Building up: Taking the necessary steps to carry the country forward

More than a decade of multi-party elections have consolidated Mexico’s transition to democracy, while the current administration’s ambitious reform agenda promises to take the country to its next phase of development. Radical changes in education, telecoms and energy, among other areas, aim to bring dynamism to the economy and have attracted significant global attention, though not without some discontent at home. Even so, the economy is open, regionalised and market-based, traits that have helped cement its liberal status. Significant challenges remain for the second-largest economy in Latin America. High poverty and inequality rates as well as a war on drugs and drug-related violence continue to hamper social development.

History

Pre-Hispanic Mexico was home to five major civilisations: Olmec, Maya, Teotihuacan, Toltec and Aztec. Following its conquest by the Spanish in 1521, Mexico was, for nearly 300 years, part of the Viceroyalty of New Spain, which comprised modern-day Mexico and parts of today’s central and south-western US, as well as eastern territory along the Gulf of Mexico to Florida. Mexico’s war of independence began on September 16, 1810, commemorated today as Independence Day. Independence was achieved in 1821.

In 1822 Agustín de Iturbide, a central figure in the war, was declared emperor of Mexico. His rule lasted one year, and a failed military coup of 1823 eventually led to the creation of a new constitution in October 1824, establishing the United States of Mexico as a representative federal republic with Catholicism as the official religion. The following years were characterised by the loss of significant portions of Mexican territory. In 1836 the state of Texas claimed independence, causing a dispute between the US and Mexico over Texan borders which led to the Mexican-American War from 1846 to 1848. As a result, Mexico lost what is now California, Nevada and Utah, and sizable portions of New Mexico, Arizona, Wyoming and Colorado.

Changing Hands

 The period from 1855 to1872 is generally known as La Reforma (“the Reform”), a time of liberal reforms, which began with Benito Juárez and saw Mexico become a nation state. In 1857 Congress drafted a liberal, federalist constitution, which among other things limited the Catholic church’s control and gave Mexicans their first genuine bill of rights. In 1861 Mexico was again invaded by a European nation, this time France, which crowned Maximilian I as emperor of Mexico in 1864. The regime lasted until 1867, when Benito Juárez once again became president.

The years following independence through 1876 were characterised by political instability and slow economic growth. This changed with the ascent to power of Porfirio Díaz, who from 1876 to 1911 oversaw a period of authoritarian political control accompanied by economic progress and modernisation. With a strong central government, Mexico flourished and there were significant improvements in infrastructure, foreign trade and national finances. However, widespread poverty led to the Mexican revolt from 1910 to 1920, decimating around one-tenth of the population. By the end of the revolt, the system of large haciendas (estates) established during Spanish colonial rule was dismantled.

Setting in

 In 1929 the centre-left National Revolutionary Party, renamed the Institutional Revolutionary Party (Partido Revolucionario Institucional, PRI) in 1946, came to power and proceeded to dominate Mexico’s political system for the next 71 years. The period of 1930-70 was one of stable economic growth in Mexico, later called the “economic miracle”. Under the presidency of Lázaro Cárdenas in the 1930s the oil industry was nationalised. By the mid-1970s Mexico had become an important petroleum producer under the leadership of President José López Portillo.

However, by mid-1981 falling oil prices, rising inflation, an over-valued peso and a dramatic increase in global interest rates resulted in significant capital flight, and by 1982 Mexico was unable to meet its debt repayment obligations, igniting a region-wide debt crisis. President López Portillo (1976-82) responded by nationalising the banking industry, but this served to further undermined investor confidence. His successor, Miguel de la Madrid Hurtado (1982-88), adopted a series of austerity measures that would set Mexico on the path to economic recovery. Carlos Salinas de Gortari, president from 1988 to 1994, began a series of economic reforms, including the privatisation of hundreds of state-owned enterprises, while deregulating the financial services sector and liberalising foreign investment laws. This transition culminated with the North American Free Trade Agreement (NAFTA), signed in 1993 between Mexico, the US and Canada, and which became effective in January of 1994, reducing trade barriers within North America (see analysis). A rising budget deficit due to unsustainable government spending saw Mexico plunge yet again into economic recession in the mid1990s, with President Ernesto Zedillo (1994-2000) spending his term restoring macroeconomic balance and implementing measures to increase government accountability and transparency.

Modern Politics

 In 2000 Mexico celebrated the victory of opposition candidate Vicente Fox Quesada of the National Action Party (Partido Acción Nacional, PAN), ending the PRI’s 71-year rule. Fox’s victory was symbolic of Mexico’s slow transition to democracy. Fox, former Coca-Cola chief executive and governor of Guanajuato, was elected with an overwhelming majority of public support on a platform of democratic change, tax and legal reform, and ending government corruption. During his six years in office, he pursued macroeconomic goals, like raising investment and employment, modernising the tax system and upgrading infrastructure, but by his term’s end in 2006 Fox had made little headway with the reform agenda, in part because PAN had failed to win a majority in both chambers of Congress.

Fox’s successor, PAN’s Felipe Calderón, won the 2006 election against Andrés Manuel López Obrador of the Party of the Democratic Revolution (Partido de la Revolución Democrática, PRD) by the slimmest margin in Mexican history (35.9% to 35.3%). Calderón’s platform focused on improving crime rates, reforming pension and labour laws, and increasing the competitiveness of the Mexican economy by promoting investment.

Calderón continued Fox’s macroeconomic policies and economic liberalisation, passing far-reaching fiscal and pension system reforms in 2007, thanks to support from the PRI. Nonetheless, Calderón’s achievements were overshadowed by sluggish economic growth and drug-related violence.

Enrique Peña Nieto, who won the July 2012 presidential elections with 38% of the vote, assumed office in December that year, returning the country to PRI rule. His presidential campaign focused on five key goals: combating poverty, improving security and justice, boosting the education system, economic growth and redefining Mexico’s position in the world, in particular through the strengthening of ties with the Asia-Pacific region. Peña Nieto promised to transform Mexico into a more modern, dynamic and competitive economy, following key structural reforms. Soon after Peña Nieto assumed power, the leaders of the three most important parties signed in December 2012 the Pact for Mexico, an agreement aiming to negotiate 95 structural reforms.

Key Challenges

 A longstanding challenge for Mexico’s leaders has been its high poverty and inequality rates. Despite stable economic growth in recent years, almost half of Mexico’s population still lives in poverty. According to the National Council for the Evaluation of Social Development Policy, the poverty rate fell by 0.6% between 2010 and 2012, from 46.1% to 45.5% . However, given population growth, the number of people living in poverty increased from 52.8m to 53.3m. On the positive side, extreme poverty has declined from 13m in 2010 (11.3% of the population) to 11.5m in 2012 (9.8%). Among OECD members, Mexico also has the second highest Gini coefficient, the most common measure of income distribution disparity, at around 0.47% (with 0 representing no inequality and 1 complete inequality). Moreover, in 2010 the gap between the average incomes of the richest and the poorest 10% of the population, was 29:1 in Mexico, the highest among OECD countries. However, several structural reforms are aimed at addressing income inequality and poverty.

Reform

The Pact for Mexico helped steer an ambitious reform agenda through Congress, leading to significant accomplishments during Peña Nieto’s first year in office. This also attracted a great deal of international attention and seems to have renewed confidence in Mexico’s economy, which saw a record $35bn in foreign investment in 2013. As of April 2014, Congress had passed reforms to education, telecoms, tax and energy, designed to make Mexico’s economy more competitive, via professionalisation, increased competition and foreign investment. Additional reforms are expected, including in the agriculture and health sectors.

However, the pact broke down amidst negotiation of the energy sector reform, which remains a highly controversial subject. The PRD is now strongly opposed to energy reform. Nonetheless, Peña Nieto’s PRI has enough votes in the Lower House to pass legislation and needs only a few additional votes from PAN to pass the Senate. This has enabled the party to make significant progress with the reform agenda, despite the breakdown of the pact. However, secondary laws will ultimately determine how much the PRI will be forced to dilute the original reforms in order to arrive at a compromise. In the case of the education reforms, significant opposition from the teacher’s union resulted in months-long, large-scale protests in Mexico City.

Political Reform

 Another item on Peña Nieto’s reform list is electoral reform, which has passed both the Senate and Chamber of Deputies but is pending review by state assemblies before its enacted. Mexico is a bicameral congressional democracy. The president is elected directly and serves a six-year term with no option of re-election. The Senate is composed of 128 members; 96 elected by popular vote at the state level and 32 chosen from party lists at the national level, serving six-year terms. The three biggest parties, PRI, PAN and PRD now hold 52, 38 and 22 seats, respectively. The lower house, or Chamber of Deputies, is made up of 500 members serving a maximum term of three years; 300 are elected by a plurality vote in single-member districts, while the remaining 200 are allocated via proportional representation from closed-party lists in five 40-member districts. The PRI holds 208 seats, PAN holds 114 and PRD holds 100, with the remaining 78 seats distributed among four other parties. Until February 2014 no politician could be re-elected for a second consecutive term. Following Peña Nieto’s reform, deputies and senators are now allowed to serve up to two terms. The president and state governors remain restricted to one six-year term. The electoral machine has also changed with the establishment of the National Electoral Institute (Instituto Nacional Electoral), which will oversee state elections, a task that was previously overseen by agencies at the state level.

Judicial Reform

A part of Peña Nieto’s political reform addressed the judicial system. The attorney general’s office became an autonomous entity, a move that seeks to avoid political interference in sentencing. This change is in line with the reform package approved by Congress in June 2008, the implementation of which is to take place across the country by 2016.

Constitutional changes will see trial procedures at federal and state levels move from a closed-door process based on written arguments to an adversarial public trial where arguments are presented orally. Judicial reform is important since Mexico has traditionally experienced high levels of criminal impunity, leading to low public confidence. According to the World Economic Forum’s “Global Competitiveness Report 2013-14”, Mexico ranks 90th in judicial independence out of 148 countries. It ranked particularly low in organised crime (143), reliability of police services (126), and business costs of crime and violence, though the last two are partly offset by high scores in investor protection (41) and auditing and reporting standards (45). When Peña Nieto assumed office in December 2012, 22 of Mexico’s 32 states had enacted new criminal procedure codes, although only 12 had started operating under the new system. While implementing reform measures has been slower at the federal level, on assuming office Peña Nieto affirmed his commitment to continuing judicial reform. His government now faces the task of enacting a unified penal code and a code of criminal procedure while overseeing and supporting states until 2016 in the transition to the new system.

Internal Security

Further highlighting the importance of judicial reform is the need to address Mexico’s single-biggest challenge: internal security. While internal security has been a long-standing problem, homicide rates during Peña Nieto’s first year in office dropped. According to early figures by the National Public Security System, homicide rates fell some 15%, from a monthly average of over 1800 intentional homicides during Calderón’s last year in office to 1550 in 2013. A study by the Trans-Border Institute’s Justice in Mexico Project shows that violence has slowed.

One significant achievement of the current administration has been the arrest of drug cartel kingpin Joaquín Guzmán Loera, also known as El Chapo, in February 2014. Guzmán was the head of the Sinaloa Cartel, considered the most powerful drug trafficking organisation in the country. Peña Nieto has said he will be adopting a different strategy from his predecessor Calderón, who sought to dismantle organised crime by deploying the military. Instead, Peña Nieto will focus on crime prevention and reducing homicide rates, kidnapping and extortion. The president dismantled the Ministry of Public Safety as a Cabinet agency in January 2013, and replaced it with the new National Security Commission. The new agency, now a part of the Ministry of Interior, centralises control of security policy. The administration has also created a unified police command system at the state level and is in the process of forming a National Gendarmerie, which is scheduled to become operational in the summer of 2014.

Global Integration

 One of Peña Nieto’s campaign promises was to better position Mexico in the international economy. Mexico is already very integrated into global trade networks, boasting 10 foreign trade agreements (FTAs), 30 reciprocal investment promotion and protection agreements and nine trade agreements within the framework of the Latin American Integration Association. A new agreement was signed with Panama in April 2014, and negotiations were ongoing for FTAs with Brazil and Korea. Mexico has been a member of the Asia-Pacific Economic Cooperation (APEC) since 1993, which has 21 members, and the Pacific Alliance, uniting Chile, Colombia, Mexico and Peru. Mexico also joined the World Trade Organisation (WTO) in 1995. Moreover, it is one of only two members from Latin America that is part of the OECD. It is also in the negotiation phase to join the Trans-Pacific Partnership, which stands to unite 12 Asia-Pacific countries.

North-South Ties

 Perhaps Mexico’s most significant FTA, NAFTA cements the country’s economic liberalisation and trade relationship with its northern neighbours. It is one of the largest trading blocs in the world, encompassing a $19trn market, nearly 500m people and a wealth of natural resources. Intra-regional trade flows rose from $290bn in 1993 to more than $1.1trn in 2012, and much of this growth is attributed to higher trade between Mexico and the US. Canada’s trade with Mexico increased six-fold under NAFTA, and investment doubled. Combined, the US and Canada make up almost 70% of Mexico’s foreign tourism arrivals, with tourism Mexico’s fourth most important source of foreign currency. The links between Mexico and the US go much deeper, however, with decades of heavy emigration from south to north. Between 1994 and 2000, the number of Mexicans moving to the US increased annually by 79%, while the number of Mexican-born residents living in the US doubled from 4.5m in 1990 to 9.4m in 2000, reaching 12.6m in 2009.

José Antonio Meade Kuribreña, secretary of foreign affairs, told OBG, “One in 25 businesses in the US is owned by Mexicans. It is estimated that 8% of US GDP derives from the economic activities of Mexicans or Mexican-origin communities and, according to figures from the US Census Bureau, by 2060 one-third of the US population will be of Hispanic origin. The close ethnic and cultural links between our populations should be exploited if North America is to become the most dynamic region in the world.”

Mexicans living in the US have an equally strong impact on the Mexican economy, with remittances representing the third-highest source of foreign currency for the Mexican economy, after manufacturing and oil.

Outlook

 With education, energy, telecoms and political reforms already under way, Peña Nieto’s government has accomplished much in a little over a year in office, in part because of the number of seats the PRI enjoys in the Chamber of Deputies. This, coupled with the amount of attention and foreign investment, is placing Mexico centre stage. Nonetheless, secondary laws have yet to determine the extent to which reforms are enacted, while overall support for Peña Nieto’s government will rest on its ability to secure stable economic growth and follow through on its related reforms.