What Mexico Chose

On July 2, Mexican voters chose conservative candidate Felipe Calderón by a slender margin over his leftist rival, Andrés Manuel López Obrador. Most investors and employers breathed a sign of relief at his victory, especially after post-electoral protests by López Obrador led them to revise their assessments of what he might have done had he prevailed.

According to the conventional wisdom, Mexico narrowly escaped a relapse into populism and statism. Calderón’s victory promised much-needed measures to strengthen Mexico’s economy, such as rehabilitating an under-funded pension system, revising antiquated labor laws, and opening the government-controlled energy sector to private investment. Even if Calderón’s National Action Party (PAN) failed to capture a majority of seats in either house of Congress, at least his triumph had kept Mexico on a market-oriented, fiscally responsible path.

As with all conventional wisdom, this interpretation has a grain of truth. Nevertheless, it overstates the appeal of a PAN government and ignores the many attractive elements of López Obrador’s agenda that now have little chance of becoming policy. What Mexico really needs is a combination of the agendas of the two main candidates.

Calderón is by far more favorably disposed to private investment in the energy sector than his main rival, and some measure of liberalization is needed if producers in Mexico are to remain competitive. If he is able to secure congressional support, Calderón will expand private investment in power production, permit private exploitation of low-yield oil fields that the state monopoly (Pemex) would prefer to ignore, sign contracts with foreign companies to exploit deep-water reserves, liberalize certain downstream activities, and increase private participation in all aspects of natural gas (which remains subject to the same legal restrictions as oil but is politically less sensitive). Calderón also favors labor market reform, which would give employers greater flexibility to hire, fire, and cross-train workers. Again, some measure of flexibilization is needed for Mexico to compete. Finally, Calderón seems committed to putting Mexico’s under-funded pension system on firmer financial footing. This task requires serious attention, and Calderón was the best equipped of the candidates to undertake it.

There are, however, two caveats to these points. First, the real problem in Mexico’s oil and gas sector is not that it remains in state hands. Rather, the problem is that successive administrations have pillaged Pemex to fund regular government operations. If new revenues could be generated for the federal government, substantially less private investment would be needed. From a comparative perspective, there is certainly nothing odd about heavy state involvement in an industry where the sale of non-renewable resources yields extremely high rents.

Second, however desirable labor market reform might be, in many cases it would largely formalize arrangements that already exist. At least as important as legislative change is a repeal of the “corruption tax” levied by corrupt union leaders. This problem is best resolved by allowing truly independent union organizing. Such an approach may ultimately lead to higher wages and better working conditions, which might worry employers but which in the end would yield substantial gains.

It must also be acknowledged that López Obrador’s platform contained a number of proposals that could contribute substantially to economic growth and competitiveness. One of the most problematic features of Mexican political economy is the domination of many sectors by one or two firms, with telecommunications being only the most obvious target. Monopolization raises the costs of doing business and retards innovation, to say nothing of its effects on small business or on income distribution more broadly. A López Obrador administration would have treated Mexico to a much-needed spell of trust-busting; Calderón is much less inclined to move aggressively against the business groups who so generously contributed to his campaign. Nor will Calderón revisit the “Ley Televisa”, a particularly repugnant piece of legislation passed midway through the campaign, which effectively guarantees Mexico’s two main broadcasting networks the right to dominate their industry for at least two decades.

Crony capitalism is also apparent in Mexico’s bank bailout scheme, in which bad loans incurred through poorly regulated and often dubious transactions were socialized to the Mexican taxpayer to the tune of one quarter of national income. The corruption and influence-peddling related to this scheme has resulted in virtually no legal action. A López Obrador administration would have been much more aggressive in prosecuting criminal activity than Calderón’s team will be.

Finally, there is the question of government revenue. Mexico may need more markets, but it needs more government just as badly. It needs investment in human capital necessary to produce a skilled labor force; it needs funding for infrastructure to reduce transport costs; it needs federal welfare programs to maintain social peace and ensure social justice; and it needs enhanced funding for law enforcement to ensure public safety. How should Mexico pay for these services?

Mexico now relies heavily on regressive forms of taxation, such as the value-added tax (IVA). Whereas Calderón favors better enforcement of the IVA and a flat tax on income, López Obrador would have been much more aggressive in creating a progressive income tax regime, closing loopholes, and preventing evasion. In a country where inequality already approaches that of South Africa, a more progressive strategy would be welcome.

There were many problems with López Obrador’s proposals, from his apparent failure to grasp the concept of opportunity cost to his sometimes casual attitude towards the rule of law. Analysts and investors can hardly be blamed for celebrating Calderón’s victory. But market-oriented approaches alone will not create the Mexico of the future that figured so prominently in Calderón’s campaign rhetoric.

On July 2, Mexican voters had to choose between Calderón’s vision and López Obrador’s. When forced to do so, they split almost evenly. Mexico’s next leaders are in a more enviable position, as they are free to select a bit from each of the candidates’ platforms. Over the past month, Calderón has indicated his interest in incorporating some of López Obrador’s policy proposals. Such a gesture would not only promote political reconciliation; it could also produce the sort of economic policies that Mexico desperately needs.
 

Chappell Lawson is an Associate Professor of Political Science at the Massachusetts Institute of Technology and a non-resident fellow at the Pacific Council on International Policy.

ABOUT VIEWPOINTS AMERICAS
ViewPoints Americas is a publication of the Americas Society and the Council of the Americas. It helps Council member companies achieve their business goals by stimulating thoughtful debate on the most pressing issues facing Latin America. The positions and opinions expressed in this publication are those of the authors or guest commentators and speakers and do not represent those of the Americas Society and the Council of the Americas or its members or the Board of Directors of either organization. No part of this publication may be reproduced in any form without permission in writing from the Americas Society and the Council of the Americas.