Global Observer

Can Mexico live up to its economic promise?

Can Mexico live up to its economic promise?

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MEXICO CITY -- The country is struggling to reform itself to spur growth, but there are challenges ahead -- and Mexicans are anxious for real results.


MEXICO CITY -- The world's frothy expectations for Mexico have fizzled since the start of the year.

Investors worldwide saw in Mexico a new global economic darling when the reform-minded administration of Enrique Pena Nieto returned the country's Institutional Revolutionary Party, or PRI, to power on December 1. Optimism over structural reforms including education, telecommunications and energy, and taxation underpinned the widespread predictions that Mexico was the new Brazil.

Such lofty expectations have been scrapped, at least for this year, as external and internal factors have held Mexico back.

The U.S. economy has yet to pick up the speed needed to spur growth in Mexico, which exports 80 percent of manufactured goods to its northern neighbor. Meanwhile, the ongoing financial crisis in Europe hasn't helped, either.

Domestically, Mexico remains hampered by entrenched structural issues including high levels of informality, weak market competition in important sectors and low wages that prevent internal consumption from driving growth, says Alejandro Villagomez, an economist with the Mexico City-based Center for Research and Teaching in Economics, or CIDE.

"All these elements have come together to create a very, very weak year," he said.

Mexico's finance secretariat has slashed its outlook twice this year, from 3.5 percent to 3.1 percent in May and, in August, to 1.8 percent. The GDP expanded an anemic 0.6 percent in the first quarter and 1.5 percent in the second, according to Mexico's statistics agency INEGI.

Those numbers have been a reality check both for the administration -- which had successfully promoted the Mexican growth story from a PR standpoint -- and for global investors.

Mexicans "don't care about the message but about the goods, so to speak," said Carlos Bravo Regidor, a professor of political science at CIDE. "There is a lot of impatience to change the country."

To that end, the president also announced this month a $2.1 billion stimulus package that will target infrastructure, consumer credit and the housing sector in an effort to kick-start greater growth.

Meanwhile, the government's ambitious reform agenda aims for nothing less than transformation -- and Pena Nieto repeated variations of that word no less than 17 times during his first state of the union speech in early September, nine months into his presidency.

"I will respect the rights of all, but I'm also committed to using all the instruments of the democratic state to drive the transformation that the great majority of Mexicans demand," he said.

A pact among Mexico's three top political parties helped Pena Nieto push through controversial reforms of the education system and telecommunications industry, including tougher competition laws, already this year. Now, as he tackles the toughest reforms of his agenda -- of the energy industry and tax system -- he is facing a massive backlash from the powerful teacher's union as well as the potential for similarly debilitating protests against the proposed energy reform.

"The political reality is that the honeymoons always wear off," said Eric Farnsworth, vice president of the Council of the Americas. "The reform agenda is so immense that it was obvious that affected parties would try to claw back some of the protections that they had."

Since late August, tens of thousands of unionized teachers have flooded the streets of the capital on an almost daily basis, snaggling traffic and even blocking road access to the international airport. They camped out in Mexico City's historic Zocalo square until the Pena Nieto government evicted them ahead of the country's independence day celebrations in mid-September.

Thousands of the teachers have set up camp elsewhere in the city and continue their marches, while thousands of other teachers are striking in their hometowns. An estimated one million children, especially in southern Mexico, have been without classes for more than a month.

Sensing the potential for opposition to reforms to spread and recognizing the effect it would have on spending, the administration curbed its goals for fiscal reform and did not proposed a value-added tax on food and medicine as had been expected. Instead, Pena Nieto unveiled a plan that would raise taxes on companies and Mexico's higher earners and would raise the preferential value-added tax rate in the border region to the national 16 percent rate.

The energy reform, too, is being debated in congress. Key is the government's proposal to permit profit-sharing contracts, which would allow for private investment in exploration, production and refining in partnership with Petroleos Mexicanos, the national oil monopoly better known as Pemex. Keeping Pemex in the mix, and not permitting foreign oil companies to book reserves, has allowed the administration to skirt accusations from the left that the reform would privatize the company that is a national symbol of sovereignty. It remains to be seen whether the proposed scheme will be enough to lure foreign oil producers.

The reforms are a promise for future growth, but Edna Jaime, director of Mexico City-based think tank Mexico Evalua questions whether the government is doing enough to ensure growth in the short term, given that Mexico has already endured 2 percent annual growth on average for a decade.

"I think the government should wager on the reforms but it also has to deal with the day to day," she said. "How do you manage these months that could turn into years?"

Photo top: Flickr/Lidia Lopez
Photo bottom: Flickr/Eneas de Troya

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Lauren Villagran

Correspondent (Mexico City)

Lauren Villagran has written for the Associated Press, Dallas Morning News and Christian Science Monitor. She holds a degree from the Medill School of Journalism at Northwestern University. Follow her on Twitter. Disclosure