Mexico’s Economic Policy: Latin America’s Other Story

A brief introduction

 

Commodity exporters had profited from the price boom that occurred over the last decade, but the recent fall in demand amid the global financial crisis hit their economies and unleashed a series of concerns. That is particularly the case in some countries in Latin America, such as Brazil, Argentina, Ecuador, and Venezuela, where deep structural problems will make them more vulnerable amid a weak global environment.

As a result, policymakers in the hemisphere are urged to carry out much-needed reforms, as they will face slowing growth and increasing demands from new constituents. The type of adjustment they embrace will be a result of geopolitical and domestic factors, such as the geographical position, the political capital of incumbents, and the economic structure.

Most emerging economies will transition to different economic models, as the developed world fails to provide a consistent path towards growth. Latin America, a region historically under the influence of the US, would probably continue to embrace a state-led economy, and seek protectionism to defend domestic interests.

Highly misread by many analysts, Mexico will adopt a different response to global economic slowdown, especially at a time when its pro-market economic model and location is starting to pay off. The economy of Mexico is again in a different phase of the business cycle relative to other countries in Latin America, and is growing stronger despite the crisis in the developed world.

The extent to which Mexico is capable to maintain this trend will depend on the new government’s ability and willingness to advanced long-postponed reforms and on the economic recovery of its northern neighbor. It will be critical to determine whether the country is ready to lead a new trend in the Americas and become a relevant strategic partner to the US, a country that could find solutions to its domestic economic problems by formulating a more proactive relation with Latin America. 

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Mexico’s new president will likely secure important economic reforms

Mexico could be on the verge of significant structural economic changes thanks to the recent election of President-elect Enrique Pena Nieto of the Institutional Revolutionary Party (PRI). His election comes after 12 years during which two successive presidents from the National Action Party (PAN) failed to secure much needed reforms thanks to stonewalling by the PRI in congress.

Pena Nieto, however, signaled his willingness to push ahead with changes by supporting the labor reform presented to the national congress by the outgoing President Felipe Calderon. Congress approved those reforms in mid-October, though vested interests close the PRI forced a significant dilution of the original reform. That same group will also be the biggest obstacle for other changes to the economy.

Pena Nieto’s incentives to pursue much-needed reforms are shaped by three main realities. Mexico needs to create more jobs and the government wants to accelerate growth during the global economic slowdown. In addition, the country’s growing middle class will encourage policies that focus on growth and the provision of additional services. Finally, growing competitiveness and macroeconomic stability will further support expansion of the current economic model.

Mexico strong rebound after the global crisis attests to strong fundamentals and skillful policy management, but additional jobs for the growing population are still a priority. The need to spur job creation puts enormous pressure on Pena Nieto, and the other major political parties to unlock the country’s economic potential.

Those concerns are also reflected in the evolving makeup of Mexican society and the growing strength of the middle class. The new middle class values stability and demands more accountability from the government and is critical of the failure to ensure stronger economic growth and reduce inequality. A stronger middle class will also impel Pena Nieto to distance himself from the PRI’s old guard in order to ensure the credibility of his government. The pressure to reform the PRI and its links to vested interests will grow as the middle class organizes itself as an effective social force.

Macroeconomic stability and growth, as well as personal preferences from the new president, are the final set of factors that could help cement liberal and pro-business economic policies. After about 15 years of reforms from PRI technocrats starting the middle 1980s, the PAN won the presidency in 2000. But the victory was soon overshadowed by obstructionist policies from the PRI’s old guard during two successive PAN presidencies that effectively blocked any additional reform. Those changes now finally seem to be paying off as wage inflation in China, higher energy costs, and proximity to the US help boost Mexico’s exports.

But the PRI’s old guard, which maintains ties with traditional interest groups, will be a major challenge for Pena Nieto. Breaking with a powerful segment of the PRI is politically too costly and ineffective. If Pena Nieto is to win congressional approval for much needed reforms, he will have to rely on a mix of young technocrats and veterans from the PRI, the grudging support from the center-right PAN, and finally the small Green Party. That coalition could also be big enough to provide the two-thirds majority needed to change the constitution. Pena Nieto has picked two PRI veterans, Manlio Fabio Beltrones and Emilio Gamboa, to keep the PRI’s congressional faction in line, while the government agenda is overseen by a top aide, the reform-minded economist, Luis Videgaray.