Why you should care

Enrique Peña Nieto reclaimed the presidency for Mexico’s conservative party, and his bold, modernizing reforms may finally tap the country’s vast economic potential.

With the swearing in of the impeccably groomed President Enrique Peña Nieto, the PRI — the long-ruling Party of the Institutional Revolution — was back. And this time, he promised, things would be different: The Aztec Tiger was finally ready to roar.

But after he was sworn in last December, the “bold reformer” of Mexico was hurried off the stage with protests and yells before he could deliver his presidential address. Exiting president Felipe Calderón was ushered into the House of Representatives along a human chain that held back opposition legislators screaming “Assassin!” and holding signs accusing the new president of electoral fraud. This wasn’t a unique predicament: No incoming Mexican president has been able to give an inauguration speech to the country’s legislature since the year 2000. And the uproar wasn’t confined to the halls of politics: Students marched on the Angel of Independence, a key monument in Mexico City, and protesting citizens filled the surrounding streets.

Can Peña Nieto’s sweeping economic and political reforms survive political wrangling and widespread unrest?

Peña Nieto is proposing sweeping economic and political reforms as the solution to Mexico’s deep-seated problems. It is unclear, however, whether his ambitious plans will survive political wrangling and widespread unrest. Even then, a bigger question remains: if he succeeds, will the purported benefits of the reforms spread beyond the political and business class that has long held most of the country’s wealth and power?

“We’re moving forward,” he said from the National Palace two days after his swearing in. “It is time to debunk, together, the myths, the paradigms, everything that has held our development back.” An unlikely messenger for change, Peña Nieto is the new face of the PRI, the authoritarian powerhouse that ruled Mexico for 71 years.

During its first nine months, the coalition passed major reforms in telecommunications, education, and taxes.

He promptly took aim at some of the country’s biggest institutions. On his second day as president, Peña Nieto signed the “Pact for Mexico,” an historic political partnership between the country’s three largest parties: the ruling PRI, conservative PAN and left-leaning PRD. During its first nine months, the coalition passed major reforms in telecommunications, education and taxes. The bold reformer of Mexico seemed to be delivering, and all eyes turned to Latin America’s second largest economy.

Ending media monopolies

The Mexican oligarchy has long controlled the telecommunications industry in a country where 70 percent of the country’s wireless subscribers use America Móvil (a company controlled by billionaire Carlos Slim), and two entities (Grupo Televisa and TV Azteca) control nearly 100 percent of the television market. In January, Peña Nieto established a new regulator — FTEL — which has the power to grant and revoke telecommunication concessions, hopefully giving Mexicans a greater diversity of affordable telecom services and lowering barriers to Internet access.

Accountability in education

Things got a bit more colorful when Peña Nieto took on education reform. He dethroned Esther Elba Gordillo, the long-ruling leader of Mexico’s largest teachers union, the SNTE, and implemented test-based evaluations for teachers. The government has largely blamed teachers for low student performance in a country that outspends all other OECD members in education. Private educational testing providers celebrated the prospect of incoming contracts, while thousands of teachers occupied the capital’s main plaza in protest before being forcefully removed by federal authorities.

The Mexico Institute of the Wilson Center warned that the “whole reform … is based on a faulty assumption, i.e., that the main factor associated with student learning, is teachers … [it] dismisses the importance of cultural, learning environments and poverty issues.” The reform cut ties between the SNTE and the Ministry of Education and pushed Mexico further toward the test-based accountability model that has become a landmark of U.S. education.

Carlos sitting in chair right of frame, turned towards left of frame in a suit speaking.

Billionaire Carlos Slim at the Broad Institute in Cambridge, Mass.

Source Getty

Treading carefully with tax reform

While education reform drew teachers from some of the poorest states into the streets of Mexico City, tax reform ruffled the feathers of the wealthiest businessmen.

Last year, Mexico collected 1.3 trillion Mexican pesos ($107.5 billion) in tax revenue; this represents a mere 8.5 percent of GDP, well below the regional average. Half the population of Mexico lives in poverty and another 30 percent works informally and pays little or no taxes, meaning the tax burden lies heavily on an estimated 20 percent of the citizenry. Currently the richest man in the world, Carlos Slim, sits in the same tax bracket as a worker earning just over $30,000 a year – an incongruity the reform promises to fix. The plan would broaden the tax base, increase weak revenues, impose a “junk food tax,” and close loopholes and special programs for the highest-earning bracket.

Conservatives legislators groaned, leftist lawmakers celebrated and Mexican Business Council filed for appeal. Yet analysts predict that the reforms are unlikely to spell big change for the tax system. “[The reforms] represent barely a one percent additional share of fiscal revenue,” according to Andres Rozental of the Brookings Institute’s Latin America Inititative, who claims that they would only marginally broaden the taxpayer base.

If this unfolds successfully, Peña Nieto will have moved Mexico forward more than anyone since NAFTA was passed.

That’s still quite a bit of change for a presidency that’s only a year old. “If all of this unfolds successfully, Peña Nieto will have moved Mexico forward more than anyone since NAFTA was passed, putting Mexico on the path to economic and democratic modernity,” said James R. Jones, co-chair of Manatt Jones Global Strategies.

As NAFTA turns 20, Mexico is still a country where half of the population of 118 million lives in poverty, with the second highest level of income inequality in the OECD. Despite steps forward, eleven months of popular protest, violent confrontation, and human rights violations have shaken President Peña Nieto’s image as the bold reformer, and 2013 economic growth is forecast at a meager 1.4 percent. While homicides are down, kidnappings and extortion rates are at an all-time high. Armed community groups have emerged across the country to defend themselves from ongoing violence and 23,000 people are still missing from Felipe Calderón’s bloody drug war.

The numbers paint a complicated picture of a country still mired in violence, but Mexico has the human capital and resources to become an economic powerhouse. Deaths attributed to organized crime during Peña Nieto’s rule have declined by 25 percent, while higher education levels and access to technology have increased civil engagement. Rising labor and transportation costs in China have once again made Mexico an attractive manufacturing center. The automotive industry has grown steadily, contributing a sizable portion of the estimated 100,000 jobs added since 2010. Mexico has signed an incredible 12 free trade agreements with 44 countries, the most of any country in the world. And, on top of all this, the country has some of the largest untapped oil reserves on the planet.

Which brings us to the president’s most challenging reform: energy. It touches a deep nerve, and the once audacious Pact for Mexico appears to be bursting along its political seams because of it.

Man inspecting blue car in production line. He has a Mexican flag sewed to the upper part of his sleeve.

Chrysler assembly plant in Toluca, Mexico

Getty Images

Energy reform could slow the president’s roll

Announced in August, energy reforms would open the state-owned oil company Pemex to private investment and profit sharing. Mexico nationalized the oil industry in 1938, and Pemex is currently covering 40 percent of public expenditures. The administration argues that partial privatization will boost oil production, increase the amount of crude sent to the U.S. for refinement, and make North America one of the largest oil-producing regions on the planet.

Mexico is struggling to reconcile ruling class enthusiasm for U.S.-style capitalism with deep-seated socialist values and a strong sense of nationalism.

Yet energy reforms have caused a widespread public outcry, prompting 2012 presidential candidate Andrés Manuel Lopez Obrador to call for civil disobedience to stop them from passing. Many fear that opening Mexican oil reserves to transnational companies — with dubious track records in other parts of Latin America – will undermine economic security and national sovereignty. On December 1st, thousands gathered around the 130-foot tall Christmas tree erected in Mexico City’s main plaza, the Zócalo, to protest what Obrador called ”a hold-up that would eliminate the future of Mexicans.”

The biggest blow was dealt in late November, when the left-leaning PRD announced that it would withdraw from the Pact for Mexico in protest of the partial privatization of Pemex. Their departure suggests that energy reform defines deeply contrary visions for the country’s future.

But Peña Nieto is staying the course. Some signs play in his favor: direct foreign investment reached $8.2 million in the first semester of 2013, the U.N. declared Mexico the seventh most attractive country for investors, and the national soccer team is headed to the World Cup. Two Sundays ago, Mexico celebrated its version of Black Friday. Called the ‘Buen Fin,’ or good weekend, stores across Mexico slashed their prices and a flood of Mexicans spent an estimated $3.4 million in three days. It was a weekend of jolly consumerism promoted by the Secretariat of Economy.

Mexico is struggling to reconcile ruling class enthusiasm for U.S.-style capitalism with deep-seated socialist values and a strong sense of nationalism. Peña Nieto has taken steps to modernize an economy bogged down by paralyzing monopolies and corrupt institutions, but the trajectory of the awakened Aztec Tiger may be beyond his control. Riding on its back are the powerful political and business interests that have long ruled one of Latin America’s most unequal societies. It remains to be seen if the new president will be the one to free the tiger and let it truly roar.

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