In Defense of the Mexican Reforms

Samuel George on EPN one year in

PRIzus

As a wiser man than me once said, haters gonna hate.

And when it comes to Mexican President Enrique Peña Nieto’s ambitious reform package, hate they most certainly have. Mexican conservatives hate the fiscal reform. Mexican leftists hate the energy reform. In Washington the trendy thing to say is that the reforms didn’t go far enough, presumably because everyone in Washington gets their opinion from The Economist, and The Economist said that the reforms didn’t go far enough.

Now, far be it from me to discourage hating on an elected official. Its like booing at a football stadium–it comes with the territory. And up through his election, I was very suspicious of EPN. I worried that he represented a pretty face covering up for the same old PRI—a flashy salesman convincing folks to buy something they already had and didn’t like. Lipstick on a PRInosaur, so to speak.

A little over a year later, much still remains to be seen. But for the moment, at least for the holiday season, I am off the haterade.

In his first year as Mexico’s president, Enrique Peña Nieto has attempted to make up for decades of reforms deferred.

It is an intensely political process, but the future of the Mexican economy hangs in the balance. Simply stated, Mexico cannot unleash its economy until the country addresses the bottlenecks that protect vested interests but preclude market sophistication. With an underperforming energy sector, inefficient taxation and stifling private-sector monopolies, Mexico needed a reform package with punch.

Long resilient to reform, Mexico finally broached economic modernization and global integration in the early 1990 during the Carlos Salinas presidency (1988-1994). Through reduced tariffs, deregulation, and pursuit of a NAFTA, Salinas’ efforts positioned Mexico to become a global manufacturing hub.

But the reforms proved incomplete. In particular, the service sector—goods unaffected by opened borders—survived the reforms with inefficiencies intact. In some cases, the reforms made these inefficiencies worse: The 1990s privatization of Telemex, a telecommunication conglomerate, created monopolistic conditions that helped launch businessman Carlos Slim to status as the world’s richest man.

One reform, two reform, three reform, four

Through his Pacto por México agreement of December 2012, Peña Nieto brought the PRI, PAN and PRD together to outline a broad and ambitious agenda that featured energy, fiscal, banking, education, telecom, and political reforms.

Energy reform, the most important and controversial of the package, could hold the key to unlocking Mexican growth. Between offshore oil and shale gas, Mexico has the resources for an energy revolution, but PEMEX, the nationalized energy giant, lacks the capacity to exploit either.

The current status quo threatens Mexico’s hard-fought foothold in global manufacturing.

Despite massive shale gas reserves, PEMEX has been unable to meet spiking domestic gas demand. With pipelines from the US already operating at capacity, the result has been increased gas prices in Mexico just as prices in the US have hit record lows. Inefficiencies in the Mexico’s state-owned Federal Electricity Commission have also led to industrial bills roughly twice the size of their US equivalent (The Economist told me that).

Left-leaning Mexican media on EPN

The bloated energy costs in Mexico eat away at the price advantages Mexico hopes would entice US outfits to relocate south of the border. A successful energy reform could attract the international investment needed to unleash the energy revolution in Mexico’s manufacturing sector.

As one prominent business recently told me in Mexico City, without energy reform, Mexico might as well de-industrialize.

The reform process has not been entirely smooth. Conservative PAN factions and business leaders remain bitter over the fiscal reform spearheaded by the liberal PRD, which they believe extends the depth of duties paid by the existing tax base without increasing the breadth of the tax base. Meanwhile, the liberal PRD ultimately left the Pacto por México in November 2013, objecting to PAN leadership in energy reform.

Moreover, the reforms are no fait accompli, but rather a multistep legal and political process that can be ambushed by protests that bring Mexico City to a grinding halt or by the vested interests willing to fight tooth and nail—or to grease the wheels—in order to protect their privileged positions.

Nevertheless, Mexico’s bipartisan reform momentum reflects maturity unique to the region.

President Peña Nieto may be the movement’s figurehead, but these are not populist proposals. Rather, they are based on lengthy deliberations between the leading parties. The international press might call this process “horse trading”, but for Mexico—a one-horse country for much of the last century—it is evidence of a burgeoning democracy.

The estimated growth stimulus stemming from the reforms may not be overwhelming—Banco de México pegs it at around 3 percent over the next years—but this is not a ‘get-rich-quick’ scheme. Rather it is a concerted effort to create the institutional foundation required to support of the weighty potential of the Mexican economy.

In short, EPN needed to ruffle some feathers. As with any major reform, especially in a large country (*cough* *cough*), it is absolutely impossible to get everything perfect right off the bat. It is a process, and if nobody is hating, you are probably not doing it right.

Or as, a wiser man than me once said, “if they aint hating, start worrying then.”