On July 1, 2012, Mexicans will elect a new president after two consecutive six-year terms under the ruling of the National Action Party (PAN), first with Vicente Fox and now Felipe Calderón. The latest polls show the candidate for the Institutional Revolutionary Party (PRI), Enrique Peña Nieto, leading by more than 10 points, followed by Andrés Manuel López Obrador (AMLO) from the Party of the Democratic Revolution (PRD) and Josefina Vázquez Mota from the PAN. Before the PAN took power in 2000, the PRI ruled Mexico for 71 straight years.
The Candidates and the Most Probable Verdict
Frontrunner Peña Nieto is a telegenic young politician who just finished a six-year term as governor of Mexico state, the country’s most populous. Although we recognize that the PRI’s candidate has evidently convinced the citizens of Mexico state—Peña Nieto’s gubernatorial nominee, Eruviel Ávila Villegas, had a landslide victory several months ago—it is fair to argue that his leading position is mostly a consequence of the disappointing performance of both the Fox and Calderón administrations, particularly in the areas of economic growth, job creation, and crime.
Taking advantage of the PAN’s failures, Peña Nieto promises to restore “government that delivers.” He pledges to spur growth and create jobs by keeping the country’s macroeconomic stability, strengthening regulatory institutions, and opening the state oil giant Pemex to foreign investments without privatizing it. In terms of security, he promises to keep the army in the streets and create a unified national public police force. Although it is hard for him to separate himself from the PRI’s negative reputation of cutting deals with organized crime, Mexicans are too tired of the ongoing, skyrocketing violence and may tend to forget or forgive the PRI’s excesses in this area for the sake of some sort of “peace.”
Having fallen into third place in recent polls, PAN candidate Josefina Vázquez Mota is distancing herself from President Calderón, who is leaving office as one of the least popular presidents in recent history, thanks to a feeble economy and rising insecurity. Should she win, she promises to form a coalition cabinet in return for support in an eventual clogged Congress. She promises to make the country’s economy more competitive and to fight crime by creating a national police with military discipline. Even when Vázquez Mota seemed to have emerged as the winner in a couple of televised debates among candidates, her “victory” was not clear enough to alter recent polls.
To the surprise of many observers, Peña Nieto has lost some 5 percentage points to the expense of left-wing candidate AMLO since the official campaign started on March 30, 2012. AMLO, who narrowly lost the election to President Calderón in the previous election, has left out some of the radical proposals of his 2006 campaign in an attempt to win over undecideds. In the current campaign, he has been softening his hostility to business, promising no tax increases, and pledging that he will respect existing private oil service contracts. He promises an annual rate of economic growth of 6 percent by reducing energy prices and instituting other policies. Concerning crime, he pledges first to rid the police force of corrupt leaders and practices and then implement a gradual retreat of armed forces from the streets.
Building upon recent trends—and with less than 20 percent of the electorate still undecided—some observers claim that AMLO could win further support in the days before the election, eventually narrowing the current 10-point gap with Peña Nieto. We suspect, however, that the difference is too large to turn things around and change the election’s outcome, as there is little chance that most of the undecided voters will support a single candidate.
Beyond the presidency, the PRI is set to gain the majority of the seats in Congress, as all 628 seats in Mexico’s bicameral Congress are up for election (500 in the lower chamber and 128 in the upper chamber). Given that congressional gridlock has historically hindered the passage of important reforms that would make Mexico more competitive, one could argue that a PRI-led coalition will overcome this problem. Optimism for change should be watered down, however, as most of the reforms proposed by Peña Nieto during his campaign are the same that his party rejected during the current Calderón administration.
The challenge for Mexico is whether PRI-controlled executive and legislative branches will govern according to democratic principles. The PRI has earned a reputation for corruption and for being too close to organized crime during its long time in power, and while the next Mexican president is too young to be associated with the PRI’s history of corruption, many pundits link Peña Nieto with old party dinosaurs that are not extinct. Therefore, the question for Mexican voters is whether the PRI has changed during its 12 years out of government, and even more importantly, whether its candidate is willing to free himself and his cabinet from old party habits.
Will a PRI Administration Change the Direction of Mexico’s Economy and Manufacturing Industry?
The short answer is that absent pending reforms, probably not. Mexico’s economy, and manufacturing in particular, are too closely tied to the fate of U.S. manufacturing, a link that cuts both ways. When U.S. manufacturing is growing, we typically observe that Mexico’s manufacturing industry is in an expansionary phase. Any contraction in activity north of the Rio Grande has a lagged but fairly quick response from Mexican-based factories to cut production.
We suspect that the PRI will focus on bringing violence down, leading to a positive confidence shock that—underpinned by the recent bout of strong economic activity—will spur much-needed investments to expand capacity. A less violent Mexico will translate into a potential improvement in the country’s growth sustainability. If presumptive winner Peña Nieto opens up the oil industry to foreign investments and companies actually invest in exploration and refineries, there might be opportunities for U.S. manufacturers supplying goods in the sector.
Despite the potential virtuous cycle of more sustained and stronger growth that will eventually lead to further investment opportunities, however, we presume that the U.S. economy will continue to dictate the fate of Mexico’s economic growth. Absent major pending reforms to make the economy more competitive and less dependent on powerful monopolies, we believe that the implications of Mexico’s elections on U.S. manufacturing companies with sizable operations in the country will be limited.
A more competitive Mexican economy is a necessary condition to keeping—and hopefully growing—the country’s strong manufacturing base, especially at a time in which global supply chains are both constantly evolving and locating certain processes in just a few cost-efficient locations around the world. In turn, a more competitive economy will broaden and diversify the country’s export markets, making it less dependent on U.S. activity and more sensitive to changes in local economic policies.