mexican government is imposing this project on Indigenous territories. The population was not consulted,” Beas Torres said. “They are removing people from their land.”

Moreover, Mexico City’s past invocation of the “national security” requisa clause gives more than enough reason for skepticism. Last year, the Mexican government employed Article 56 to justify the government’s seizure of private land to develop AMLO’s longtime pet project to provide a rail link for tourists traveling the Yucatán Peninsula known as the “Maya Train.” In May, the Mexican Supreme Court agreed that the government illegally abused the constitutional provision to fast-track infrastructure projects, but a statement in the official state gazette a day later reaffirmed AMLO’s plan to continue public infrastructure projects under the bogus national security justifications, including the Tehuantepec Railroad. This matches the trend seen in other areas of the economy where the AMLO administration has sought to intervene in sectors ranging from energy to vaping — often under dubious legal grounds.

These developments are alarming for a number of reasons. Legally, running roughshod over the Supreme Court represents a dangerous precedent of executive overreach and a threat to the institutional norms of the republic. At the same time, the ambiguous nature of the duration of the federal government’s seizure of the Tehuantepec Railway renders it an effective shadow expropriation of private property that threatens to depress business investment. Critically, firms need regulatory clarity and consistent application of the rule of law in order to provide a predictable environment conducive for private investment. In effect, AMLO’s arbitrary nationalization of the Tehuantepec Railroad threatens to derail three decades of growth in the rail sector driven by private investment. Since privatization, Mexican rail has been at the heart of the country’s export driven growth. Mr. López Obrador would be wise not to squander it.

Property rights are absolutely crucial to a well-functioning market system, allowing price signals and market information to flow freely. Moreso, as evidenced by the International Property Rights Index (IPRI), countries with strong property rights experience more economic freedom, access to the internet, and freedom from corruption. Similar to Mexico’s encroachment on property rights, South Africa proposed a land expropriation and confiscation scheme in 2018. That year South Africa’s score in the IPRI dropped the most out of 120 countries included in the Index and has continued to decline every year since then. The Property Rights Alliance also organized several campaigns to bring attention to the severity of President Ramaphosa’s encroachment on property rights.

As a neighbor enjoying preferential access to the largest economy in the world in season of “re-shoring,” the upside to protecting property rights in Mexico is limitless. However, if AMLO continues down the path of expropriation, history warns of impending poverty and disorder.