Mexico

Andres Manuel Lopez Obrador will likely become Mexico’s next president at a time of mounting concern over corruption and violence, but his reform plans are hazy.

This is a guest post by David R. Mares, the Institute of the Americas chair for Inter-American Affairs and professor for political science at the University of California San Diego and the Baker Institute scholar for Latin American energy studies at the James A. Baker III Institute for Public Policy at Rice University. Mexico’s energy reform has taken important first steps but to come to full fruition, several additional critical reforms remain to be designed and implemented, including another constitutional reform. The task of adopting and implementing new reforms is all the more difficult because not only did the government of Enrique Peña Nieto oversell the short-run benefits of the package of reforms, including energy, adopted at the beginning of his term but also his administration is linked with other, broader political failures, including corruption scandals and the mishandling of the economy. Peña Nieto’s missteps have wrested credibility from the political system and make it unlikely that a mainstream candidate could put together a governing coalition with sufficient political support to adopt the next stage in Mexico’s energy reform. That’s why a political outsider would be more uniquely positioned to further energy reform, should that be a credible political choice. Once Andrés Manuel López Obrador (AMLO) wins the election, he could have the credibility to put together a coalition with the support of the Mexican people that could justify the next stage in Mexico’s energy reform.  Whether he will do so remains an open question, but the next stage of the energy reform is unlikely to happen without him. Stage III of the Mexican Energy Reform The first stage of the energy reform in Mexico was President Calderon’s 2008 reform that was designed to strengthen Pemex without breaking Pemex’s monopoly position. After a fractious national debate, the reform was adopted because it was promised it would make Pemex an effective national oil company. The failure of that reform led to stage two in Mexico’s energy reform, which was the constitutional reform instituted under President Peña Nieto. This constitutional reform was intended to make Mexico’s energy sector more efficient and able to meet the power, gas and oil needs of a growing economy, with a small nod to generating more clean energy. By design, it allowed Pemex to lead the process by permitting the national oil company (NOC) to select the best properties for its own exploitation in Round Zero before opening the bidding process to companies other than Pemex. The first auctions for oil and gas blocks did not go well, partly due to falling oil prices and partly because terms reflected Mexico’s relative inexperience with auctions. However, more recent auctions have gone extremely well. Foreign capital has committed to investment over the life of their contracts of almost $150 billion, and some new fields have already been discovered. Winning bids including seventy-three companies from twenty countries attest to the interest in Mexico’s energy future. There’s been less success in developing the infrastructure to get new energy and more imported energy to end users and the government has not solved the theft from Pemex oil pipelines or Pemex’s CAPEX and its pension liabilities. Given Pemex’s dominant position, the company needs to develop a better business model. To generate capital, it needs to take the steps taken in Brazil, Colombia, authorized in Peru, and maintained in Argentina after the renationalization of YPF: privatize some stock in the NOC. The sale of the stock would require a constitutional amendment, but would not put Pemex in the hands of private equity holders and its stock price would provide a basis for evaluating how well Pemex was reforming. The government and Pemex have already modified the weight of the Petroleum Workers’ Union on Pemex’s governing structure and balance sheet, but the pension obligations that were made with Pemex need to be restructured and funded through other mechanisms. Building a New Political Coalition for Energy Reform While these necessary reforms have a technocratic nature, they cannot be adopted by technocrats or political leaders by simple decree. The first two stages of Mexico’s energy reforms rested on the backs of strong political coalitions behind them. The next stage will also require a political coalition. Unfortunately, the political system that generated the first two reforms has been discredited in the eyes of the Mexican people by actions both within and outside the energy sector. The clearest sign of disappointment with the process is AMLO’s widely expected victory in a few weeks. AMLO represents a new political coalition. López Obrador will need to convince that new coalition that when his government continues to attract private capital into Mexico’s energy sector, the benefits of a strong and efficient energy sector will benefit the Mexican people and not go into the hands of corrupt officials or the economic elite. His restructuring of Pemex needs to emphasize that the company is a means to promote the country’s interests in a rejuvenated energy sector, not to benefit oil workers and the PRI party at the expense of Mexican society. So What Will AMLO Do? The three pillars of the Mexican economy over the past decades have been manufactured exports under NAFTA, remittances from Mexican migrants to the United States, and oil exports. AMLO has an ambitious agenda for generating public goods as well as rewarding the groups who supported his victory. The income earned from manufactured exports under NAFTA will likely stagnate, if not actually decrease, even if NAFTA is successively renegotiated, and could decrease more substantially if NAFTA is terminated. Remittances have probably peaked because Mexico’s demographics and growing economy result in fewer Mexicans going to the United States for work; U.S. policy will likely enhance that decline. Oil exports have fallen as reserves and production have been falling, and it will take up to ten years for significant new reserves to be discovered and produced. Those efforts will require companies following through on their promised investments as well as new investment.  AMLO will need an energy sector that generates revenue during his six-year term and credibly paves the way for greater future benefits that will be distributed to the Mexican people. Such nationalist messages could strengthen his political coalition as he implements his reforms of what has become an illegitimate political system. AMLO’s political discourse radicalized when López Obrador and half the Mexico electorate believed that he had been deprived of previous presidential election victories in the extremely close and controversial election in 2006 and a close second in 2012. But when López Obrador was mayor of Mexico City from 2000-2005 he was pragmatic, worked with the private sector, and was perceived as an effective leader. Analysts say lack of technology and funds required to modernize Mexico’s oil sector could lead to an additional output plunge of 700,000 b/d by 2020, unless the next administration takes some definitive action. Output is expected to rebound slightly this year and is currently averaging 1.9 million b/d, down roughly 5 to 10 percent from 2017. Pemex is targeting 1.95 million b/d for 2018. Pemex’s natural gas production has also been declining, and fuel theft has plagued the country’s refining sector. López Obrador has said he will not seek a constitutional change to reverse the 2014 energy reform and will respect the legitimate contracts signed under the reform. There is hope that AMLO can be like President Lenín Moreno of Ecuador and implement reforms from the left with a significant role for the private sector. Will AMLO take this path? We won’t know until he begins to govern, but the Mexican economy and the Mexican people need him to enact reforms that allow Mexico to reap the benefits produced by their energy sector.

The president has been clear about his protectionist views. Why didn’t anyone listen?

Trump has turned on longtime allies, labeling them a national security threat in order to levy 25 percent tariffs on steel and 10 percent on aluminum. For neighboring Mexico, this will affect some $3 billion in exports. While not insignificant, it is just a speck of the $300 billion-plus the nation sends north each year (for Canada, steel and aluminum comprise $11.5 billion of more than $300 billion in U.S.-bound trade). Yet the size of the tariffs belies their true import. They officially bury the already dying NAFTA renegotiation. They threaten the integrated industries that send basic inputs back and forth across the border, hurting manufacturers, workers, and consumers alike. And more broadly, notwithstanding the president’s repeated claims, they demonstrate that trade wars aren’t easy to win. Take Mexico, which responded to the tariffs with its own counter-salvo. While many observers anticipated a fight with the EU, fewer expected it from Mexico. The nation is utterly reliant on the United States. As one of the world's most commercially open countries, Mexico has turned trade into its main economic motor. And of the $400 billion Mexico exports each year, eight out of ten cents head north. Among Trump’s ever-growing number of combative trade fronts, Mexico might therefore stand out as the most likely to fold. But Mexico is prepared for this fight. As Economy Minister Ildefonso Guajardo declared after the tariffs were announced, "we always said that we were going to be ready to react." It immediately announced punitive measures. Certain types of steel made the list; so did lamps, cheese, pork, apples, grapes, and cranberries. This menagerie wasn’t haphazard. Instead, it was designed to gain both economic justice and political leverage, targeting key congressional districts and Trump supporters. Mexico has been down this road before, during a decade-long battle over cross-border trucking. NAFTA promised, alongside goods and services, to open up transportation markets: After a phase-in period, Mexican and American truckers were supposed to be able to take their loads straight from the factories to their final customers on the other side of the border. Yet the U.S. government continued to block Mexico’s rigs on safety fears and more than a little pressure from the Teamsters. After years of cajoling, after the creation and then cancellation of pilot programs, Mexico in 2009 finally invoked retaliatory tariffs to the tune of $2.4 billion a year. Nearly 100 products, ranging from Oregon Christmas trees, Wisconsin paper and Washington pears to New York jewelry, Florida orange juice and Idaho potatoes, were hit with levies of five to twenty-five percent. As the tariffs rose, so too did the constituent phone calls to influential representatives and senators of both parties. Two years later, the Obama administration developed a new pilot program to allow vetted trucking companies and their drivers to cross the border, and the tariffs ended. As a trade tit-for-tat begins anew, the Mexican government is deploying the same strategy. This time it isn’t alone. Several U.S. manufacturers along now well-developed supply chains are supporting their neighbor. Canada and the EU are joined in the fight, and their initial lists look notably similar to Mexico’s initial trucking foray, penalizing cosmetics, manicure and pedicure products, felt tip pens, toilet paper, and hair products among dozens of others items produced in targeted congressional districts of influential House members. At home, these steps are proving popular. Despite being in the middle of a heated and ugly election season, all the candidates support the Mexican Commerce Department’s moves. President Enrique Pena Nieto looks to gain at least his citizen’s sympathy, if not their political approval, from his stance. The nation’s business community also has the government’s back. Granted, Mexico was careful to not put tariffs on the types of steel used in the auto industry, and domestic dairy producers may even benefit. But overall a mix of patriotism and justified indignation has overridden anxieties among Mexico’s manufacturers. This stands in stark contrast to the United States. The U.S. Chamber of Commerce condemned Trump's tariff move, and agricultural interests announced the tariffs will “take American farm operations to the breaking point.” No one knows yet where this skirmish will lead. Despite its initial bravado, Mexico will suffer, particularly if the U.S. ups the ante with further tariffs or threats to NAFTA. The nation is also facing a political transition that could have its own severe economic repercussions. But the initial round already shows that there are no easy trade war wins, and that the U.S. government would be wise not to underestimate the weapons of the seemingly weak. View article originally published on Bloomberg. View article in Spanish on El Financiero.

The PRI is dead, long live the PRI!  As Mexico hurtles toward a momentous election this July, the storied Institutional Revolutionary Party that dominated the country for nearly a century seems doomed. Sadly, however, while the PRI may implode, the clientelist system it created — and that holds Mexico back — will likely roll on. Things weren’t supposed to turn out this way. President Enrique Pena Nieto was going to be the PRI’s savior. After the party’s heavy legislative losses and dismal third-place showing in the 2006 presidential race, the photogenic governor used his political lineage, his made-for-TV personal story, and a revitalized party machine to win the 2012 election by some 3 million votes, and make the PRI again the largest party in both houses of Congress. After 12 years out in the cold, the PRI looked as if it was back and had adapted to a more democratic era. Yet now, Pena looks to be the PRI’s final executioner. Polls portend the PRI’s imminent dissolution. Its presidential candidate Jose Antonio Meade ranks a low third with voters — many surveys put fewer than two in 10 Mexicans in his corner. At the state level, the party trails the others in all but Campeche, which holds less than 1 percent of the country’s population. It looks to surrender more than 30 of its current 55 Senate spots, and upwards of 100 seats in the House, leaving it third in terms of size and influence in a new Congress. At best it could win one of the nine governorships up for grabs this July, leaving it in control of roughly a dozen of the nation’s 32 states, compared to every single one 30 years ago. The PRI’s decimation is all the more shocking given its famous adaptability and resilience. The key to its longevity was its big-tent model, enabling it to incorporate, mollify and ultimately control different interest groups. By creating official pillars for labor, peasants, and professionals and bureaucrats, the PRI ensured that political conflicts occurred within the party and were mediated by it, not the government. Thus, even when particular sides lost, the party, as the final and indispensable arbiter, still won. And the promise that loyal losers would be compensated if not rewarded politically in the next round kept the game going for years. The PRI reinforced this control by manipulating the press through a mix of lavish advertising budgets, personal payoffs and control of newsprint paper. It bought business support though handouts, subsidies and concessions. Its clientelism extended to individuals: Local PRI leaders mobilized voters with washing machines, building supplies or even just a meal given away at a campaign rally or the polling stand.   The PRI was never above manipulation at the ballot box — more than once it may have lost the vote but won the election. At times it resorted to outright repression, mostly of leftist opposition. But its real brilliance and staying power came from organizing and buying off society and interests. Out of the public eye and realm, these backroom negotiations and cold hard cash enabled it to tighten its grip. Since the start of the 21st century, this system looked to be faltering. Democratic competition took away the PRI’s near political monopoly, diminishing its hold over office seekers and public pots of money. Rising violence and insecurity washed away the belief in the PRI’s ability to “get things done.” And corruption scandal after corruption scandal revealed the seedier side of these clientelist exchanges. Yet here’s the thing: Even as frontrunner Andres Manuel Lopez Obrador has railed against the PRI’s “mafia of power,” he is attempting to re-create his party of Morena in its image. To his political tent, AMLO has invited teachers’ unions and labor leaders, most notoriously former mining union head Napoleon Gomez Urrutia, currently exiled in Canada due to allegations of stealing $55 million from a workers’ trust fund. AMLO has assiduously cultivated rural workers and organizations, and reached out to religious conservatives. He is wooing the PRI’s rank and file, and converted many party notables to his side, including former ministers of the interior Manuel Bartlett and Esteban Moctezuma Barragan, by implicitly offering a pass on past misdeeds. And like many of his PRI brethren before, he has no use for independent voices from civil society or the media, accusing them of being part of the larger power mafia and of protecting rather than fighting corruption. Rather than change Mexico’s political system, AMLO looks to reinforce it. True, if he wins, his new political apparatus is unlikely to last as long as the PRI. Mexico has profoundly changed: Its economy is more open, diversified, and private sector-driven than during the PRI’s mid-20th century heyday. Citizens have access to more information, and voters count themselves more independent than in the past. And Morena won’t achieve the monopoly of power at all levels of government that the PRI wielded for decades. Yet AMLO and Morena’s strategy shows that the system of channeling competition and conflicts through back rooms rather than democratic processes and branches of government is proving surprisingly resilient. This way of politics will continue to hold Mexico back, as it relies on clientelism and corruption rather than legislation and rule of law. The PRI may soon die. Unfortunately, the system it spawned looks set to prosper. View article originally published on Bloomberg. View article in Spanish on El Financiero.

This is a guest post by Isidro Morales, a professor of the School of Government at Tecnológico de Monterrey, Santa Fe (Mexico City) campus. On Sunday April 22, the first of three presidential debates took place in Mexico City, gathering the five candidates out of which three are sponsored by their respective political parties, and two are running as independent contenders. Slightly more than two months ahead of election day on July 1, polling indicates the choice will be between Andrés Manuel López Obrador and Ricardo Anaya Cortés. López Obrador is sponsored by Morena, the political party he founded himself, in coalition with two other parties, the center-left Partido del Trabajo (PT) and the center-right Partido Encuentro Social (PES). Anaya is supported by the center-right Partido Acción Nacional (PAN), in coalition with two center-left parties, Partido de la Revolución Democrática (PRD) and Movimiento Ciudadano. A few days before the first debate took place, Reforma, a Mexican leading newspaper, published a poll showing a major lead by López Obrador on electoral preferences: 48 percent, while Anaya held 23 percent of the preferences and Jose Antonio Meade, the Partido Revolucionario Institucional (PRI) candidate, only 14 percent. The polarization in voting preferences is not surprising. López Obrador has been successful in exploiting the frustration and disaffection of most parts of the Mexican population against the PRI, the party which lost the presidential election in 2000 after ruling Mexico for more than seventy years and which came back to power in 2012, with Enrique Peña, whose presidential term became highly disappointing. Indeed, the presidential election of July 1, will take place in a country in which public safety is fragile, political corruption is widespread (various PRI’s former governors are either prosecuted or law fugitives), and NAFTA is being renegotiated with uncertain outcomes. The backdrop on energy issues is that oil production continues to fall while gasoline prices increase, in spite of a major energy reform which opened to private participation (national and foreign) to all production chains of the industry. The first presidential debate did not cover the energy issue, which is slated for later sessions focused on economic issues. However, the energy reforms have not been successful enough to help the PRI with its reelection. With a historically low record of popularity reached by Peña’s administration, it looks difficult for Meade, the current PRI candidate. In spite of his good record as a public administrator, he seems unlikely to narrow the gap he still has vis-à-vis Anaya. Despite the widely touted energy reforms, the Mexican oil industry still faces a host of challenges, not the least of which is increasing theft and violence against oil facilities that have endangered the lives of oil workers. Announcements to begin developing Mexico’s vast shale resources in the state of Tamaulipas have also been greeted with some skepticism since the region is dominated by the Zetas and Gulf drug cartels and it is unclear how the government would address any security issues that could plague drillers.     While the margin is still large between López Obrador and Anaya, it could eventually be narrowed and eventually reversed, depending on how electors scatter their choices among the independent runners, and how the two major contenders attract or disappoint their respective constituencies. The outcome of the first debate, for example, seems to have played to the benefit of Anaya, at least this is what another survey published by Reforma shows slightly after the debate was over, including the opinion of leading voices from academia, politics, business, and civil society. Indeed, López Obrador was vague on critical issues during the debate while Anaya was assertive and specific in his attacks regarding important proposals and against some controversial members included in Lopez Obrador’s party (i.e., Manuel Barlett, blamed for being the orchestrator of an electoral fraud favoring the PRI during the 1988 elections, when he was Secretary of Government). Two contentious issues of the debate are particularly salient to Mexican voters. The first one is the amnesty previously announced, while campaigning, by López Obrador to Mexican drug barons in case he becomes president, as a means to end the “war on drugs” initiated by former president Felipe Calderón, in 2006. Anaya and most of the other candidates have rejected this possibility, highly sensitive in a country in which more than 120,000 people have lost their lives since the armed confrontation against drug traffickers started. During the debate, Anaya confronted his rival on the issue, asking him whether he continues to support the amnesty. López Obrador rather provided for a diffuse answer, suggesting that organized crime activities is the result of social and economic conditions prevailing in the country, and that the final decision will be taken after consulting a group of experts. The second hot confrontation in the debate was on the means for making more transparent and accountable Mexico’s public policy, including the performance of the Presidency. Anaya was clear in advancing his proposal for creating an independent prosecutor, elected not by the president in power (as it is currently the case) but by the congress, with the mandate to prosecute the corruption of public officials, including the president. According to rules still prevailing in the country, the president cannot be impeached, unless there is an alleged cause of “treason to the Nation”. The proposed change would make impeachment by mismanagement possible for all public officials, if the Mexican Constitution is changed and an independent prosecutor is established. By contrast, López Obrador calls for abating corruption and tackling government accountancy by putting himself as the model of good governance when he arrives to the presidency. He promises to rule with austerity and transparency, by emulating the political and social performance of past national heroes—such as Benito Juárez, the president who repelled a French intervention; Francisco Madero, the president who restored democracy after the fall of the Diaz dictatorship; and Lázaro Cárdenas, the president who nationalized the oil industry in 1938—and putting in place a sort of referendum, every two years, in order to ask the electorate whether the president should continue in power or step down. The first debate also revolved around security and political issues, while coming debates will deal with economic, social, and foreign policy aspects. However, the electorate is already anxious to know, whether López Obrador will remain vague and diffuse as he was in this first debate, concerning other controversial issues of his campaign. A critical question is his ultimate position on the reversal of the energy reform incepted by the current administration, which needed a constitutional amendment requiring at least two thirds of the votes of the legislators and the support of at least half of the state congresses. According to Alfonso Romo, the would-be chief of staff in the case that López Obrador becomes president, the reform will remain in place and contracts signed by the current administration with private companies will not be cancelled. However, according to Rocío Nahle, current leader of Morena in the Chamber of Deputies, and potential secretary of energy if López Obrador becomes president, the reform could be revisited and private contracts cancelled in case evidence of corruption is found. Will López Obrador call for a group of experts once he is in power in order to decide the future of his energy policy, as he said he will do for confronting organized crime? If he does, how will the group of experts be formed? It is up to López Obrador and his team to clarify their position in this hot issue during the following two months of the presidential campaign. If the ambiguity is maintained, López Obrador risks losing part of his constituency to the benefit of the rest of the candidates.

When Felipe Calderon handed the presidential sash to Enrique Peña Nieto on December 1, 2012, Mexico’s economy was just pulling out of a four-year slump. The oil sector, which covered roughly a third of the federal budget, was in decline, production down nearly 1 million barrels a day and falling fast. Monopolies and oligopolies made everyday transactions cost up to 40 percent more than if markets were more open. Mexico’s infrastructure lagged its emerging market peers; its students languished at the bottom of developed-country rankings. And more than half of its workers toiled off the books, with few benefits or legal protections. As Peña Nieto gets ready to hand the sash to another, growth has returned—averaging a respectable if underwhelming 2.4 percent a year. Foreign direct investment is also back, with tens of billions of dollars pouring into autos, telecommunications, and energy. But for Mexico to really change, the ambitious reform project of the last five years needs to deepen. And the government’s other failures have undermined the very model that can brighten Mexico’s economic future, making any such deepening much less likely. Peña Nieto took on Mexico’s long-standing structural barriers to growth through the Pacto por Mexico forged by its three biggest political parties, passing nearly a dozen reforms in his first 18 months to enhance competition, extend credit, revive the energy sector, expand the tax base, and better train young Mexicans. This ambitious project led to real wins. Mobile calls now cost less than half what they used to, and mobile broadband access has become more a norm than a luxury, subscriptions up eightfold as regulators weakened telecom mogul Carlos Slim’s grip on the market. New pipelines and processing plants have eased the gas shortages formerly facing Mexico’s industrial heartland. And several million workers have emerged from the labor shadows, their firms pushed by financial incentives, temporarily lower payroll taxes and stronger enforcement to register with the government. Millions of Mexicans have opened their first bank accounts or received their first credit cards; banks now offer more mortgages, credit lines, and lending than in the past. Yet these gains represent only a small part of what the reforms can do for Mexico. The real payoffs for consumers, companies, and the economy will only happen down the road. It will take years for the $100 billion of foreign investment in the energy sector, for instance, to stanch the long slide in production with new finds and fields, and for the transformation of the electricity grid to increase production, lower prices, and boost clean energy. Challenges to dominant economic players and powers are just beginning: The new and fiercely independent antitrust agency COFECE has launched dozens of investigations into shipping, sugar, pharmaceuticals, airport taxis and pension managers, but the lower prices, competition, and innovation from this opening are yet to come. Changes in the classroom have barely started. A new curriculum that moves from rote memorization to critical thinking and social and emotional learning will be rolled out only this August, with the benefits accruing to the next generation of Mexican learners. Unfortunately, however, the country’s patience has worn thin. The government over-promised quick gains—GDP growth of 6 percent and drastic declines in poverty—leaving many Mexicans disillusioned. Mexico’s geographic economic chasms continue to deepen, the fast-paced productivity and Asian rates of economic growth in the NAFTA-linked north leaving behind the stagnating southern states. There, tens of millions of Mexicans—some 40 percent of the population—still face entrenched poverty, as good jobs remain few, and crime and migration combine to tear apart communities. Fiscal mismanagement and greed have further eroded public trust. Overspending every year by tens of billions of dollars, the Peña Nieto administration will leave Mexico vastly more indebted than when it started, with debt rising from a third to nearly 50 percent of GDP. And his government spent poorly: Public investment has plummeted to its lowest relative levels since the 1940s, as almost all of this new largesse has gone to salaries and benefits or disappeared into private hands. This administration’s profligacy and over-the-top corruption have cast a long shadow over the general economic consensus of the last 30 years. True, the second and third top candidates in the polls—respectively, Ricardo Anaya of the Frente alliance and Jose Antonio Meade of Peña’s PRI—promise to continue market-friendly policies, even in the face of a debt-constrained budget and battered credibility. Yet that could not be said of the populist who leads the polls, Andres Manuel Lopez Obrador. Champions of civil society, transparency, and strong independent public institutions can derive little comfort from some of his recent pronouncements. On the stump, he offers a return to a time of business subsidies, state ownership, and agricultural self-sufficiency. He repeatedly questions energy and infrastructure contracts—including those undergirding Mexico City’s new $13 billion airport—and promises to roll back the educational shifts underway. If that happens, the as-yet-unrealized promise of faster and more inclusive growth, and of a more competitive and prosperous Mexico, could recede yet further into the future.   View article originally published on Bloomberg View.  View article in Spanish, published by El Financiero.

Elections in Mexico and the U.S. could spell doom for any new agreement.

He isn’t negotiating. He’s stalling for time.

United States institutions have led the charge against corruption and corporate malfeasance in Mexico. But they can’t replace a working homegrown legal system. For all the strides Mexico has made in structural reforms, economic growth will remain out of reach until the nation can enforce basic legal rules. You can't blame that on Donald Trump.

If Russia wants to make life difficult for the U.S., Mexico's big vote next year offers rich opportunities.