Mexico: Modernization and a New Economy

author_c15_1

author_c15_1Enrique Peña Nieto was born on 20 July 1966. He holds a Law Degree from the Universidad Panamericana in Mexico City and a Master’s in Business Administration from the Instituto Tecnológico de Estudios Superiores de Monterrey. He was a State Legislator for the State of Mexico, the most populous one in the country, between 2003 and 2004. From 2005 to 2011, he was Governor of the State of Mexico. At the end of his term as governor, he publicly expressed his hopes for running for the presidency. He won the presidential election on 1 July 2012 and was sworn in on 1 December 2012.

Commentary

Mexico’s future is full of potential. The past decade brought important changes. A fortified democracy saw the first peaceful rotation of government in generations. Today, freedoms of press, assembly, and speech are hardly an issue of debate; indeed, Mexico’s civil society is thriving as never before. Business reforms liberated the private sector from its dependence on politics and bureaucracy. Yet notwithstanding these changes, economic expansion has been sluggish during the last few years. This is poised to change dramatically in the coming years.

Mexico’s economic acceleration is already happening. Fortunately, the global economic crisis of 2008 spared many emerging economies—Mexico included—from much damage. Today, Mexico is in the enviable position of enjoying an economic rebound, despite the fact that many of our large Latin American partners are starting to slow down. A survey by Mexico’s central bank expects the economy to expand by 3.87 percent in 2012 (Banco de Mexico 2012).

My government views the acceleration of the economic expansion as our number one priority. If Mexico is to achieve its place as a world leader, we must—once and for all—use economic growth to raise millions of our fellow citizens out of poverty.

According to analysts at Goldman Sachs and Nomura, Mexico will be one of the ten largest economies in the next decade (O’Neill 2012). Goldman Sachs’ Jim O’Neill explains that by 2020, Mexico could be one of the top ten economies if it develops to its full potential (2011). Similarly, Nomura’s Tony Volpon and Benito Berber argue that Mexico’s economy might even be bigger than Brazil’s within ten years (Rapoza 2012).

I like to agree with those financial leaders who have said that the coming decade will belong to the so-called MIST nations (Mexico, Indonesia, South Korea, and Turkey), which are the four biggest markets in Goldman Sachs Next-11 Equity Fund.

Today, Mexico is one of the most open large economies in the world. It is the second-largest supplier of electronic goods to the United States. Rising manufacturing costs overseas, combined with high petroleum prices and long shipping times, make Mexico an increasingly desirable destination for foreign capital in the Western hemisphere. And manufacturing is coming home to our nation. Honda, Mazda, Coca-Cola, DuPont, General Motors, Nissan, and many others are flocking to our borders, as are investments in aerospace technology.

“We must find new ways to take advantage of the country’s enormous energy potential”

Despite these encouraging forecasts, many Mexicans still live in poverty. Although we have solidified and opened up our country, our economy has not done enough for the people who need it most.

A central tenant of my pledge to the Mexican people has been the improvement of economic conditions for the millions struggling to make ends meet. For them, the fact that our economy is one of the world’s largest has made no difference in their daily lives. Average growth of 1.7 percent between 2001 and 2010, according to the Instituto Nacional de Estadística y Geografía (INEGI, the National Institute of Statistics and Geography), means that they still struggle to find a well-paying job. Affording the basic costs of life proves difficult. The country needs profound structural changes if it is to meet the challenges of the twenty-first century global economy.

My strategy to ensure this success involves a multi-pronged approach to reform Mexico’s labor laws, energy sector, competition framework, and tax code. The Mexican Institute for Competitiveness estimated that the first three of these reforms would add 2.5 percentage points to our country’s growth rate (Instituto Mexicano para la Competitividad 2011).

Before I even took office, the Mexican Congress approved significant reforms to the country’s antiquated labor law. The sweeping measure allows for streamlined hiring of workers. It will improve market flexibility and modernize the economy while boosting growth and productivity. And it will end burdensome rules that discouraged businesses from hiring workers and pushed millions into the informal economy, where workers have limited protections and virtually no benefits. In fact, more than 29 percent of workers are informally employed.[i]

Similarly, we must change the view that for decades has predominated in Mexico’s energy sector. Now is the time to modernize the country’s most important company, Petróleos Mexicanos (PEMEX). We must find new ways to take advantage of the country’s enormous energy potential. While I do not intend to privatize PEMEX, reform is needed to allow private investment—both national and foreign—in this important segment of the Mexican economy. The challenge to achieving such a reform is reaching political consensus to break the political gridlock that has led to years of stagnation in energy production.

My proposal to reform the energy sector keeps the state in control of the oil industry and the nation’s hydrocarbon reserves but provides PEMEX the powers and legal authority necessary to enter into strategic public-private alliances. If PEMEX is to benefit all Mexicans, the company requires investments in new technologies, which come through increased private-sector partnerships. Why exhaust Mexico’s financial capacity by investing in new projects if they can be financed by private capital? As a result, a new legal framework must be in place to allow private investors to assume greater investment risks. This is the only way to maximize PEMEX’s production capabilities, increase its profitability, and improve transparency. These changes will bring millions of dollars into our economy.

“Mexico’s economy is also being held back by a lack of competition in sectors of the economy where there is a high concentration of ownership”

Simultaneously, we must wean the federal government off its dependence on PEMEX by pushing for changes in Mexico’s tax system. Currently PEMEX’s revenue provides about one-third of Mexico’s public budget, according to the INEGI. I will introduce a bill to simplify and expand tax collection that would boost revenues by at least four percentage points. Such changes will ensure we have the resources to invest in social welfare programs in order to lift millions out of poverty.

Mexico’s economy is also being held back by a lack of competition in sectors of the economy where there is a high concentration of ownership. We must loosen the grip of a handful of companies on entire industries. In order to spur growth, Mexico must go beyond recent strengthening of its antitrust commission. Currently, rulings by the Federal Competition Commission are adjudicated in ordinary courts, which can take exceedingly long periods of time and face extremely complicated, technical proceedings. Specialized courts for competition matters should be created with subject matter experts expediting the legal process. Opening these sectors to competition is seminal to economic development within Mexico.

While growing the economy moves Mexico in the right direction, specific action to lift people out of poverty is also needed. This starts by boosting funding for social welfare programs. It also includes measures such as increased domestic agricultural production to reduce prices of basic goods and contribute to the reduction of poverty, temporary unemployment insurance for those who lose their jobs, and a “universal pension” for Mexicans sixty-five and older.

Indeed, Mexico is poised to enter a new period of expansion. Achieving the prominence we so desire can only happen if Mexico breaks through its past political stagnation and institutional roadblocks to build an economy that has long-term strength and alleviates the epidemic of poverty. We can do both.

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