Mexico reforms boost international confidence

Sweeping reforms in energy, telecoms and education, among other sectors, are being implemented in Mexico in an effort to boost the country’s economy and attract investment. Significant structural changes were achieved in the past year with the aim of increasing economic competition and efficiency, though the benefits have yet to fully materialise. In its first two years in power, the government of President Enrique Peña Nieto has opened the oil sector to private investment and the telecommunications sector to competition, as well as overhauled the education sector with the introduction of compulsory teacher evaluations and widened the tax base through fiscal reform. Despite the speed with which the reforms were passed, the momentum has slowed slightly as the implementation stage gets under way and the government feels the effects of lower revenues from the sharp decline in hydrocarbons prices since mid-2014. As Mexico moves forward as an open, liberal economy, challenges remain. High rates of poverty and inequality, as well as organised crime, continue to be obstacles to development.

Political History

After nearly 300 hundred years under Spain’s colonial empire, Mexico achieved independence in 1821. Political instability and slow economic growth characterised the first five decades following independence until Porfirio Díaz rose to power in 1876. Under his leadership until 1911, Mexico saw improvements in infrastructure, foreign trade and national finances. However, pervasive poverty led to a decade of civil war from 1910-1920, which devastated approximately 10% of the population.

The centre-left National Revolutionary Party came to power in 1929 and dominated Mexico’s political system for 71 years, renamed the Institutional Revolutionary Party (Partido Revolucionario Institucional, PRI) in 1946. In the 1930s, under the presidency of Lázaro Cárdenas, the oil and electrical industry were nationalised. From 1930 to 1970, Mexico experienced stable economic growth, with significant public investment in education, agriculture, energy and transport infrastructure. This period saw the creation of many state-owned industrial enterprises and a growing dependence on the oil industry. However, falling oil prices in the 1980s, which were accompanied by rising inflation, an over-valued currency and a rise in global interest rates resulted, in a regional debt crisis that saw Mexico unable to meet its international repayment obligations.

President José Lopez Portillo (1976-82) responded to the crisis by nationalising the banking industry, but this undermined investor confidence. A series of austerity measures implemented by his successor, Miguel de la Madrid Hurtado (1982-88), put the country back on the path to economic recovery.

The 1980s saw a rise in opposition to the longstanding PRI rule as the National Action Party ( Partido Acción Nacional, PAN) began to gain support. Carlos Salinas de Gortari (1988-94) adopted economic reforms to privatise hundreds of state-owned enterprises, deregulate the financial services sector and liberalise foreign investment laws. His accomplishments included signing the North American Free Trade Agreement (NAFTA) in 1993 with the US and Canada to lower trade barriers in North America, as well as gaining a seat at the Organisation for Economic Cooperation and Development (OECD). Untenable government spending led the country into another recession in the mid-1990s. President Ernesto Zedillo (1994-2000) worked to restore macroeconomic balance and increase government accountability and transparency throughout his term.

Modern Politics

In 2000 the historic victory of PAN candidate Vicente Fox Quesada ended the PRI’s 71-year rule. After winning the election on a platform promising democratic change, an end to government corruption as well as tax and legal reform, he made little progress in implementing his reform agenda, partly because the PAN did not have a majority in both chambers of Congress. The PAN maintained power in the 2006 election through Felipe Calderón, though only by a very narrow margin. During his term in office, Calderón passed fiscal and pension reforms with support from the PRI. However, slow economic growth and drug-related violence overshadowed these accomplishments.

In July 2012, former state governor Peña Nieto won the presidential elections with 38% of the vote, bringing the PRI back to power. He pledged to transform Mexico into a modern, competitive economy by implementing key structural reforms with five overarching goals: combating poverty, improving security and justice, advancing the education system, stimulating economic growth and redefining Mexico’s position in the world, notably by strengthening ties with the Asia-Pacific region. In December 2012, shortly after Peña Nieto assumed office, the leaders of the three major political parties signed the Pact for Mexico, an agreement consisting of 95 structural reforms. The agreement facilitated the passage of reform bills in the education, legal and telecom sectors, with a subsequent energy reform bill passing without the support of the PRD.

During his first years in power, Peña Nieto and his party succeeded in pushing through an ambitious structural reform agenda aiming to make the country’s economy more competitive, including an overhaul of the education system and opening the oil industry to private companies for the first time since 1938. However, Pena Nieto’s last year in office has not been without incident. His administration faced its biggest challenge yet in September 2014, following the abduction and presumed massacre of 43 student teachers in the state of Guerrero. The incident placed organised crime and political corruption once again at the centre of Mexico’s political scene and has contributed to ongoing social discontent.

Legislative Structure

Mexico is a bicameral congressional democracy. Executive power is vested in the president, who serves as both head of state and head of government. The president is directly elected to a non-renewable six-year term, meaning that Peña Nieto will complete his tenure in 2018. The bicameral legislature consists of a senate, with 128 members serving six-year terms, and a lower house, the Chamber of Deputies, which has 500 members serving for three-year terms.

Political Parties

Mexico has a multi-party political system. Founded in 1929 and now considered a centrist party, the PRI dominated state and federal politics until the 1980s, holding power for 71 years prior to the PAN’s electoral victory in 2000. The PAN, founded in 1939 as a right-of-centre party, held the presidency from 2000 to 2012, until the PRI regained executive power. A third party, the Party of the Democratic Revolution (Partido de la Revolución Democrática, PRD), was founded in 1989 as a left-of-centre party and has dominated the political scene in the capital city. Smaller parties, such as the Movement for National Regeneration (Morena) and the Green Party, have recently risen in popularity.

Electoral Reform

Prior to February 2014, no politician could be re-elected for a consecutive term. While the president and state governors continue to be restricted to one six-year term, recent reform to the electoral system has enabled deputies and senators to serve up to two terms. Mayors and local deputies can also be re-elected, though the specific mechanisms are determined by local authorities.

In response to questions of legitimacy and transparency following the 1988 election, the Federal Electoral Institute (Instituto Federal Electoral, IFE) was created in 1990 to organise and oversee federal elections, ensuring legality and impartiality. As part of Peña Nieto’s recent electoral reform, the IFE was replaced by the National Electoral Institute ( Instituto Nacional Electoral, INE). The INE has a broader mandate that includes overseeing both federal and state elections, which were formerly administered by local electoral management bodies. These significant electoral reforms also put new restrictions on campaign financing and created an independent body to prosecute electoral offences, which is attached to the new autonomous attorney general’s office, as well as enabling independent candidates to participate in elections for the first time.

Mid-Term Elections

While presidential elections are held every six years, mid-term elections are held every three years, primarily for the Chamber of Deputies. Mexico held mid-term elections in June 2015, voting for a new Congress and nine of the country’s 31 state governors, as well as scores of mayoral positions, for a total of over 2000 posts nationwide. Voter turnout for the election was the highest for a mid-term since 1997 at about 48%, which is up from 44.7% in 2009 and 41.7% in 2003.

Peña Nieto’s ruling party and its allies won a small majority. With the PRI garnering 29.18% of the vote, and the PAN and the PRD at 21.01% and 10.87%, respectively, the three main parties combined garnered roughly 60% of the vote, the lowest combined total since competitive national elections began in 1988. The PRI maintained its dominance in Congress through its coalition with the Green Party and the New Alliance (Nueva Alianza), which have 6.91% and 3.72% of the vote, respectively. The results allow the current administration to focus on implementing constitutional reforms passed in the past two years without political opposition in Congress.

Rancher Jaime Rodriguez became the country’s first independent candidate to win a governorship, garnering nearly half of the vote in Nuevo León, Mexico’s main industrial hub. He defeated candidates from both the PRI and PAN, which had alternated power in the state for years and continue to control the local congress and most cities within the state. Waging his campaign to break with the traditional parties almost entirely through social media, his success represents a decisive shift in the status quo of Mexican politics. Three other independent candidates were also successful under the new election laws, garnering 0.56% of the total vote.

A spate of smaller parties also gained ground across the country. Morena, a leftist party founded in 2014 by former PRD presidential candidate Andrés Manuel López Obrador, garnered 8.39% of the national vote, becoming the fourth-largest party and winning five key districts in the capital including the city centre, formerly dominated by the PRD since the mid-1990s. The PRD lost eight of the 14 city districts formerly under its control and half of its deputies in the local legislative assembly, fragmenting power in the city to an unprecedented extent. Meanwhile, the Citizen Movement (Movimiento Ciudadano), a small leftist party, took the mayor’s office in Guadalajara and received 6.09% of the total vote. While the election results ensure political stability during the current administration’s remaining three years in power, the shift away from the traditional parties toward smaller parties and independent candidates increases the uncertainty of the next presidential election, to be held in 2018.

Reform

Peña Nieto’s administration has guided an ambitious reform agenda through Congress, attracting international attention and renewing confidence in the country’s economy. Reforms in education, telecoms, tax and energy have been passed, and additional reforms are under way. With the legislative phase of the reform process now complete, implementation is ongoing. Changes to the education sector were the first in a series of ambitious reforms to increase Mexico’s competitiveness, designed to improve education standards and increase transparency in the sector through the introduction of teachers’ evaluations and a competitive hiring process. However, in May 2015 Peña Nieto’s administration suspended the evaluations, which were central to the reform and due to begin in July, amid rising protests leading up to the midterm elections. The evaluations were later re-instated, though not in all states. In the states of Oaxaca, Michoacán and Chiapas, where opposition from the teacher’s union to the reform measures is strongest, the evaluations remain suspended.

Reforms in the telecoms sector are being carried out through the introduction of a new regulator as well as regulatory changes aimed at breaking down monopolies to level the playing field and allow smaller players into the market. The reform is also set to modernise the national telecoms infrastructure.

Perhaps the most significant economic shift since the signing of NAFTA, energy reform is liberalising the sector and opening it to private competition for the first time since 1938. The current administration enacted 21 secondary energy laws in August 2014, paving the way for increased competition and lower prices throughout the sector.

In January 2015, Peña Nieto announced new measures to stimulate the country’s economy. These include: reducing electricity tariffs; terminating government-mandated oil and gas price increases; eliminating charges for national long-distance telephone calls; issuing 10m digital televisions to poor families; launching a new credit programme for young entrepreneurs; increasing the construction of affordable homes through new tax and credit incentives; and finally by providing preferential tax rates to less-developed rural areas in the south.

Judical Reform

In 2008 Congress approved a reform package to modernise the judicial system, which is to be implemented across the country by June 2016. Constitutional changes will bring an end to the traditional closed-door trial process at federal and state levels and shift to adversarial public trials with arguments presented orally. The changes are very important since high levels of criminal impunity have historically led to low public confidence. By March 2015, four states had completely adopted the new system, with an additional 25 states having partially implemented the changes. The shift is intended to streamline the justice system and increase both transparency and confidence.

The US Agency for International Development (USAID) is supporting the wide-ranging judicial reforms with $75m invested in training judicial operators, developing legal curricula and disseminating information about the new system. The biggest challenge remains tackling corruption within the judicial system. Corruption was identified as the most problematic factor for doing business in Mexico in the World Economic Forum’s (WEF) “Global Competitiveness Report 2014-15,” with Mexico ranking 98th in judicial independence out of 144 countries. Nevertheless, training sessions and instructive projects are under way across the country to help prepare courtrooms and personnel for the transition.

Security

Despite considerable advances through the new reforms, internal security remains Mexico’s biggest challenge, particularly following a surge in political violence in the run-up to the mid-term elections. Reducing drug-related violence has become a priority for the current administration, which is focusing on crime prevention and reducing homicide rates, kidnapping and extortion through criminal justice reform. While homicide rates in Mexico decreased by nearly 15% between 2013 and 2014 after peaking in 2011, the lowest historical rate of 2007 is just half the current rate. Though homicide rates have fallen under Peña Nieto’s leadership, the National Institute for Statistics and Geography ( Instituto Nacional de Estadística Geografía e Informá tica, INEGI) estimates that 87% of crimes are unreported, an issue the government is addressing.

In 2014 Peña Nieto’s administration succeeded in arresting the country’s most notorious drug trafficker, Joaquín Guzmán, known widely as El Chapo, and eliminating key leaders of the Knights Templar Organisation. However, in July 2015 El Chapo made headlines once again, after successfully escaping from the high-security prison where he was being held. Authorities also approved a unified code of criminal procedure, to be implemented at the federal and state levels throughout the country by June 2016. The WEF’s Global Competitiveness Report 2014-15 ranked Mexico 140th out of 144 countries for organised crime and 135th on the business costs of crime and violence, indicating the need for further efforts to improve security.

Anti-Corruption Measures

Like many Latin American countries, Mexico has suffered from endemic corruption. Mexico ranked 103rd out of 175 countries on Transparency International’s “Corruption Perceptions Index” in 2014, with a score of 35 out of a possible 100, up one point from the previous year. The index ranks countries according to their perceived levels of public sector corruption from 0 (highly corrupt) to 100 (very clean). No major politician has ever been convicted of corruption in Mexico, in contrast to other Latin American countries such as Brazil, Peru and Colombia, which ranked 69th, 85th and 94th, respectively, on the index. With an average global score of 43, Mexico’s position and score suggests that much remains to be done.

In August 2014 Peña Nieto deployed a 5000-member national gendarmerie, a division of the existing federal police force, to focus on combatting the country’s drug cartels. He subsequently introduced a plan to address corruption, transparency and public security. The proposals include bringing local police forces under state control, creating dedicated anti-corruption commissions and launching a wave of special security operations in the southwest of the country. A new anti-corruption law was approved in April 2015, creating autonomous institutions to investigate public officials and increasing accountability over how public funds are spent.

Foreign Affairs

Mexico is well integrated into global trade networks with some 11 free trade agreements in place. The US is by far Mexico’s largest trading partner, followed by China, the EU, Japan and the Canada. A new agreement was signed with Panama in 2014. Meanwhile, Peña Nieto signed an economic accord between Mexico and Brazil in May 2015, which aims to double trade volumes between the two countries over the next 10 years. Mexico is also seeking to expand its connections to Asia and is a negotiating party to the Trans-Pacific Partnership (see analysis), which was approved in autumn 2015.

Outlook

Maintaining power in the 2018 elections for the PRI will depend largely on the administration’s ability to boost the economy, improve security, and ensure the benefits of ongoing reforms are passed on to the majority of the population. Peña Nieto’s challenge in the coming years is to ensure implementation of his ambitious reform agenda, strengthen the rule of law and reduce the powerful grip of drug cartels or other criminal groups in Mexico. Tackling organised crime and security issues, as well as demonstrating the ability to implement approved reform plans in a timely way, will be key in determining the success of the current administration. As it stands, the ambitious reforms are under way and Mexico’s encouraging trajectory only looks set to continue.