Progress and Pitfalls in Emerging Mexico

3 years ago ccwa 0

elecciones-mexico[1]If you search “Mexico” on the Internet, you are likely to find a list of stories on cartel violence, immigration, or border control under the news section. Unfortunately for America’s neighbor to the south, images of brutal murders, kidnappings, and narcotic trafficking tend to grab attention and make for captivating headlines. Consequently, the enduring image of Mexico for most Americans is a country that is virtually powerless to the organized crime units that traffic drugs throughout the country and is, on the whole, a dangerous place to visit.

However, over the past three decades Mexico has undergone changes that – while less attention-grabbing than a drug war – will prove significant in the long run for the nation. Since the 1982 debt crisis, Mexico has been quietly putting together the pieces of a stable democracy and a vibrant, open economy. Below the surface of the drug war lies the potential for an economic giant.

The First Piece: A Multi-Party System

 

Officially, The United States of Mexico has been governed by a representative republic since 1824. However, it has not been until the turn of the 21st century that Mexico has had a true multi-party, representative democracy. In 1821 Mexico signed the Treaty of Cordoba, granting it full independence from Spain. After three years of a failed Mexican empire, which saw the leader of Mexico’s War for Independence mismanage his absolute rule, the United States of Mexico was established under a constitution not unlike the constitution of the United States of America. In name, the United States of Mexico was a representative federal republic; however, over the next ninety years – including a brief period of French rule – the country was run by largely self-interested and overall corrupt regimes.

The longest lasting regime was that of Porfirio Díaz, whose three decade-long reign came to an end in the throes of the Mexican Revolution in 1911. A new constitution was signed in 1917 though unrest continued into the 1920’s, finally stabilizing in 1929 after the founding of the National Revolutionary Party. The goal of this party was to stabilize the volatile political climate of Mexico and ensure that the progress of the Revolution was maintained. Though the party underwent a few name changes – the Mexican Revolutionary Party (PRM) and finally the Institutional Revolutionary Party (PRI) – little else changed politically in Mexico for the next 70 years. The PRI maintained single-party rule over the country as the party elite essentially handpicked the President every six years. Open elections were held, but in most cases electoral fraud proved superior to the voice of the people. Over the course of its reign the PRI became synonymous with corruption: absolute political power granted PRI officials the luxury of making policy decisions that benefited them financially, and officials often looked the other way on organized crime.

Cracks in PRI rule began to show in the late 1970’s as the conservative National Action Party (PAN) gained broader support as a result of PRI mismanagement. Extending this trend was the election of the first non-PRI governor since 1929 as well as the 1989 split in the PRI as the left wing of the party separated to create the Party of the Democratic Revolution. Following the 1994 economic crisis the PRI lost full control of the legislative body. The nail was placed in the coffin of the PRI’s absolute rule in 2000 when Vicente Fox of the PAN won the presidency. With the advent of free elections in Mexico have come the fuller benefits of democracy for the Mexican people. Now held fully accountable through fair and open elections, officials are compelled to make policy decisions that are beneficial to the general population rather than their pockets.

Nowhere are the gains from free elections more evident than in the policy aims of President Enrique Peña Nieto. Elected in 2012, many feared the return of a PRI President meant the renewal of the PRI’s corruption and near absolute control. Instead, because of the competition that free elections have created, Peña Nieto has proven to be fiercely reformist. Since his ascendancy to the nation’s top office, Peña Nieto has aggressively – and, at times, controversially – pursued reforms in education, corruption, and energy. Demonstrative of this commitment to reform and the PRI’s willingness to work with the other parties is the “Pact for Mexico”. Signed in 2012, the Pact is an agreement by the major political parties of Mexico to ensure the democratization of politics and the economy and to expand social rights while increasing general participation in public policy. At face value the Pact for Mexico seems like a largely symbolic gesture – albeit an important one given the political history of the country, but in fact the Pact has had meaningful impacts. The Pact has resulted in reform bills for education, legal proceedings, and the telecommunications market. The democratization of a once fraudulent political system has allowed Mexico to capitalize on an economy that has steadily become one of the largest and most open in the world.

The Second Piece: An Strong, Open Economy

 

Another misconception about Mexico is that in addition to being a country torn by violence it is also an underdeveloped country with a stagnant economy. However, with the 10th largest economy in terms of purchasing power parity (Goldman Sachs predicts Mexico to rise to 5th by 2050) and the highest per capita income of any Latin American country, Mexico is solidly an upper middle-income country. In fact, financial experts around the world are particularly bullish about Mexico’s future, with Financial Times calling Mexico’s economy “bulletproof”, as well as Goldman Sachs including Mexico in its latest group of up and coming economic powers, MINT (Actually coined by Fidelity Investments but popularized by BRICs creator Jim O’Neil, MINT stands for Mexico, Indonesia, Nigeria, and Turkey). The strength of the Mexican economy lies in its openness and strategic position with regards to some of the largest economies in the world. Along with the North American Free Trade Agreement, which celebrates its 20th anniversary this year, Mexico currently maintains free trade agreements with over 40 countries, more than any other nation in the world. These trade agreements have had an immediate impact on Mexico, as exports have more than quadrupled since 1994. Additionally, these FTA’s have afforded Mexico a more diverse economy and the luxury of being less reliant on the economy of the United States. This is not to say, however, that Mexico does not benefit from sharing a border with the United States; 90% of Mexico’s exports still go to the US.  As Mexico’s economy expands NAFTA may prove to be one of the most important deals the country has made – the agreement is somewhat of a safety valve for the Mexican economy given that products can be exported to major markets cheaply. Moreover, Mexico’s proximity to the United States has, in recent years, brought jobs back to Mexico. The increased cost of shipping combined with higher wages in China has forced manufacturers to seek production closer to the US, and they are increasingly choosing Mexico to fill that role. For instance, the electronics industry of Mexico has boomed in the last decade, becoming the 6th largest in the world and 2nd largest electronics supplier to the US as foreign companies look to take advantage of Mexico’s low wages and its FTA with the US.

With the largest economy next door and the most FTA’s in the world, one might presume that Mexico would be content with its current trade conditions. However, the country is not resting on its laurels. Together with Chile, Colombia, and Peru (and with Costa Rica set to join within the next year) Mexico has established the “Pacific Alliance” FTA in order to orient Latin American trade towards Asia. Recognizing their advantageous location on the Pacific Ocean, the Pacific Alliance aims to exploit the vast Asian market. With its FTA’s Mexico has, in effect, done a complete 180 from the protectionism that persisted for much of the 20th century. During most of the PRI rule Mexico was known for its high tariffs and import quotas that caused many areas of the country to be mono-economies that were typically based on agriculture. After the 1982 debt crisis Mexico has set itself down a path of neoliberal reforms that, while controversial, has expanded trade and diversified the economy.

The Third Piece: Clearing Remaining Hurdles

 

Despite the recent strides it has taken, Mexico still faces several challenges on its path to stability. The highest profile amongst these obstacles is, of course, dealing with cartel violence. The drug war continues to be costly not only in terms of lives but also as an economic burden. A more integrated approach between the federal and state governments under President Peña Nieto has had a positive impact, but the crisis at hand will require the wherewithal of politicians for years to come.  Additionally, a more involved United States will help mitigate the violence, as an increasing majority of the weapons used by the cartels come from the US.  An equally impactful problem, however, is the corruption the cartels produce. In order to ensure stability and growth, Mexico’s leaders must have the courage and resolve to fight this cancerous byproduct of the drug trade. Perhaps the primary grievance with the election of President Peña Nieto was the fear that the PRI would again turn a blind eye to the cartels, and one of the biggest tests for Mexico’s developing democracy will be whether the PRI can move past their coziness with organized crime.

Another stumbling block for Mexico is the staggering inequality that persists in its society. Among OECD countries only Chile has a higher degree of disparity between the extremely rich and the extremely poor. Indicative of this gap is the fact that one person, Carlos Slim, currently represents 8% of the nation’s GDP. Despite the fact that Mexico has a higher per capita income than other emerging economies such as Brazil, China, and India, one of the main drivers behind Mexico’s manufacturing revival has been the shockingly low wages for manufacturing workers. Furthermore, even though the majority of Mexicans have ascended to the middle class, an alarming percentage of the rural population remains destitute. Compounding this issue is the fact that, in absolute as well as relative terms, Mexico spends less than a third of the average OECD country on poverty alleviation.

Finally, Mexico must decide on its energy future. Currently, the Mexican oil industry, which represents 34% of its federal revenue and is the 6th largest in the world, is run by the state owned company PEMEX. Despite new technology making more oil accessible, production has actually decreased dramatically over the past ten years. The oil industry is the only part of the Mexican economy that remains untouched by foreign investment, both direct and portfolio. But for many Mexicans, the oil industry is a source of national pride and opening up PEMEX to foreign investment would be a blow to the nation’s identity. Still, the introduction of the private sector, though a potential political landmine, would likely have a positive societal impact and undergird future growth

These hurdles represent a steep challenge for Mexico. But with a multi-party democracy that breeds competition and an open economy that encourages trade, Mexico is more equipped than ever to overcome these potential pitfalls and emerge as an economic superpower. In addition to being unfettered by the security concerns of a more contentious region of the world, Mexico’s geostrategic position affords it the proximity to other economic giants like the United States and Brazil as well as the opportunity to expand trade across the Pacific. Exploiting these two advantages is key to Mexico’s development, and the country’s burgeoning democracy and focus on FTA’s make it prepared to do so.

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by Peter Giblin

(photo credit: www.unomasuno.com.mx, news.bbcimg.co.uk)