Mexicos New Leader Essay, Research Paper

As a new president prepares to take power in Mexico, the biggest economic news is what’s not happening. The peso is not plummeting, investors are not panicking, and people are not suddenly paying more for their tortillas or televisions. Given recent history, this is a small miracle: every presidential transition in the last two decades has been scarred by an economic crisis. Instead of fears, there are great hopes, all raised by the next president, Vicente Fox Quesada. Mr. Fox now must institutionalize the stability he has inherited. He has pledged sweeping tax and fiscal reforms, annual economic growth rates of up to 7 percent, millions of new jobs, a stable economic architecture for foreign capital, private investment in the state-run oil industry and competition in telecommunications. He also promises budget austerity, increased social spending, the rise of the rule of law, and an end to ingrained political corruption.

Mexico is still very much a developing nation. Reliable electric power and potable water are sometimes hard to find. In the capital, one of the world’s most populous and polluted cities, the elite live behind barricades, protected from the impoverished by armed guards. Middle-class Mexicans have less buying power than they did 20 years ago, and some of the biggest banks are shaky from a legacy of bad loans. Many small businesses are threatened by imports, credit is difficult to obtain, and millions of people scrape by on less than $2 a day.

The departing president, Ernesto Zedillo, never addressed the huge structural problems of the state-run energy industries, which are inefficient and suppress competition, or of the justice system, which cannot control crime – a serious worry for foreign companies considering operations here even if they are optimistic about Mr. Fox. “He’s going to have his hands full,” said Peter E. Weber, vice president of Latin American operations for the FMC Corporation, a Chicago- based industrial and chemical company that does extensive business in Mexico. “Fox will have to address the crime situation, which has an impact on attracting foreign investment. There’s an awful lot of work to be done in the micro-economy, the ability of industry and agriculture to compete on a global scale, improving the quality of education” (Burton).

Yet Mr. Zedillo has enabled Mr. Fox to come to power in a Mexico that looks – on paper – economically stronger than ever. Real growth rates have averaged 5 percent for the last four years. Driven by the North American Free Trade Agreement, Mexican exports to the United States have grown from about $60 billion in 1995 to more than $100 billion in 1999. Richard W. Fisher, the deputy United States trade representative, estimated that two- way trade between Mexico and the United States is running at the equivalent of more than half a million dollars a minute. At its current growth rate, it will exceed the trade between the United States and the European Union by 2004.

President Zedillo, an economist trained in the United States, took office in 1994, inheriting and in some cases aggravating a series of financial shocks that staggered Mexico, including a banking crisis that may wind up costing citizens $100 billion. But he is in many ways keeping his pledge two years ago to hand over the presidency in healthy economic conditions, protected from the crises that have ruined the country over the past 20 years (Flores). Some of the success has to do with the trade and economic policies that Mr. Zedillo instituted during his first three years in office. Some has to do with what he was handed: namely, Nafta. Mexican government figures show that export growth generated by the free trade agreement accounted for nearly half of the 3.3 million jobs created in Mexico in the last five years.

But nothing that Mr. Zedillo has done for Mexico economically may be more important than the way that he is giving up power. He became the first president of Mexico to create the conditions for truly free elections and a democratic transition of power. For decades, the economy, like every other institution in Mexico, was manipulated by the ruling Institutional Revolutionary Party (PRI). Every six years, each president played tricks to help his hand-picked successor win – artificially strengthening the peso, increasing the money supply, lowering interest rates, handing out a nationwide wage increase shortly before election day (Mari). This is especially relevant to the economy under the Salina s administration.

The party kept power, but the economy kept crashing, undermined by the previous administration’s acts of self-interest. Mr. Zedillo, mindful of that history, strove to make the economy more institutional than individual. He never took on some sacred cows – like state-run oil and state- sanctioned barriers to competition – and thus never fully transformed Mexico’s centralized economy into that of a modern market-driven nation. But when he gave independence to Mr. Ortiz and the central bank in 1997, Mr. Ortiz turned the central bank into a stabilizing power. “The central bank’s independence, as an institutional counterbalance to the presidency, was also a deliberate erosion of the power of the presidency,” said Gray Newman, the head of the Latin American economics group at Morgan Stanley Dean Witter in New York (Robinson).

Mr. Fox, 58, cuts a rougher figure than his courtly predecessor. A Reaganesque rancher, wearing cowboy boots engraved with his name, he has little formal background in economics. By instinct and training from his days as president of Coca-Cola of Mexico, he sold himself to Mexico like a soft drink. He is a delegator, with deep faith in corporate management techniques. He has promised that the economy will grow by up to 7 percent a year– although he is now hedging on that bet. (G.D.P. grew at an annual rate of 7.6 percent in the second quarter, fueled in part by windfall revenue from Mexican oil exports, but Merrill Lynch’s and J. P. Morgan’s economists are predicting Mexico’s growth rate will slow to 4 percent in 2001. He has also pledged to create 1.35 million jobs a year, spend millions to fight illiteracy, poverty and disease, and to institute the first coherent tax- collection system that Mexico has ever known. But during the long transition, Mr. Fox – who has yet to name a cabinet – has also failed to say precisely how he will accomplish all this.

Mr. Fox has some other ideas as well. One is his vision of the United States, Mexico and Canada united in a common market, their borders mere lines on the map, a generation from now. Another is breaking down corrupt structures in banking, finance, real estate and political circles. He expresses high regard for the Grameen bank, the Bangladeshi institution that pioneered credits for the poor, and he promises to help Mexico’s farmers and shopkeepers with loans. As the governor of the state of Guanajuato in 1995, Mr. Fox himself started such a bank, granting credits of $50 and up. He wants to enforce tax collection from the rich, something that Mexico does poorly. Tax revenue is equal to only 11 percent of Mexico’s G.D.P., compared with 30 percent in the United States. The low level of tax collection means that the government can do far less to help the 30 million or more Mexicans living below the poverty level (Gomez).

One key to Mr. Fox’s success will be whether he can open Mexico’s electrical and petrochemical sectors to foreign investment and change the nature of Petr leos de M xico, known as Pemex, the state-run oil and natural gas company, to allow more competition. Such a shift would diminish Mexico’s financial reliance on Pemex, which provides about a third of the government’s annual revenue. Some members of Mr. Fox’s circle – including people vying to become cabinet ministers – have suggested that Pemex have more autonomy and that the entire energy sector, including the ragged electric-power grid, be opened to private investment (Flores). Mexico is the last large nation in the Western hemisphere without private-sector power. The departing administration’s top energy officials say Mexico would have to amend its constitution to allow private investment in electricity. And restructuring Pemex would be a radical change for Mexico, which nationalized the oil industry in the 1930’s.

But if Mr. Fox wants to meet his economic goals, he may have to change the way energy is produced and sold in Mexico. Demand is outpacing the supplies provided by state-run monopolies. To meet demand, $5 billion a year in new investments in electricity and $2 billion a year in natural gas may be needed for the next decade. “Everything starts with the need for economic growth, and to get it you need to make the energy sector more productive, and to do that you have to open it up to foreign investment,” said Daniel Yergin, chairman of Cambridge Energy Research Associates, a petroleum consulting firm in Cambridge, Mass. (Sanchez). You have to get the gas and power from somewhere, afterall.

Mr. Fox has said he will push Congress in the coming year to open up the electricity and natural-gas markets. Not everyone is confident that it can be accomplished so soon. “We are very eager for the new administration, to see the new rules of the game,” said Jean Noel Mesnard of Gaz de France in Mexico. “Providing natural gas for Mexico is going to be a big question in the coming years, and opening it up to private operators would be a good solution” (Sanchez). The lack of affordable energy already is threatening some businesses, like iron and steel manufacturers, which laid off hundreds of workers in September after natural-gas prices shot up.

“The root of the problem is that we have a monopoly here,” said Mr. Elizondo, the Hylsamex chief executive, who is also chairman of Mexico’s iron and steel industry council. “There’s only one supplier of natural gas, and that’s Pemex (Hernandez ). The most important thing is to do away with the monopoly, open up the industry to private investment, local and foreign, and allow market forces to freely do their work.. Mr. Fisher, the deputy United States trade representative, said he is convinced that Mr. Fox “believes that competition is good and monopolies are bad.” He understands, as a business guy, that to take Mexico to the next stage of growth, he’s going to have to put in place structures that enhance competition and encourage foreign investment,” Mr. Fisher said (Burton).

Making rich and powerful Mexicans pay their taxes and obey the law would also help. Mexico did not invent impunity, but after 70 years of often corrupt one-party rule, it has made an art of it. A contract signed with a powerful person in Mexico may not be a legally enforceable document, one member of Mexico’s business elite observed. That is what the middle-class, educated people who helped put Mr. Fox in power voted for. In the election, the freest and fairest in Mexico’s history, one of Mr. Fox’s strongest assets was who he was not: not a member of the political ruling class, not weighed down by its often sordid past. He is already a historic figure: the man who drove the world’s longest-ruling party from power after seven decades. Amid great change, the country feels stable, and its economy looks strong for the moment. But Mexico is a land of earthquakes, and if Mr. Fox cannot keep his promises when he is in power, the ground may well shake before he leaves office in 2006.