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As
appeared in the Summer/Fall 2000 edition of "Trade Trends"
(Washington International Trade Association) and in the Women in International
Trade Summer 2000 Newsletter.
Historic
Elections Boost Mexico’s Position as World Trade Leader
Katja
S. Newman
Manager,
Latin American Consulting Group
Recent
presidential elections solidified Mexico’s role as a democratic country and
as a world trade leader. Typically, such historic transitions cause political
instability and economic uncertainty in Latin America, but in Mexico, the
outlook for U.S. policy makers and international businesses is optimistic.
The
Historic Transition
The
July 2, 2000 elections consolidated two decades of ongoing economic and
political reforms in Mexico as citizens voted to end the Institutional
Revolutionary Party’s (PRI) 71-year rule. Vicente Fox, candidate for the
National Action Party’s (PAN) Alliance for Change, convinced voters that an
opposition candidate could run the country, ensure stability, and bring change
for the better.
President
Ernesto Zedillo also deserves much credit for Mexico’s political and
economic development. He assured Mexicans of a peaceful transition, despite
worries that the PRI would not give up power easily. In addition, Zedillo
guided Mexico to its current macroeconomic success and further opened the
country to international trade. Fox promises to continue Mexico’s trend
toward economic liberalization and free trade.
Mexico’s
historic transition to its new government began immediately. Fox, a
businessman-turned governor, met with Zedillo the day after the elections to
discuss plans for a smooth transfer of power on December 1, 2000. The change
will undoubtedly be difficult. However, the overall transition will be
peaceful, and Mexico’s political and economic stability is expected to
continue.
Political
Considerations
To
date, Zedillo and Fox appear committed to a smooth transfer of power without a
major reshuffle in the bureaucracy. Fox responded to Zedillo’s pledge to
work with the new government with a promise to include members of the PRI in
his administration. Fox also pledged to replace only senior government
officials. Such changes would have taken place in a transition between two PRI
governments as well.
This
election also furthers Mexico’s evolution as a multi-party democracy. Fox
must work with the PRI in opposition, as well as the Democratic Revolutionary
Party (PRD) and other smaller parties, and reach compromises to govern, as no
party won a majority in either house of Congress. This is not completely
unprecedented. There has not been a majority party in the Congress since 1997
– the parties have worked together previously to pass legislation. Fox also
faced an opposition Congress as Governor.
Observers
expect he will be able to forge agreements on such important legislation as
the budget, much-needed bankruptcy law reform, and improvements to the
judicial system. However, on issues such as labor reform and privatization, he
will encounter difficult opposition from PRI hard-liners and leftist PRD
members.
The
future of the PRI is uncertain. A division of the party would not be
surprising. The PRI lacks a unifying ideology and has survived on its ability
to grant patronage over the past several decades. In a sense, its ideology was
to remain in power. Having lost the presidency, its greatest source of power,
the traditional PRI is destroyed. However, the party still controls the second
largest voting bloc in Congress and governs 20 states.
Depending
on how the PRI reorganizes itself, Fox could eventually face negotiations with
two PRI blocs instead of one party. He could even face negotiations with
individual legislators rather than unified blocs. Either way, this will
complicate governing.
Fox’s
Economic Agenda
Fox
largely promised to continue with the Zedillo Administration’s economic
reforms and fiscal discipline. Mexico’s robust economy leading up to the
elections assured citizens that it was safe to vote for change. Reforms over
the past five years have led to economic growth, a declining inflation rate,
and record foreign-exchange reserves. Fixed foreign investment has largely
replaced volatile portfolio investment. Due to these reforms and budget
austerity, Mexico recently won Moody’s "investment grade" rating.
Fox
will likely use his business-oriented style to govern Mexico. He has indicated
he will recruit several advisors from the private sector. His ambitious
economic agenda includes the following goals:
-
fight
corruption and strengthen the rule of law.
-
adhere
to strict financial discipline, balance the budget, and provide more
autonomy for the central bank.
-
support
the central bank’s goal to cut annual inflation to three percent by
2003.
-
achieve
seven percent annual economic growth by doubling foreign investment
(currently at an already high average of $11 billion) and providing jobs
programs (including micro-lending programs and foreign trade advice).
-
create
1.3 million jobs per year.
-
nearly
double spending for public education.
-
deepen
free trade agreements and work toward a common market with North America
(long term).
Mexican
stocks soared on the news of Fox’s victory. In addition, the president of
Mexico’s Central Bank, Guillermo Ortiz, who is well-liked by Wall Street,
will likely remain in his post through 2003.
A
temporary slowdown in economic growth during the transition between
governments is possible. However, overall economic conditions are favorable
enough that Mexico will likely avoid the historic "sexenio curse" of
economic crises that follow presidential elections every six years.
Fox’s
victory created new hope. He faces high expectations from Mexicans who seek
change and economic improvement from their new government. To achieve this,
Mexico requires significant foreign investment and new jobs, which Fox has
promised to provide.
International
Trade Relations
Mexico
has become a world leader in free trade agreements (FTAs) in the last five
years. During Zedillo’s Administration, Mexico entered FTAs with almost 30
countries and continues negotiations with several more, including Singapore,
Japan, and the Mercosur bloc. In 1999, exports accounted for nearly 30 percent
of Mexico’s gross domestic product, up from 13 percent in 1993. The topic of
free trade agreements received little public opposition during the election
campaign.
The
network of free trade agreements negotiated under the Zedillo Administration,
including the recently initiated FTA with the European Union, has become a
foundation of Mexico’s economic policy. The agreements anchor Mexico’s
economic reforms, making it extremely difficult to revert to a closed economy.
The next administration has little choice but to continue with the trade
opening created by the Zedillo government.
Fox
advocates stronger trade relations, but he faces a major challenge. The
benefits of free trade are immediately clear for exporting businesses.
However, the benefits are only slowly reaching domestic-focused companies and
the poorer classes. Fox must address this issue immediately, as Mexicans
increasingly object to worsening income disparity.
Investment
Opportunities
Privatization
of Pemex, the state-owned petroleum company, was a controversial issue during
the July election campaign. Fox believes in liberalization of the energy
sector and offers hope of Pemex being opened to foreign investment. However,
due to political obstacles, Fox will likely adopt a long-term, incremental
strategy for opening Pemex. It is likely that the petrochemical sector will be
the first to open for foreign investment.
Other
Mexican industrial sectors will receive more immediate attention from the Fox
Administration. The electricity sector will likely see privatization efforts
in the near future, because of the desperate need to modernize and update
Mexico’s electricity service. In addition, the automotive and electronic
industries will continue to attract major investment opportunities.
It
remains to be seen if Fox will address Mexico’s foreign investment law,
which requires 51% Mexican ownership in a company. Many U.S. companies are
wary of owning only 49% and exercising minority control.
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