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Mexico's Long Road to Reform

Jaime Daremblum

Mexico is not known as a country where major political and economic reforms happen quickly. It took 71 years for the once-authoritarian Institutional Revolutionary Party (PRI) to lose power, and the first two non-PRI presidents of the modern era, Vicente Fox and Felipe Calderón, found their energy, labor and tax initiatives either blocked or hopelessly watered down by Mexican lawmakers. “Political gridlock has virtually paralyzed Mexico’s government for more than a decade,” columnist Andres Oppenheimer lamented in October 2011. “Even where there is consensus, Congress contrives to disagree,“ The Economist grumbled in January 2012.

Thus, by Mexican standards, the reforms that President Enrique Peña Nieto, a member of the PRI, has achieved during his first year in office are extraordinary. On February 25, he signed a historic education reform aimed at improving teacher quality and increasing accountability. On June 10, he signed an equally historic telecom reform designed to boost competition and curb monopolistic practices. Both reforms were constitutional amendments that required “secondary laws” for implementation. Earlier this month, with union-led protests filling the streets of Mexico City, Congress passed an education reform package that will create a new evaluation system for teachers and prevent their jobs from being inherited or sold. The vote was 390 to 69 in the lower house and 102 to 22 in the upper house.

While the final legislation was not as ambitious as many education activists had wanted, it was still a landmark victory in the battle to improve Mexico’s underperforming schools. “It’s not everything we would have hoped for but it’s an historic change,” David Calderón, director general of the pro-reform group Mexicanos Primero, told the Associated Press. “Of course it’s just a change in the rules that still has to be turned into reality.” The teachers’ union that opposed it most vociferously, the National Education Workers’ Coordinating Committee (known by its Spanish acronym, CNTE), will surely continue to stage protests and make threats as the new law is implemented nationwide.

In the meantime, Peña Nieto is pushing ahead with the rest of his reform agenda. On September 8 he unveiled a fiscal reform plan that would expand social programs, expand the reach of value-added taxes, raise taxes on higher incomes, introduce a new tax on capital gains, get rid of various tax loopholes and limit deductions. (To appease the left, he decided not to propose slapping a VAT on food and medicine.) There is much to dislike in Peña Nieto’s plan; the tax increases on income and investment would hurt Mexican economic growth, and the VAT expansion would squeeze middle-class families. Nevertheless, his fiscal reform would simplify Mexico’s tax code, enlarge its tax base and reduce the government’s dependence on oil revenue.

Speaking of oil revenue, Peña Nieto is also hoping to revamp the Mexican energy industry by allowing for private investment in Pemex, the state petroleum monopoly. Mexican oil reserves were first nationalized in 1938, and for the past 75 years Pemex has defied all serious reform efforts. It is more than just a company — it is a powerful symbol of national pride, an economic asset that is often called Mexico’s “crown jewel.” Indeed, the date of the 1938 oil nationalization, March 18, is still a civic holiday in Mexico. And yet, given the urgency of reform and the limited nature of Peña Nieto’s proposal, the odds seem high that his Pemex initiative will succeed.

“With the help of allies in the conservative National Action Party, or PAN,” reports the Los Angeles Times, Peña Nieto “appears to have sufficient support for the reform in Congress, and the likely backing from at least two-thirds of state legislatures, the amount necessary to approve a constitutional change.” When former presidential candidate Andrés Manuel López Obrador, a prominent leftist gadfly, held an anti-reform rally in Mexico City on September 8, he attracted a much smaller crowd than he had anticipated. As Mexico expert George Grayson told the Wall Street Journal, “The train has left the station on opposition to the energy reform.”

The case for such reforms is painfully clear to any neutral observer. Pemex’s daily oil production declined from 3.4 million barrels in 2004 to 2.6 million barrels in 2012. It urgently needs private investment from foreign multinationals to help it extract Mexico’s deep-water reserves. On current trends, Mexico could become a net oil importer by 2020, according to the U.S. Energy Information Administration. The government is excessively reliant on Pemex revenue — which funds anywhere from one-third to 40 percent of the national budget — and Mexico’s overall revenue-to-GDP ratio is the lowest in the OECD. Hence the need for sweeping tax reform in addition to energy reform.

As for education reform, to appreciate the deficiencies plaguing Mexican schools, simply watch the 2012 documentary film De Panzazo (“Barely Passing”). The average Mexican spends only 8.6 years of his or her life attending school, while the average American attends for 13.3 years. The average Mexican student also has a much shorter school day (4.5 hours) than the average French student (7 hours) or the average Korean student (8 hours). Just 36 percent of Mexican adults have completed upper secondary education, compared with an OECD average of 75 percent. And no OECD country has a lower school enrollment rate among those aged 15 to 19. Meanwhile, Mexico spends a bigger portion of its education budget on staff compensation in general (over 93 percent), and teacher compensation in particular (over 83 percent), than any other OECD member, thanks to the influence of unions such as the CNTE and the National Educational Workers’ Union (SNTE). (This past winter, longtime SNTE leader Elba Esther Gordillo was jailed on embezzlement charges.)

Some reform advocates were disappointed at the perceived modesty of Peña Nieto’s education and energy initiatives. Yet it was always unrealistic to expect sudden, radical changes in Mexico after years of political sclerosis, especially given the power of organized labor and other entrenched interests. The three-party Pact for Mexico, which Peña Nieto orchestrated upon taking office in December 2012, has already delivered historically significant reforms and banished the perception that Mexico is paralyzed by gridlock. As a result, the Pact — which encompasses the ruling PRI, the conservative PAN and the left-wing Party of the Democratic Revolution — has bolstered investor confidence in Mexico and fueled optimism about the country’s future.

Indeed, despite a sluggish performance this year, Mexico’s long-term economic prospects are looking brighter than ever, particularly since rising labor costs in China have helped America’s southern neighbor become a global manufacturing powerhouse. Nomura, the Japanese bank, has projected that Mexico could have a larger economy than Brazil by 2022. For that matter, in the World Economic Forum’s newly released Global Competitiveness Index, Mexico ranks ahead of Brazil. In the 2009-10 index, by contrast, it ranked eight places behind Brazil.

The durability of the Pact for Mexico is uncertain. Thus far, the opposition PAN has been far more cooperative and constructive under Peña Nieto than the PRI was under Presidents Fox and Calderón. However, there are congressional elections due in July 2015, and the parties will begin campaigning long before then. The Pact may eventually collapse under the weight of partisan politics. But for now, at least, it is allowing Mexico to adopt long overdue reforms that will pay dividends in the years to come.

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