As Mexico gears up for elections next year, its president, Felipe Calderón, finds himself in a similar position to that of his predecessor, Vincente Fox, at the end of his term.
The latter’s presidency ended in 2006 with a whimper: the economy was stagnant after a series of reforms that never came to pass; and there was a conviction, even among his sympathizers, that he had squandered an historic opportunity.
Calderón came to office promising a series of bold structural reforms his predecessor had failed to deliver: overhauling the tax system in an effort to fight corruption, breaking up state-owned monopolies and striking hard against the country’s powerful drug cartels.
But five years on, a series of structural bottlenecks continue to weigh down the country’s growth prospects, while the political class has proven once again incapable of tackling them.
As a result, Mexico has become something of a laggard in recent years. Average annual growth since 2000 has hovered around 2%. By contrast, the average growth of Latin America and the Caribbean during the same period is about 3%.
Candidates for next year’s elections are therefore grappling with how to devise policies to reverse Mexico’s fortunes and to allow its advanced emerging economy to compete more effectively with its Bric – Brazil, Russia, India and China – peers.
Many challenges lie ahead, not least finding a solution to the drug-fuelled violence that has cast an ugly shadow over the country – and Calderón’s presidency. Five years since vowing to take on the drug gangs, the government is still locked in a bloody battle that has cost some 45,000 lives.
Mexico’s fate is also entwined with that of its northern neighbour, the United States. The 2008 financial crisis and US recession triggered Mexico’s worst economic contraction since 1932 – a severe drop in exports, a catastrophic loss of jobs and a rapid drying up of bank lending.
For a time it seemed things were looking up as the US recovery gathered steam last year. Mexico’s growth of 5.5% outstripped expectations, buoyed largely by a pick-up in exports. But as fears emerge once more of a double-dip recession in the US, analysts are rushing to slash growth forecasts for 2011.
This has added even more urgency to firing up Mexico’s internal engines of growth. In spite of considerable effort to diversify trade – the country has trade agreements with more than 40 countries – Mexico still relies heavily on the US for business. About 80% of exports still head north of the border, and total exports account for roughly a quarter of GDP.
Agustín Carstens, governor of Mexico’s central bank, tells Emerging Markets that the US downturn makes it “more urgent for Mexico to undertake the structural reforms that are needed”.
He adds: “We probably haven’t done them at the speed that is required.”
Calderon’s government has managed to push through a successful reform of public-sector pensions along with sweeping fiscal reform, under Carstens’ watch in his previous role as finance minister; it has also seen through an expansion of housing for salaried workers and of healthcare.
But Mexico’s biggest problem remains creating the conditions for sustained rates of higher growth. Most private-sector economists and government officials believe the country must embark on a series of structural reforms to lessen the state’s dependence on oil revenues, while making the economy more flexible, more efficient and, above all, more investor-friendly.
THE PROBLEM OF ONE
The economy is held back by monopolies – most profoundly the state monopoly over oil. Mexico’s constitution prohibits state oil company Pemex from entering into joint-venture contracts with other companies to share the risks and rewards of exploring for oil.
“There is one oil company, one teachers union, one national television network worth mentioning, one cement company worthy of the name, one electric power generator, one tortilla maker, one bread baker,” Jorge Castañeda, a former foreign minister, wrote recently.
Meanwhile the telecommunications sector continues to be dominated by business mogul Carlos Slim. In August, América Móvil, his mobile company, bought the 40% of the fixed-line operator that he did not already control.
Mexico got something of a boost this month when it moved up eight places in this year’s World Economic Forum’s Global Competitiveness Report, ranking 58th out of 142 countries compared with 66th a year ago, and its overall score rose to 4.3 from 4.2.
But the country continues to lag in institutions, which include regulatory burdens, organized crime and security, dispute settlement, and others, and in labour market efficiency.
“We are not building up the assets that we should be building up to meet the business opportunities that will open up to us,” says Roberto Newell, chief executive of the Mexican Institute of Competitiveness.
Foreign investment is still pouring in: Volkswagen, Nissan, Mazda, General Motors and Honda have all announced investments in Mexico totalling over $2 billion in new factory capacity.
But as Juan Carlos Moreno, an economist with the UN in Mexico City, puts it: “No nation in the world – including China – is able to grow on the basis of FDI.”
Mexico is stuck between two rounds of reforms, according to Newell. The first round – the trade liberalization that followed Nafta (North American Free Trade Agreement) in the mid 1990s and associated reforms – hurt many small companies.
But the second round of structural reforms, which would strengthen the formal sector and allow the resources freed up by the opening of trade to be put to productive use, has yet to take place because of the political deadlock.
The structural problems with the Mexican economy are unlikely to be overcome by slogans or by any single politician, as Calderón has discovered to his detriment. But for there to be any hope of bringing dynamism back to the economy, Mexico’s next leader will have to achieve what’s eluded the country for over a decade: broad-based political support.
— Additional reporting by Greg Brosnan in Mexico City