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Mexican Economic Policy Under Pena Nieto

On July 1, the citizens of Mexico elected Enrique Peña Nieto as their next president.  The most remarkable aspect of the election is that it marked the political resurrection of the Institutional Revolutionary Party (PRI, by its Spanish initials).  The PRI ruled Mexico continuously for seven decades from the 1930s to 2000, though its reign was marked by repression, corruption, and, often, poor economic policy.  After the PRI finally lost its grip on power in 2000, the party nearly disintegrated.  Now, under the leadership of Peña Nieto, the party has a new lease on life.  The question is whether the new administration will return to the corruption, patronage, and corporatist approaches of the past, or embark on the free-market economic reforms that Mexico needs in order to accelerate its economic growth and compete better with rival emerging economies such as China and Brazil.

Peña Nieto, 46 years old, is the son of a Federal Electricity Commission employee and a school teacher.  He received his education entirely within Mexico, earning a bachelor's degree from the Universidad Panamericana and a master's of business administration from the EGADE business school.  After earning his degrees, Peña Nieto rose through various public and party positions until finally becoming governor of the state of Mexico from 2005 to 2011.

During its previous seven decades in power, the PRI billed itself as the only organization capable of guaranteeing the accomplishments of the Mexican Revolution of the early 1900s.  It reality, it developed into a well-oiled political machine that maintained its control over the country by being all things to all segments of society.  For example, it built support among workers by nurturing unions and instituting rigid labor laws that continue to make layoffs difficult to this day.  At the same time, it allowed powerful monopolies and oligopolies to develop throughout much of Mexico's economy.  Fortunately, the economic agenda Peña Nieto described in his campaign appears to be aimed at addressing many of the country's most pressing problems:

Energy Sector Policy.  Perhaps the signature achievement of the PRI in the 1930s was the nationalization of Mexico's oil industry and the constitutional prohibition against private-sector involvement in the energy industry.  Unfortunately, these moves have limited the country's ability to take advantage of its vast petroleum reserves.  The state oil company, Pemex, is now essentially treated as a cash cow to cover a large portion of the country's budget.  Investment in the industry has stagnated, and Mexican oil production is on a gradual slide downward.  To address this issue, Peña Nieto has proposed allowing the private sector to participate in the energy industry, just as Brazil has opened its state oil company, Petrobras, to alliances with private businesses.  If fully implemented, this policy has the potential to increase investment, raise output, and make the energy sector much more dynamic and competitive.

Fiscal Policy.  The Mexican government has been financially disciplined in recent years, keeping its budget nearly in balance.  Its main problem is that tax revenues are extremely low as a share of the economy.  Tax revenues in much of Europe normally exceed 50% of gross domestic product (GDP), while in the United States and most dynamic Asian countries they normally total 30% to 35% of GDP.  In Mexico, tax revenues typically come to only about 25% of GDP, meaning the government has little to spend on important public investments.  To address this problem, Peña Nieto has said he would make the income tax system more progressive (i.e., impose higher tax rates on higher incomes), and that he would consider applying the value-added tax to at least some foods, though with some form of compensation for the poor.  Peña Nieto has also promised to make federal revenue sharing with Mexico's state and local governments more transparent.

Competition Policy.  Many Mexican industries are dominated by monopolies and oligopolies.  In telecommunications, for example, only two firms control a vast amount of the broadcasting and telephony markets, stifling innovation and raising costs for consumers.  Peña Nieto has promised to make Mexican anti-trust laws more effective by boosting penalties for monopolistic behavior and establishing dedicated anti-trust courts with the expertise and resources to stamp out anticompetitive business practices.  If fully implemented, this reform would probably help ease the formation of dynamic, new entrepreneurial companies in Mexico.

Labor Policy.  Even though Mexican economic policy has long coddled major businesses, it has simultaneously maintained inflexible labor laws that raise the cost of hiring and firing.  Economists generally agree that these policies inhibit hiring and drive many workers into the grey economy or force them to look for work in the drug cartels or in the United States.  Peña Nieto has vowed to address these issues by liberalizing Mexico's labor laws.

In sum, Enrique Peña Nieto has focused his economic agenda on some of Mexico's most important problems.  He has promised to work hard preparing the groundwork for this agenda in the months leading up to his inauguration in December.  If he can put these policies into place, it would likely make Mexico's long-term economic prospects much more positive.  But will Peña Nieto really implement his policies?  There are grounds for skepticism, especially given the fact that Peña Nieto and the PRI do not have a majority in Congress.  Moreover, the PRI itself has long resisted the very reforms Peña Nieto is now advocating, and he is likely to face defections among many PRI members in Congress.  Nevertheless, the prospects for real change in Mexico may be better than currently realized.  One key reason is that the outgoing party and main opposition, the conservative National Action Party (PAN), has long supported just the reforms that Peña Nieto is now pushing.  In fact, several leading PAN members have already signaled that they would support Peña Nieto's reforms, though at a price.  For instance, newly elected PAN senator Gabriela Cuevas recently said the PAN would support Peña Nieto's labor reform if it included the democratization of unions.  There will be some tough bargaining ahead for Mexico's politicians, but if they can compromise enough to implement just some of these reforms, the Mexican economy could start to grow faster and potentially start to catch up with the faster-growing developing countries (see chart).

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