Issues in Brief

Mexico’s Reform Momentum

Economic Consultant
January 15, 2013

Mexico’s prospects for reforms that would eventually unleash the country’s economic growth potential are on the rise since Enrique Peña Nieto was elected president in July 2012. Since the election and taking office on December 1, 2012, the president has focused his energy on a host of proposals, including ambitious reforms that would shake up an economy that has shown disappointing results on the growth front for two decades. Growth has been poor relative to developing nations in general and to South American counterparts in particular. The truth is that the Mexican economy is too dependent on the U.S. business cycle, and any U.S.-led growth is limited by the stable and moderate growth usually seen in developed nations and, as of late, by the recent recession and its long-lasting effects.

The good news is that the consensus among analysts is that the new administration is committed to an ambitious reform agenda targeting Mexico’s most pressing needs: education, security, and infrastructure. The new administration has shown clear signs that it is also concentrating on long-overdue energy and fiscal reforms, which are in turn necessary to generate new sources of government revenue to fund the entire reform agenda.

Focusing on laying out proposals is a common practice among elected governments in the region. It is unusual, however, to have the elected president working on finding consensus among the broader political spectrum. With the Institutional Revolutionary Party (PRI) lacking a majority in both houses of Congress, Peña Nieto is in need of strong support from the outgoing conservative National Action Party (PAN) and the left-wing Party of the Democratic Revolution (PRD) if he hopes to undertake meaningful reforms.

Although securing a consensus, especially with the PRD, seems a daunting task, the evidence shows that Peña Nieto is on the right path. First, he has appointed people from the PAN and the PRD to his cabinet, including José Antonio Meade (finance minister in the outgoing PAN administration) as foreign secretary; Rosario Robles (a former leader of the PRD) to run the social development ministry; and Manuel Mondragón (the police chief in PRD-run Mexico City) to lead public security efforts. Moreover, when he took office, he unveiled a “Pact for Mexico” of 95 proposals, signed by the leaders of all three main parties. The support from the PAN, which governed Mexico for the past 12 years and shares many of the PRI’s economic ideas, was largely expected. The real victory was the last-minute support of the PRD.

One of the first signs that Peña Nieto’s consensus building is gaining momentum is the recent approval of an important labor reform that makes hiring and firing much easier for employers, among other measures. This labor reform should lead to productivity enhancements and less informality in the economy, helping improve the country’s ailing competitiveness. On December 7, the new authorities released the 2013 budget and economic program; it sets the stage for future reforms, including modernization of the energy sector and a comprehensive fiscal renovation. With oil revenues representing one-third of total fiscal revenues and with oil output plunging 30 percent between 2005 and 2009 and remaining stable thereafter, private sector capital for PEMEX—the country’s state oil giant—is needed not only to modernize and increase the country’s oil production but also to free up the resources needed for improvements in education, security, and infrastructure. Consensus is paramount when it comes to fiscal reform, as any opening of PEMEX to the private sector necessitates a constitutional amendment, which requires a two-thirds majority in Congress.

The president recently sent a bill to Congress proposing far-reaching education reform that also entails constitutional changes. The reform is aimed at improving the quality of schooling in Mexico—which lags behind in most international rankings—by creating a merit-based system for hiring and evaluating teachers. In the process, the federal government would erode the influence of the powerful teachers union led by Elba Esther Gordillo, who is in practice the owner of the country’s education budget. The bill sent to Congress on December 11 would restore control over teachers’ pay and hiring to the education ministry, and proposes creation of an independent agency to assess their performance. If approved, the reform would represent a major victory for the government. It would send a strong signal that the new administration is willing and able to challenge interest groups that benefit from the status quo and that represent the main risk to Mexico’s reform agenda. Improving Mexico’s education would help the country attract more and better foreign investment.

In terms of fighting rising crime and insecurity, a law approved on December 13 empowers the interior ministry regarding public security matters. The stronger interior ministry will be in charge of a new paramilitary gendarmerie (mainly retrained soldiers, and initially numbering 10,000 members). The federal police, greatly expanded by outgoing President Calderón, will focus on investigating crimes. In Mexico, crimes are usually not reported; for those that are disclosed, very few get solved. Solving the country’s crime problems will surely take time and these changes are not enough, but they are a starting point. Peña Nieto knows that Mexicans rank the country’s crime as the number one priority for his term, so he must obtain short-term results if he hopes to undertake other meaningful changes in Mexico. U.S. manufacturing executives will also welcome short-term improvements in security.

Evidence clearly suggests that Peña Nieto is starting his six-year term with a strong commitment to undertaking reforms that would make Mexico’s economy more competitive and a better place to invest. Based on the first round of reforms, such as for labor and security—both requiring support from other parties—he is building solid momentum toward consensus in Congress.

A word of caution is necessary, as reforming the union-centered education system or even partially addressing the 1938 nationalization of Mexico’s oil industry will prove more difficult than the already approved labor and security reforms. Education and energy reforms entail changing the status quo that benefits a small number of strong vested interests. None of Peña Nieto’s predecessors were able to fight those powerful groups. Meaningful reforms will lead to a less U.S.-dependent Mexico and will surely have implications for U.S. manufacturing companies. The new administration must take advantage of the reform momentum they have built, as it will likely lose strength in the second half of 2013, possibly returning the country to the well-known status quo that has dominated for many years.


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