Mexico’s Second Revolution

March 28, 2014


Mexico, a stagnant and violence-plagued country in recent years, finally began to overcome its malaise in 2013, thanks to an activist president and a coalition of political parties determined to move the country forward. But alongside substantive changes, there is considerable uncertainty and hyperbole. It could hardly be otherwise.

The situation resembles that of 20 years ago – almost to the day. When the North American Free Trade Agreement (NAFTA) among Mexico, Canada and the United States entered into force on January 1, 1994, it seemed that Mexico was poised for a true takeoff. But a series of events – the Zapatista uprising in Chiapas, the assassinations of a presidential candidate and the incoming president’s chief aide, and the collapse of the currency – shook Mexico that year, underscoring the depth of the challenges it faced.

NAFTA brought with it a spectacular increase in Mexican exports, as well as a dramatic shift in their composition. But it proved to be a great disappointment in terms of foreign investment inflows and economic growth, which has averaged 2.6% per year over the last two decades – slower than Peru, Chile, Colombia, Brazil and Uruguay. As a result, Mexico’s income gap with the U.S. and Canada has barely narrowed.

Thus, President Enrique Peña Nieto’s task since taking office one year ago has been to ensure that the promise of major change in Mexico finally translates into sustained economic growth, improved living standards, and faster convergence with the U.S. and Canada.

While both the foreign and local press refer generally to “reforms,” or lump together education, labor, financial, fiscal, energy, telecommunications, and political initiatives, there are significant differences among them. Some consider all of the changes that have taken place in Mexico this year to be equally important. Others have mused that Peña Nieto’s administration sometimes seems intent on announcing reforms – regardless of their content, the time necessary to implement them, or their actual impact on Mexican society.

In fact, a clear distinction can be drawn between two subsets of legislative achievements: those that, while not meaningless, are incomplete, superficial, or essentially maintain the status quo, and those that will change Mexico (if all goes well). The changes in how teachers are evaluated and their labor rights (wrongly described as an education reform), together with changes to tax and telecommunications legislation, belong to the first category; energy and political reforms belong to the second.

Energy reform opens up electricity generation and oil exploration, extraction, and refining to private foreign or domestic investment through licenses, concessions, production sharing, or profit sharing. The oil workers’ union has been banished from the board of directors of Pemex, the national oil company, and new contracts for shale oil and gas, together with deep-water prospecting and drilling, will be signed with a government agency, not with Pemex.

Once the myriad legal and political obstacles are cleared, Mexico will be able to increase oil and gas production, drive down the price of electricity, and stimulate growth in an otherwise lethargic economy. One hopes that 12 years of obstruction by Peña Nieto’s Institutional Revolutionary Party (PRI) will not mean that these reforms are too little, too late.

The second crucial reform is political. For the first time since the early 1920s, Mexican legislators and mayors will be allowed to seek reelection to consecutive terms. While no panacea, reelection is one of the most important instruments of accountability in a democracy, and Mexico has been deprived of it for nearly a century. The same is true of ballot initiatives, referenda, and independent candidacies, all of which were non-existent until the recent reform. For the first time since Mexico left behind 70 years of authoritarian rule, the country has a political and electoral framework that resembles those found in all modern democracies.

Both reforms are incomplete and may not be sufficient to jump-start the economy and mobilize a singularly passive civil society. Because Pemex, unlike the Brazilian and Colombian state-owned oil companies, will not be listed on the New York or Mexico City stock exchanges, internal reform will be postponed or half-baked. Moreover, it will be years before any oil actually begins to flow from the deep waters of the Gulf of Mexico, and how much shale oil and gas actually exists in northeastern Mexico is unknown. Nor is it certain that foreign investment (or tourism) will increase, given the country’s current levels of violence, crime, and human-rights violations.

Likewise, restrictions and ambiguities continue to plague the institutional arrangements sought by the framers of the country’s political and electoral reforms. Reelection is permitted only for candidates nominated by the same party for which they originally ran, and the enabling legislation for independent candidates, ballot initiatives, and referenda remains unclear.

Most important, the government appears to be backtracking on a commitment to allow a binding referendum on the opening of the oil sector and other “transcendent” issues. Its reluctance is understandable, because voters are evenly divided on the issue, and no one will invest a cent in Mexican oil or gas if the recently approved constitutional amendment on Pemex can be overturned in 2015, as the opposition claims will happen. But curtailing democracy in order to modernize the energy sector is not a good idea.

Finally, skepticism persists with regard to the Mexican economy’s capacity to achieve sustainable 4-5% annual economic growth – the bare minimum needed to ensure long-term prosperity. Deficient education, infrastructure, security, and courts, together with endemic corruption and scant entrepreneurial dynamism, militate against excessive optimism. NAFTA 20 years ago, and Peña Nieto’s reforms now, are necessary but insufficient conditions for progress. More is needed, and what is needed is not necessarily attainable.

Article provided by Project Syndicate

Posted in LatAm, Politics Risk