'A Capacity to Act': CFR Prepares USA for Mexico's Election

First Part: Reviewing the Past

The victor in Mexico’s July 2, 2006, presidential election faces many of the same domestic policy challenges as his predecessor—fiscal dependence on volatile petroleum revenues, enormous pension liabilities that expand with Mexico’s aging population, insufficient investment capital in the energy sector, declining global competitiveness, weak job creation and growth, corruption, inadequate rule of law, and increasing crime. How these problems are addressed during the six-year tenure of the new president will determine Mexico’s economic and political course well into the future. The main contenders for the Mexican presidency present a fairly broad array of programmatic solutions to Mexico’s challenges, ranging from continued heavy reliance on the free market to a more activist state that promotes and regulates private economic activity. Rarely have Mexican voters been able to make such an important choice about the future course of their nation. The stakes for the United States in this election are large as well. Finding a solution to the immigration question inevitably involves Mexico. A politically and economically stable Mexico is necessary to manage the flow of Mexicans into the United States, coordinate binational efforts to fight drug trafficking, and resolve a long list of border issues. A stable Mexico plays an important role in fostering U.S. national security. And a stable and prosperous Mexico can contribute significantly to U.S. efforts to ensure its energy supplies and to enhance the global competitiveness of important sectors in the U.S. economy.1 The United States has also come to rely on Mexico as an important ally in trying to secure a hemispheric free trade agreement and mitigating the efforts of Venezuelan President Hugo Chávez to build an anti-U.S. block of Latin American states. The outcome of the 2006 election will determine the tenor of U.S. relations with its southern neighbor and will therefore place Mexico squarely at the center of both the U.S. domestic and foreign policy agendas.

As investment capital returned to Mexico, encouraged in part by the North American Free Trade Agreement (NAFTA), which institutionalized Mexico’s opening to the international economy, Mexico’s political leaders lauded the resulting spurt in economic growth as clear evidence of the success of their market-based strategy. Unfortunately, many Mexicans blamed the ensuing collapse of the peso in 1994–95 and its associated economic crisis on the very same economic strategy. A 7 percent drop in economic activity in 1995, an increase in unemployment, and the spectacular and costly failures of the recently privatized banking and highway systems soured Mexicans on privatization and reinforced the position of politicians who opposed the “neoliberal” economic model. When the opposition took control of the Congress in the 1997 midterm elections, economic reform ground to a halt, leaving behind a broad array of structural weaknesses in the Mexican economy that today threaten the country’s capacity to generate growth and jobs.

Before the 1990s, Mexican foreign policy was based on broad principles—self-determination, nonintervention, and the peaceful resolution of disputes—rather than specific national interests. This policy focus made pragmatic sense for a country that lacked the capacity to stop great powers from meddling in its internal affairs. It also was feasible because Mexico’s insular model of economic development created very few economic interests that needed protection in the international arena. The opening of the Mexican economy to international trade, however, created Mexican national interests that could be protected only by engaging the international community, including the need to ensure access to markets and to protect domestic producers from unfair competition. Since the vast majority of Mexico’s international economic interactions involved the United States, foreign policy innovations focused on its relationship with the United States.

The deepening of these bilateral ties, however, was hindered by domestic opposition in Mexico and the 1994–95 economic crisis. Important segments of the Mexican populace were never comfortable with this new foreign policy focus. Many in the political and intellectual elite, the media, and the urban middle class believed this institutionalization of Mexico’s dependence on the United States was a mistake. NAFTA’s role as the symbol of the new U.S.-Mexico relationship and its association with Mexico’s broader economic opening also made the country vulnerable in the aftermath of the 1995 economic crisis. The crisis weakened the president, forcing him to choose his political battles carefully. Although President Zedillo solidified the bilateral cooperation established by his predecessor, he downplayed the significance of these cross-border ties and did little to promote their expansion or formal institutionalization.

In the economic realm, the country deepened and institutionalized previous policy advances rather than adopting additional measures to ensure future growth and democratic stability. Consequently, the competitiveness of the Mexican economy fell steadily over the past five years. (Mexico surrendered its position as the number two exporter to the United States to China.) The country is still unable to generate more than a fraction of the formal sector jobs needed to absorb new entrants into the job market. The underlying causes of these economic problems are weak investment in human and capital infrastructure and inefficiencies in the country’s energy and labor sectors. Mexico has not yet implemented fiscal reform to increase tax collection, which remains one of the lowest rates in the Western Hemisphere, 11 percent of gross domestic product (GDP). Such a move could generate the funds urgently needed to finance investments in human and capital infrastructure while reducing the government’s dependence on volatile petroleum revenues. Nor has it undertaken changes to the national petroleum company, Pemex, in which declining production and a profound shortage of investment capital threaten the economic viability of a firm that generates a quarter of Mexican exports. Finally, Mexican labor law has not been revised to allow for the increased flexibility characteristic of modern labor markets and to encourage uni*n democracy and transparency in order to eliminate the traditional practice of Mexican uni*n leaders enriching themselves at the expense of workers and economic efficiency. The pension liabilities of the Mexican government, meanwhile, are already greater than the country’s GDP and growing rapidly.

The culprit was a series of structural and transitory factors that undermined governability throughout the Fox administration. Understanding the nature of these obstacles, and particularly the balance between the structural and the more transitory barriers to effective governance, is essential to determining their probable long-term impact. As the last five years have demonstrated, it is not sufficient to propose viable technical fixes to Mexico’s political and economic problems; they also require the political capacity to act. The impact of the 2006 elections on Mexico and U.S.-Mexico relations, therefore, depends heavily on the policymaking environment that will greet the new president, how it interacts with his particular policy preferences and political skills, and his consequent ability to deal with Mexico’s pending reform agenda. Excerpts from Pamela K Starr’s June 17 Report from the Council on Foreign Relations(2005)

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