Mexico

With vote-buying allegations swirling around Mexico’s last presidential race and new ones appearing in the aftermath of the recent local contests, electoral reform could reappear on the congressional agenda. Front running the debates, the Centro de Estudios Espinosa Yglesias (CEEY) brought together a distinguished group of well-known academics such as María Amparo Casar and Javier Aparicio, former IFE (the Federal Electoral Institute) officials Benito Nacif Hernández and Luis Carlos Ugalde, and well-regarded pollsters Francisco Abundis Luna and Ulises Beltrán Ugarte among many notable others to evaluate Mexico’s current electoral system, and particularly to look at the issues of campaign financing. Off the books campaign donations and spending are nothing new in Mexico. The PRI “secretly” siphoned money from PEMEX and other state owned companies to fund their candidates for decades, and groups such as the Amigos de Fox—who backed the PAN’s Vicente Fox in the 2000 election—blatantly circumvented regulations. The latest allegations—including SorianaGate, where voters were allegedly given prepaid cards to Soriana stores in exchange for PRI votes and accusations of misusing funds from the national public social welfare program Oportunidades for political aims—are but variations on long-running themes. The current electoral laws, put into place in 2007 after the contentious 2006 presidential election, dramatically altered the way political campaigns can legally be financed. The formula for public funds given to political parties now depends on the number of Mexicans registered to vote times 65 percent the capital’s minimum wage (totaling some US$280 million in 2013--but more in election years). Of this amount, 70 percent is allocated according to the number of votes a party receives during the previous congressional election, with the other 30 percent is shared equally among all registered parties. This makes winning seats doubly important, as it shapes both political power and future funding. The guidelines for private contributions are even stricter, limiting donations to 10 percent of the money spent in the previous presidential campaign (roughly US$2.6 million using 2012’s election numbers). The problem today, according to CEEY’s report, is not as much the rules as the enforcement. One of the biggest issues is that the Auditing Unit of the Federal Electoral Institute (IFE), which is charged with policing elections, doesn’t have the tools necessary to truly monitor the campaign financing process. Some scholars estimate illegal campaign contributions at more than four times the legal amounts. In my own private discussions with close observers of the process many suggest that spending in last year’s presidential race broke the US$1 billion mark. The study recommends that the IFE shift its focus to expenditures rather than donations (as the former are more traceable), and concentrate on problematic areas such as local media coverage and vote buying (which have increased in recent years due to stiffer competition). They also argue for auditing media coverage in real time, instead of relying on reports submitted months later, to not just stop egregious behavior but also raise its costs. And for those parties and candidates that do flout the rules, the CEEY experts recommend much more punishing financial and political sanctions, and even the threat of annulling the elections. Passing an electoral reform won’t be easy. Mexico’s academics and experts have agreed for years about the need for reforms without much success. But as part of the Pact for Mexico, electoral reforms could be tied into a larger negotiation for the economic changes that the Peña Nieto government has championed. If successful, such reforms would make a long-term difference in leveling the electoral playing field and consolidating Mexico’s democratic gains.

Mexico faces many challenges in improving its overall competitiveness. In an opinion column in today’s Financial Times, I argue that investing in the country’s infrastructure will be a vital step for creating a more competitive future. Take a trip to see the famed monarch butterfly’s winter grounds, one of Mexico’s most prized tourist destinations and a Unesco world heritage site, and the desperate straits of Mexican infrastructure come into full view. The first stretch of the trip from Mexico City to the western state of Michoacán begins smoothly enough. But once you turn off the main highway, the potholes multiply, slowing drivers to a crawl. On reaching the final road to the butterfly sanctuary, only the sturdiest of vehicles can pass, forcing visitors to hire local drivers for the four-mile, 45-minute drive along the narrow dirt road, steering hard lefts and rights to miss the huge potholes and other obstacles along the way. Though just one hundred miles from Mexico’s capital, it takes nearly four hours to reach the site. This trip is not an anomaly. According to the World Bank, less than 40 percent of Mexico’s roads are paved, unchanged over the last decade. To read the rest of the article, click here.

My colleagues in CFR’s Civil Societies, Markets, and Democracy Initiative have just released a new book, Pathways to Freedom: Political and Economic Lessons From Democratic Transitions, which highlights eight countries’ (Mexico, Brazil, Poland, South Africa, Indonesia, Thailand, Ukraine, and Nigeria) transitions from authoritarianism to democracy. Each chapter analyzes the economic and social factors behind the countries’ historical transformations, with many interesting trends emerging across the different states (you can also read a distilled version of the book’s “lessons learned” here). In the Mexico chapter, I outline how economic shifts and gradual reforms helped open the country’s political system and slowly strengthen institutions. And although many challenges remain, Mexico has come a long way from its one-party-rule past. Overview Though better known for its struggles with corruption and violence, Mexico has also undergone significant political and economic transitions. Controlled for decades by the Institutional Revolutionary Party (PRI) through an authoritarian political system, the country is now a democracy. Its economy, once largely closed and dominated by oil, has become one of the world’s most open, and is increasingly a global manufacturing powerhouse. Finally, years of economic change and macroeconomic stability have enabled a growing middle class. The PRI consolidated its rule in the wake of the Mexican Revolution (1910–20) and maintained this control until the turn of the twenty-first century through the savvy use of an expansive revolutionary ideology, a patronage system, and a willingness to use repression when necessary. Economically, the party pursued an import substitution industrialization (ISI) framework of high tariffs, subsidies, economic favoritism, and widespread state ownership and management. These policies fueled strong growth and development for nearly four decades. During the 1970s, this economic model began to founder, plagued by deficits, debt, falling oil prices, and inflation. In 1982, Mexico stopped payments on its $80 billion in foreign debt, setting off the Latin American debt crisis. This crisis crippled the economy and threw millions into poverty, but it also pressured the government to implement serious economic changes. President Miguel de la Madrid began lowering tariffs, downsizing the government’s expenditures, and reducing subsidies. His successor, Carlos Salinas, built on these steps toward economic opening, privatizing hundreds of companies, changing land ownership laws, and negotiating the North American Free Trade Agreement (NAFTA) with the United States. These reforms—combined with the 1994 peso crisis—opened Mexico’s economy further, bringing substantial foreign direct investment and an exponential expansion of trade. PRI leaders believed they could open the economy while maintaining political control, but found it difficult to do so. Although nondemocratic, the PRI had long maintained the trappings of electoral legitimacy. It held regular elections and even reformed laws to make it easier for the opposition to gain a few token seats. With fewer patronage resources to hand out in the wake of the economic crisis and subsequent reforms, the country’s democratic institutions slowly began to take on real meaning. The political opposition gained momentum in the 1980s, using the economic crisis to rally support and win their first local and state-level elections. And in 1988, former PRI politician turned opposition candidate Cuauhtemoc Cardenas made his historic bid for the presidency. While Cardenas officially lost, widely reported fraud led many to believe that he had actually bested his PRI opponent, Carlos Salinas de Gortari. The ensuing outpouring of frustration energized the political opposition and budding civil-society organizations to demand greater electoral transparency, and pushed Salinas to make electoral reforms. In 1990, Salinas created the Federal Electoral Institute. Although initially designed to maintain PRI control, it became a fairly powerful tool for political opening. Salinas’s successor, Ernesto Zedillo, further reformed the electoral system. Zedillo also reorganized the Supreme Court, believing that the court’s independence would be in the PRI’s best interest if and when the party was voted out of power. The combination of economic opening, declining state resources, institutional reforms, stronger opposition parties, and an increasingly vibrant and independent press and civil society all came together, accelerating the move toward democracy. When the PRI lost its majority in Congress in 1997 and the presidency in 2000, democracy had arrived in Mexico. Still, strengthening this democracy is a challenge that continues today. Socioeconomic Exclusion and Inclusion Among Mexico’s chief economic concerns is inclusiveness. Public policies during the transition years did little to alleviate longstanding economic and social disparities. After the 1995 peso crisis, an estimated 70 percent of the population lived in poverty. Although Mexico remains very unequal, there are some signs of change. Over the last fifteen years, macroeconomic stability, real wage improvements, and targeted social spending have helped to reduce poverty and inequality and to foster a rising middle class. Programs such as Oportunidades (begun as Progresa) give monthly stipends to low-income households that keep their children healthy and in school. From three hundred thousand recipients in 1997, the program now reaches nearly six million families, about a quarter of the population. In 2002, the government started Seguro Popular, a national health insurance program designed to reach informal and unemployed workers. Citizens who enjoy these benefits tend to reward the politicians who provide them, suggesting evidence of an important democratic feedback loop. Economic Structure and Policies After decades of booms and busts, Mexico is now known for its strong macroeconomic and fiscal fundamentals, its independent central bank, and its stable privately managed banking system. The country’s public sector is smaller than that of Brazil or the United States. Oil, once the major source of trade revenue, makes up less than 20 percent of total exports (though roughly a third of the federal budget). The manufacturing sector accounts for some 80 percent of exports and 20 percent of the overall economy, spurred on by deep North American supply chains. However, powerful monopolies, thin credit markets, and a large informal economy have slowed growth and overall development. In the late 1980s and 1990s the PRI quickly privatized many national industries, leaving many sectors of the economy in the hands of a few well-connected business leaders. One example is Telmex, whose economic monopoly status has made its owner, Carlos Slim, a billionaire many times over, and perhaps more importantly held back the overall economy through limited investment and high telecommunications prices in comparison to similar emerging markets. The Mexican government has begun working to strengthen regulatory agencies to take on such concentrated economic powers, but lawmakers face an uphill battle against many of these entrenched economic interests. Civil Society and Media Mexico’s civil society has grown substantially and has been critical in pushing for greater political opening. Some of its first successes came during the country’s political transition as hundreds of organizations rallied behind the goal of free and fair elections. With democratization, other issues ranging from good governance to the environment to women’s rights rose in prominence. The media, too, has made great strides. Once virtually a propaganda arm for the ruling party, today Mexico’s newspapers, radio stations, and television networks routinely question the official line, investigating and exposing corruption and helping to hold the government accountable. However, Mexico’s civil society arguably remains a work in progress. It is fairly weak by regional standards, largely because of the PRI’s legacy of incorporating popular organizations into the party structure and discouraging autonomous groups. Television coverage also continues to be an effective "duopoly." In fact, some worry that the media now controls politicians—who are afraid of bad press—rather than the reverse. Legal System and Rule of Law Security is perhaps the greatest challenge to Mexico’s democracy and economy. Under Calderon’s presidency, some seventy thousand Mexicans were murdered in drug-related violence. This reflects not only U.S. demand for drugs (and its supply of money and weapons to the cartels), but also Mexico’s weak rule of law. According to reports, only 20 percent of homicides in 2010 resulted in a conviction. This widespread impunity stems in part from the weakness of the Attorney General’s office. For decades, the judiciary and law enforcement were virtual arms of the PRI. Today, the culture of lawlessness and rampant corruption erodes popular trust in the authorities and complicates the government’s fight against bigger threats. Recent efforts have enlarged Mexico’s federal police force and improved recruiting, vetting, training, and salaries. However, this force amounts to just 10 percent of Mexico’s total police, with mostly unreformed state and local forces making up the rest. In the judicial system, constitutional changes passed by Mexico’s Congress in 2008 will fundamentally transform the courts, bolstering due process and transparency when implemented. But with a 2016 deadline set for enactment, many of Mexico’s individual states are lagging behind, leaving many to question whether Mexico will be able to create a more open and effective legal system. Government Structure and Division of Power More than a decade after the PRI’s presidential defeat, Mexico routinely holds competitive elections that almost all see as free and fair. The legislative and judicial branches provide effective checks on presidential power. Democratization has also devolved more power to the states, increasing the autonomy and importance of Mexico’s thirty-two governors. Roughly half of Mexico’s federal revenue is sent to the states through automatic transfers, fiscally empowering local politicians vis-à-vis their national counterparts. Mexico’s democratic consolidation, though, remains incomplete. Many feel the decentralization of power actually limits democratic deepening, with less electorally competitive states becoming the last bastions of authoritarianism. Moreover, Mexico’s unusual no-reelection laws also hinder democratic accountability, encouraging politicians to cater to party bosses, who will nominate them for the next post, rather than to voters. Education and Demography The opportunities for the average Mexican child have improved. Smaller family sizes and rising incomes allow parents to invest more in their children’s futures through education, and today primary-school attendance is almost universal. The increase in the number of Mexico’s private schools at all economic levels also attests to parents’ ambitions and desires for their children. But real challenges remain. Mexico continues to fall behind its peers at the secondary and high-school levels and ranks poorly on international test scores. Part of the problem is the teachers’ union. Built up by the PRI, it has proven better at protecting teachers’ benefits than at providing quality education. The current government is working to reform the system, but it will take significant time and effort to improve dramatically. Conclusion Mexico’s experience shows that transitions to democracy and open economies are not over when the government changes hands or when tariffs fall. Much more is needed to ensure that what Mexico has achieved does not erode, and that future changes further consolidate the country’s institutions and expand on the democratic and economic gains of the past three decades.

Most everyone agrees that inequality matters. Studies by the World Bank, the IMF, and by academics (such as Richard Wilkinson of the University of Nottingham) demonstrate how harmful inequality can be, affecting a whole host of factors, ranging from economic growth rates to teenage pregnancy rates and crime. Given the stakes, recent trends in Latin America have been quite positive. Using the Gini index, the most common measure of inequality (where zero represents a perfectly equal society, and one is perfectly unequal), Latin America has been one of the most unequal regions in the world, with the worst discrepancies found in Brazil, Honduras, Ecuador, Colombia, and Bolivia. But over the last decade the Gini declined in fourteen Latin American countries, led by Argentina, Brazil, Ecuador, and Panama. One reason is economic stability. The booms and busts of the 1980s and 1990s, which wiped out the savings of so many, have now dissipated. Another important factor has been the global demand for the region’s commodities (which range broadly from energy to foodstuffs to minerals), bringing an influx of dollars and spending. Government-run social programs too have mattered, in particular conditional cash transfer programs such as Mexico’s Oportunidades and Brazil’s Bolsa Familia that have helped improve the living situations of millions. Taken together, income for Latin America’s lower and middle classes rose much more quickly than that of the region’s economic elites, reducing inequality. These positive trends contrast to what has been happening in the United States. Measured by the OECD, America’s Gini coefficient rose by over .04 points during the last twenty years—placing it above OECD members such as Italy and Japan, and on a more comparable level with Turkey. This growing income inequality stems not from the middle and lower classes getting poorer in absolute terms, but rather from the wealthiest 1 percent pulling away from the pack—their annual income increased 275 percent from 1979 to 2007 compared to 37 percent for those in the middle. An interesting series by the Global Post illuminates these changes, matching up U.S. cities with their equals (in terms of inequality) around the world. For example, Ithaca, NY is on par with Peru (.46), Milwaukee, WI with Uruguay (.45), and Naples, FL with Chile (.52) (you can see more of the comparisons here). A different back of the envelope inequality measurement divides the annual income of a country’s wealthiest 20 percent of the population by the bottom 20 percent. Calculated by Adam Isacson, the United States is now more unequal than ten Latin American countries including Mexico, Venezuela, and Nicaragua. The question now is how to take on these widening gaps, given the social and aggregate economic costs. Here there is something to learn from America’s hemispheric neighbors. Economic growth alone won’t fix the problem; targeted social programs and safety nets matter. Perhaps too there is something to learn from their politics—with many nations finding their way past years of democratic legislative gridlock to create more socially inclusive policies.

As Senate immigration negotiations continue, the Council on Foreign Relations has just released a report on the effectiveness of U.S. immigration enforcement. The authors, Bryan Roberts (a senior economist at Econometrica, Inc), John Whitely (an economist focusing on resource allocation), and my colleague Edward Alden, detail the dramatic surge in border security "inputs"—personnel and money—outlining the sharp increases in the number of border patrol agents and the amount of their budgets. But the report highlights the lack of government data on "outputs" (i.e., the results of each program) and "outcomes" (how successful or unsuccessful each policy was in reducing illegal immigration). This data gap hinders America’s ability to understand and measure the effects of an added dollar or border patrol agent, and as a result limits the ability to improve enforcement policies. Going forward, the report urges Congress to fill this vacuum, and also calls for designing models to predict illegal immigration flows, and for strengthening congressional oversight on enforcement policies (by holding quarterly hearings for relevant Senate and House committees). By collecting and disseminating information on how well specific enforcement policies worked (or did not work), scholars and policymakers would hopefully not only be better informed, but better equipped to manage illegal immigration. It is well worth a read, and you can find the full report here.

One of the biggest criticisms leveled at Mexico is the lack of social mobility. A new report published by Mexico City’s Centro de Estudios Espinosa Yglesias (CEEY) takes a look at just how mobile (and immobile) Mexican society really is—revealing that there are both reasons for worry and for cautious optimism. On the bright side, there is a significant amount of mobility in Mexico’s middle three economic quartiles. In contrast, few of the richest and the poorest leave their origins behind (with a full 50 percent staying put on each end of the economic ladder). So what matters? Education seems to be vital. Here family is paramount, both in terms of expectations and resources, leaving many stuck on the bottom rungs. This is particularly for advanced degrees, where educated parents are more likely to push their children to follow them off to college and beyond. And their children, the report shows, generally live up to these expectations. The study also shows that attending private elementary schools matters. Here perhaps the news is getting better, and though Mexico has not yet fixed its weak public school system, private school education has expanded. Mexico now boasts some 45,000 private schools—roughly one third of all educational institutes. And while many question the quality of some of these establishments, kids attending private elementary schools were much more likely to complete their studies and attend college. The study also shows big differences between men and women, with women being more mobile than men—for good and for bad. Still, where you come from influences expectations and outcomes, with upper class women working (and earning) more than their poorer counterparts. Parental education also plays a role. For women whose parents were well educated, roughly two-thirds were employed, compared to 44 percent whose parents had not completed primary school. In international comparisons, Mexico falls far behind industrialized countries, such as those in the European Union. But studies are more mixed when comparing Mexico to its Latin American neighbors (depending on which measuring methods were used and during which time periods). A 2013 World Bank report found Mexico to have one of the lowest proportions of upwardly-moving social "climbers" in Latin America, but other studies that instead track individuals over several periods of time rank Mexico’s mobility at the top of the region. And a 2012 study by the Universidad de los Andes found that while overall levels of mobility were higher in Chile, intergenerational mobility was progressing much faster in Mexico than in either Chile or Colombia. Social mobility matters not just for individuals and families but also for the broader economy. As a 2010 OECD report puts it, countries with lower levels of social mobility are more likely to “misallocate human skills and talents.” This diminishes motivation, productivity, innovation, and, in the aggregate, economic growth. So what can Mexico do? Following through and pushing further the recent education reforms, so that the vast disparity between public and private schools diminishes, is a start. The report too calls for affirmative action programs for women in schools and workplaces and for expanding the number of secondary schools and colleges. Other reforms to reduce the size of the informal sector, and to spread access to financing so that those with good ideas or companies can begin or expand their operations will also help, ensuring that the talented, motivated, and hard-working get a chance to rise.

For today’s ask an expert feature on cfr.org, I answered the question: "After immigration reform, how would the large and newly legal Hispanic population influence U.S. politics?" You can read my thoughts here or below. Immigration reform that includes a pathway to citizenship would have sweeping effects on the lives of the estimated eight million undocumented Hispanics living within the United States. But it would not have an acute, immediate effect on U.S. politics. This is mainly because it would likely take over a decade before any former undocumented immigrant could apply for U.S. citizenship and thus gain the ability to vote. And even then it is unclear how many Hispanics would actually naturalize. If history is any guide, only one third of eligible Mexicans (by far the largest immigrant group) have applied for citizenship in the past decade. For potential voting power and political heft, the quicker and more substantial changes will come from U.S. demographic trends—where Latinos are the fastest growing group in the United States. Going forward, eight hundred thousand Latinos will turn eighteen each year, and by 2030 there will be some sixteen million more Hispanics eligible to vote—more than double today’s numbers. Comprehensive immigration reform would likely lower the vitriol in the public debate concerning immigrants and Hispanics more generally. By resolving the highly contentious issue of immigration policy, U.S. politicians of all stripes could more easily focus on wooing the growing Latino electoral base—turning to issues of economics, healthcare, schooling and the like, which polls show are at the top of Latinos’ priority lists.

Since entering Los Pinos last year, Mexican President Enrique Peña Nieto has wasted no time in pushing some of Mexico’s most-needed economic reforms through Congress, but the same has not been true for the government’s security strategy. Last week I spoke with Larry Mantle on KPCC’s “Airtalk” about Peña Nieto’s proposed new police force and what it could mean for the country’s security situation. You can listen here.

Karl Marx famously wrote that history repeats itself, "the first time as tragedy, the second as farce." But some historical events combine elements of both. Just consider the Tampico Incident, which occurred on April 9, 1914. The backdrop to the Tampico Incident was revolution in Mexico. In May 1911, longtime Mexican dictator Porfirio Díaz was ousted from power by forces loyal to Francisco Madero, the scion of one of Mexico’s wealthiest families. Madero lacked the political skills needed to keep his coalition intact and his enemies at bay. In February 1913, he was forced to resign by General Victoriano Huerta and then subsequently murdered. Huerta made himself president, but before long, Mexico was embroiled in a civil war. As April 1914 started, Huerta loyalists were defending Tampico against attacking revolutionary forces. The city, located some 250 miles south of Brownsville, Texas on the Gulf of Mexico, was packed with foreign citizens who had sought refuge from the fighting. Many of them were Americans who had moved to Tampico to work in the oil industry. In a bid to protect these U.S. citizens should it be necessary, several U.S. Navy ships anchored off the coast. And that’s when the trouble began. On the morning of April 9, a small boat with nine unarmed sailors departed the USS Dolphin to conduct a mundane task: buy gasoline from a merchant at the port. Things did not go as planned, however. Unbeknownst to the Americans, the warehouse housing the gasoline was located in a spot that had been declared off-limits to foreigners. So once the sailors docked, they were arrested. It must have been quite a scene. In what could be a metaphor for U.S.-Mexican relations more broadly, the two sides didn’t understand each other. The American sailors spoke no Spanish, and the Mexican soldiers spoke no English. News of the arrests quickly reached the soldiers’ commanding officer, Colonel Ramón Hinojosa. The last thing he needed was a confrontation with the U.S. Navy. He immediately ordered the American sailors released and returned to their boat. His quick action didn’t pay off. When his commander, General Ignacio Morelos Zaragoza learned of the incident, he had Hinojosa arrested for negligence. General Morelos Zaragoza offered his sincere apologies to an American emissary. There the incident should have ended. But it didn’t. Admiral Henry Mayo, the commander of the U.S. naval forces, wanted more than an oral apology. He wanted to send a message that the U.S. Navy should not be trifled with. So later that day, he sent General Morelos Zaragoza a message stating that he had twenty-four hours to: publicly hoist the American flag in a prominent position on shore and salute it with twenty-one guns. Morelos Zaragoza found Mayo’s demand to be a bit much and refused. There the matter might have remained, except for one thing: U.S. president Woodrow Wilson was looking for an opportunity to push Huerta from power. The moralizing Wilson despised the Mexican president as despicable and cruel, and he had terminated U.S. diplomatic relations with Mexico City because he refused “to recognize a government of butchers.” (U.S. practice had been to recognize any government that effectively controlled its territory regardless of how it treated its citizens.) As Wilson told the British ambassador to the United States, “I am going to teach the South American republics to elect good men.” So Wilson backed his thin-skinned admiral. The Mexicans offered a compromise—a simultaneous salute by both countries. Wilson rejected it. On April 18, he issued an ultimatum: Mexico would salute the American flag or suffer the consequences. Huerta refused. Three days later, 800 American sailors and marines landed at Veracruz, 240 miles southeast of Tampico, purportedly to stop an arms shipment but primarily to teach Huerta and Mexico a lesson. That invasion would leave nineteen Americans and several hundred Mexicans dead. It would also, temporarily at least, have an effect exactly opposite to the one Wilson intended. It strengthened rather than weakened Huerta. What of the American citizens in Tampico? Once Wilson ordered the invasion of Veracruz, U.S. naval warships sailed south. The Americans in Tampico were left on their own to face the backlash from Mexicans angry at the attack on Verzcruz. They would eventually be relocated to Galveston, Texas—minus all of their belongings—by British and German warships that had also anchored off Tampico during the crisis. Did Admiral Mayo ever get his twenty-one gun salute? No. At the Niagara Falls Peace Conference, which was mediated by diplomats from Argentina, Brazil, and Chile, the United States dropped its demand for an apology. That brought an end to one of the more lamentable episodes in American foreign policy.

I spoke last week with CFR’s Brianna Lee about Mexico’s telecommunication, education, tax, and energy reforms, and what they could mean for Mexico’s economic outlook. You can read the interview here or below. Mexico’s president Enrique Peña Nieto, who assumed office in December 2012, is pushing through a major package of reforms targeting some of the country’s most powerful economic interests, including those in the telecommunications and energy sectors. CFR’s Shannon O’Neil says "these are changes that Mexico’s economy desperately needs," even if only some of the measures take hold. Successful reforms could significantly improve the country’s image, she says, especially in the eyes of international investors asking: "Is Mexico for real this time." Meanwhile, she notes that while economic ties between Mexico and the United States are already strong, Washington should leverage this moment as an opportunity to expand bilateral trade further. President Peña Nieto’s economic reforms are targeting the big empires of the country’s telecommunications sector. Can you give some background on the industry? What is his goal in this sector? For the last twenty plus years, Mexico’s telecommunications industry has been basically in the hands of Carlos Slim. Whether it’s Telmex, which is fixed line, or Telcel, which is mobile, his companies have controlled 70 to 80 percent of the market. By all independent accounts, this has had huge costs for Mexico’s economy, particularly for consumers and businesses, which pay much higher rates for their telephony needs. The other big cost is underinvestment in the telecoms sector. When you look at Mexico vis-à-vis other OECD countries, as well as its emerging market peers—China or Korea or Brazil—Mexico falls behind in telecom infrastructure investment. This includes new types of connections, such as Internet and broadband. Indeed, by some measures, the country even falls behind places likes Zimbabwe and Serbia. That lack of access to the digital age has real costs for businesses and innovation. The Televisa broadcaster is another one of the empires being targeted by these reforms. Broadcast is another sector that Mexicans in general have been worried about. There is a duopoly in broadcast between Televisa, which has about 70 percent of the market, and TV Azteca, which takes the remaining 30 percent. Like many countries, the vast majority of Mexicans get their news from television, not from print media or radio, where you see more competition and plurality. So what [officials] say they’re going to do is auction off at least two new networks on the spectrum; in those auctions, neither of these existing companies can bid. So this is another opening up. There’s also been talk of creating another public channel, i.e., a government channel. The head of Mexico’s teachers’ union, Elba Esther Gordillo, was recently arrested on embezzlement charges. What’s the significance of this in light of these other reforms? Before her arrest, the congress passed a constitutional measure that would reform the education system and do things like subject teachers to performance tests. She had been politically opposed to that and some of these other proposed accountability measures. Additionally, most people believed she was corrupt--she’s been photographed for years wearing very, very nice clothes, and has houses that people have talked about. There was always a question about how she could afford all these Hermes bags on a supposed $80,000-90,000 a year salary. But there’s also a question here about the timing: Why did [Peña Nieto] go after her now? One answer is that [the government] finally got its act together and collected incriminating evidence. They’ve become much better at financial tracking. But another answer is that she had become a political adversary opposed to the government’s reform project. And [her arrest] is a way to diminish her power, if not remove her altogether from the political scene. Gordillo’s arrest also sends out a warning to other people that might oppose Peña Nieto’s reform project. It’s a little bit of a shot across the bow—that "not only are we going to push this reform, but if you do not negotiate with us or work with us in some way, we might be willing to use other tactics." Energy and tax reform are also on the horizon. What’s in development right now? In some ways, [energy and tax reform] may need to go together, because revenues from energy are such a big part of the federal budget. If you don’t reform the tax system and increase revenue, it’s hard to change the structure of energy, because you need this money to pay for day-to-day operations. Officials have been talking about energy reform since the beginning of the campaign. It’s part of the Pact for Mexico, which is an agreement between the three parties [Peña Nieto’s Institutional Revolutionary Party, the National Action Party, and the Party of the Democratic Revolution] to push things forward. It sounds like the administration will push for a constitutional reform that will open up the energy sector, mostly for new developments and particularly the type of exploration and production that requires high levels of expertise and technology that Pemex does not necessarily have. This applies to deep-water drilling in the Gulf, to shale oil and shale gas, and to potentially other fields where Mexico doesn’t really have a developed expertise. When the Pact for Mexico was signed, it was heralded as a historic moment of cooperation. Do you expect that esprit de corps to persist with these reform measures? Three different political parties with different ideological leanings may agree on the principles of reform, but as more of these negotiations get down to the details, there have been tensions, and there will continue to be tensions. The pact has survived so far through education reform; and it seems to have survived through the telecommunications reform—but I would say that it would be harder to keep this coalition together for energy and tax reform. It may survive, but it may be that just two parties come out together rather than all three. That’s a distinct possibility. And if that happens, and if only some reforms are passed, which would be too bad, it’s still worth it because these are changes that Mexico’s economy desperately needs. The drug war is still happening in the background of all this. To what degree is that affecting Mexico’s economy? Mexico has been doing fairly well over the last few years, but it could be doing so much better. Some impediments are the uncompetitive parts of the economy, but another drag is security. When foreign companies think about investing in Mexico, they all have a discussion about security. It doesn’t mean that they don’t invest, but they may not go in as fast or as big. And many may not go in at all. It’s a big cost for day-to-day operations, particularly for small- and medium-sized companies where security costs are much higher as a percentage of revenues than, say, a big multinational company. It’s very hard to measure, but people say it might cost anywhere between 1 and 2 percent of GDP per year. So if Mexico’s economy is growing at 3 or 4 percent now, it could be growing at 4 or 5. Is the United States paying attention to these reforms? Definitely. There have been meetings about it already between economic liaisons. It was part of the discussion when Peña Nieto met with Obama back in November. It’s also on the agenda of manufacturers and the finance world. Indeed, there are a lot of U.S. businesses watching to see what happens—is there enough economic opportunity for them in these new, more open sectors? But also, particularly in the financial world, people are asking: is Mexico for real this time? Are they really going to make the structural changes that would open the economy and let it grow faster? Successfully pushing through these reforms would have a much larger impact: people will look to Mexico and say, "Mexico’s really open for business and making the kind of changes necessary to be a big player." And we’ve already seen a lot of investment, particularly with U.S. manufacturers in Mexico, despite many of the country’s problems. Many factories in the United States depend on those in Mexico—there are pieces and parts that are crossing the border every day that allow a company, in the end, to create a globally competitive product. This is already the reality, but the question going forward is: Can the United States make the most of this and make it even easier for these companies to grow by facilitating trade with Mexico? Rather than thinking about cutting back this trade, we should recognize that Mexico helps support U.S. workers because trade grows the overall pie for these companies. A rising tide on both sides of the border lifts all boats.