Mexico's Modernization Sprint
WHY YOU SHOULD CARE
Because Mexico may finally be turning itself around, and that has huge implications for its neighbors to the north.
By OZY Editors
Is the Aztec Tiger finally ready to roar?
For years, that’s been the question about Mexico, Latin America’s second-largest economy.
While mainstream international media coverage of Mexico continues to paint a country caught in the throes of a bloody drug war, President Enrique Peña Nieto has been slamming through sweeping economic and political reforms as the solution to Mexico’s deep-seated problems. Time magazine just put him on the cover under the headline “Saving Mexico.”
When President Obama heads to Toluca, Mexico to meet with Peña Nieto and Canadian Prime Minister Stephen Harper tomorrow, the one-time Three Amigos will certainly discuss the 20-year-old North American Free Trade Agreement (NAFTA) and how it will fit in with the larger Trans Pacific Partnership, which the Obama administration supports. Also likely on the agenda : immigration reform, border security and visas.
Mexico has signed an incredible 12 free trade agreements with 44 countries, the most of any country in the world.
Ironically, while immigration remains a white-hot issue in the U.S. — House Republicans continue to wrestle internally over it — net immigration from Mexico to the U.S., both legal and not, dropped to zero a few years ago, according to the Pew Research Center , and may even have reversed. “The largest wave of immigration in history from a single country to the United States has come to a standstill,” Pew reported in April 2012.
Pew pointed to a number of reasons for this change, including a weakened U.S. economy and jobs market, and broader economic conditions in Mexico.
“We’re moving forward,” Peña Nieto said from the National Palace two days after his swearing in at the end of December 2012. “It is time to debunk, together, the myths, the paradigms, everything that’s held our development back.”
Now in office little more than a year, Peña Nieto is an unlikely messenger for change, even if he is the new face of the PRI, the authoritarian powerhouse that ruled Mexico for 71 years. Still, 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.
Direct foreign investment reached $28 billion in the first nine months of 2013, the U.N. declared Mexico the seventh most attractive country for investors, and Mexico has signed an incredible 12 free trade agreements with 44 countries, the most of any country in the world. On top of all this, the country has some of the largest untapped oil reserves on the planet and Mexico is just about to partially privatize its oil industry and open it up to foreign investment.
Mexico is planning to dramatically change its energy policy, allowing for private and foreign investments for the first time in decades.
On his second day in office, Peña Nieto promptly took aim at some of the country’s biggest institutions, signing the “Pact for Mexico,” a historic political partnership between the country’s three largest parties : the ruling PRI, conservative PAN and left-leaning PRD. Since then, the coalition has passed major reforms in telecommunications, education and taxes, with a huge energy initiative likely on the way, as well.
For starters, in a bid to end media monopolies, Peña Nieto established a new regulator — FTEL — which has the power to grant and revoke telecommunication concessions, in hopes of giving Mexicans a greater diversity of affordable telecom services and lowering barriers to Internet access. In an even more controversial move, Peña Nieto dethroned Esther Elba Gordillo , the long-ruling leader of Mexico’s largest teachers union, the SNTE, and implemented test-based evaluations for teachers.
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 businesspeople. 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 the Mexican Business Council filed for appeal. However,analysts predict the reforms are unlikely to spell big change for the tax system.
If all of this unfolds successfully, Peña Nieto will have moved Mexico forward more than anyone since NAFTA was passed.
Most significantly, Mexico has dramatically changed its energy policy, allowing for private and foreign investments for the first time in decades. The government has already made changes to its constitution and will present energy reform legislation in April, which is considered a formality. It could create an estimated 2.5 million new jobs , particularly along the border, but the move has also been controversial, causing more demonstrations and prompting the PRD to withdraw from the Pact for Mexico.
That’s a lot of change for a presidency that’s little more than 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 ManattJones Global Strategies.
As other observers have pointed out, perhaps Obama could even take a page or two from his south-of-the-border counterpart.
Still, Mexico remains 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, the country has been wracked by months of popular protest and violent confrontation, and human rights violations have shaken President Peña Nieto’s image as a bold reformer. Last year, Mexican economic growth was 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. 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 this president will be the one to free the tiger and let it truly roar.
OZY contributor Eva Hershaw contributed to this report.
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