While larger businesses can escape unscathed, small businesses in Mexico often have no other option in the extortion economy but to pay up, or get involved in criminal activities themselves. Those who don’t pay risk their lives, and those who do risk bankruptcy.

As Mexico’s drug war drags on, businesses have responded by upping their investment in security. “The cost of security has increased 10-fold in the past four years,” says Edgardo Buscaglia, a professor of economics and law at Columbia University and a visiting scholar at the Technological Institute of Mexico (ITAM) in Mexico City.

This is despite what Buscaglia calls a “functional normality,” in which much business appears to be conducted as usual, and in which transportation and logistics have not been affected to the degree one might find in a failed state.

However, assets -- which, of course, include not only material and products but also executives and managers -- are becoming more expensive for businesses to secure.·“The typical historical business problem with Mexico has been capital flight,” says John Ackerman, a legal expert at the National Autonomous University of Mexico (UNAM) in Mexico City. “But today it has moved beyond capital flight to human flight -- large communities of business people from Ciudad Juarez and Monterrey now live in Texas.”

The other issue is that Mexican business is, in effect, at war with itself.·To the extent that businesses cooperate with organized crime, they are only making the security situation worse. Sources contacted for this article made it clear that, in the increasingly unstable environment unleashed by the war on drugs, extortion is the number one criminal strategy for preying on legitimate businesses.

Businesses can respond in one of two ways: either through direct pay-outs to the criminal organizations, or by actively cooperating in their activities. Often, extortion is targeted at legitimate businesses that have specific appeal to the criminal enterprise, and cooperation is of more value for the criminals than a simple pay-out.

“This is not just money laundering -- there are segments of the formal economic system that are directly participating in organized criminal activities,” says Buscaglia. “This affects infrastructure, and includes buying political campaigns. These business people are part of the problem because they resist going after dirty money.”

Buscaglia argues that, until the business and political elite in Mexico are directly impacted, organized crime will continue to have a hold on businesses in Mexico -- either forcing them to spend more on security, or to directly participate in criminal activities.

“Look at the bribery index that Transparency International released,” says Buscaglia, referring to Transparency International’s 2011 Bribe Payers Survey in which, based on the views of business executives, Mexico ranked 26th of 28 countries. “Shareholders in the United States might not want to see their money mixed up with local Mexican businesses.”

But multinationals continue to invest. One tech giant, Cisco Systems, recently held its Cisco Live customer and partner event in Acapulco, despite a significant crime surge in the last year.

“We are very optimistic about Mexico -- we see positive changes, and solid economic fundamentals,” says Francisco Uribe, Cisco Systems director of strategy and business development in Mexico. “We work through our partners and conduct business in all 32 states.”

Uribe would not comment directly on crime or corruption, but he certainly did not see these issues as major factors affecting his company, arguing instead that Mexico’s pro-business regulatory environment in telecommunications would help businesses of all sizes. John Ackerman, however, notes that capital and business concentration in Mexico is actually part of the problem.

“Mexico continues to have one of the most concentrated economies in the world,” says Ackerman. “There has been no progress in breaking up monopolies -- the democratic transition has not established the rule of law or competitiveness in telecommunications and other industries.”

Some industries, such as large retail chains, the maquiladoras, and multinationals, have been relatively untouched outside of the cost of increased personal security.

But without the rule of law, for smaller local firms -- even mid-sized warehouse and trucking companies -- the cost of the extortion economy has been to “pay or play;" pay extortion demands, or play along with criminal groups' demands. Both are bad for business.

Tim Wilson is a Canadian journalist with a special interest in Mexico and Central America. His blog can be found at La politica es la politica.

Investigations

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