Economy, Not Drug War, Peña’s Main Challenge

The media have focused on Enrique Peña Nieto’s security policy, but the economy will be his priority.

Although some of the votes are being recounted to ensure that there were no irregularities, there is little question that Enrique Peña Nieto won the presidential election in Mexico this weekend. After twelve years, it marks the return to power of the country’s Institutional Revolutionary Party which ruled Mexico for more than seventy years in what was widely regarded as an authoritarian manner.

Peña’s win is hardly a repudiation of Mexican democracy however. It rather signals a desire for change than a reminiscence for the days of single party rule. As the third place finish of the incumbent liberal National Action Party showed, Mexican voters overwhelmingly desire a different economic and a different security policy.

Drug related violence in Mexico has increased dramatically during the last twelve years while economic growth has been lackluster. During the worst of the 2008-2009 financial crisis, the Mexican economy contracted by almost 10 percent.

Of the two issues, security and the economy, the former has captivated the attention of international news media. Much has been made of the potential consequences of a PRI government for the war on drugs and Mexico’s relations with the United States. American officials worry that Peña will turn a blind eye to the cartels due to public pressure. This is unlikely. He faces several constraints to his actions.

Peña’s administration will be one of negotiations and commitments. The governors of Mexico’s northern states are unlikely to accept an army retreat. Moreover, Peña faces powerful adversaries within the party, including former Senate president Manlio Fabio Beltrones who will hold considerable clout in the new Congress. Finally, the PRI was not able to win an absolute majority in Congress. Peña will have to negotiate with other parties.

Although he has announced changes in security strategy — tackling specific crimes and increasing the responsibilities of American authorities — Peña’s election will not upset bilateral relations altogether. To combat the cartels, American-Mexican cooperation is an necessity.

More attention should be paid to Peña’s economic agenda, however, because if he manages to reduce public pressure on this front, Mexican authorities will be more able to implement a wide range of actions to thwart the cartels’ activities in cooperation with the United States. Unfortunately, the prospects do not look good.

While Mexico has recently surpassed countries as Brazil in terms of macroeconomic stability and growth, a report from the Center of Economic and Policy Research shows that average GDP per capita growth for 1980-2000 and for 2000-2011 has been stagnant: .8 and .9 percent, respectively. In other words, the expansion of the Mexican economy has not translated into more income per household.

Moreover, the financial crisis destroyed what had been gained in terms of poverty reduction. Though unemployment has decreased, it has still to reach its prerecession levels. Underemployment has doubled, from 6.3 to 13.2 percent while real wages have continued to shrink.

Peña has declared that his aim is to lift GDP growth by 6 percent per year. In order to achieve it, he has set several proposals of which the following are among the most important ones.

With respect to labor, Peña seeks to establish a beneficiary state and take measures so as to make wages grow faster than inflation. He has promised to boost tax revenues and decrease the government’s dependence on oil revenue. On the topic of public investment, his proposals are reminiscent of targeted industrial policy.

Peña has also declared that his government will deepen the strategic relationship with the United States but also work to increase South-South cooperation and trade with other emerging economies.

Finally, perhaps his most interesting proposals are strengthening competition regulations, which would affect monopolies, and advancing an energy reform to open the hydrocarbons industry, especially oil, to foreign investment.

Mexican experts have criticized Peña’s growth target as too optimistic and his proposals as too general and lacking quantitative, i.e., measurable, objectives. One of the reasons, as mentioned, is that Peña’s actions will be highly constrained by political realities. Approving the necessary reforms will require careful negotiation with interest groups, unions and opposition parties.

That is not to say that Mexico’s future is a gloomy one. On the contrary, as Fareed Zakaria recently argued, it is a nation on the rise. Mexico fares better than most of the BRICS countries in several categories, including the “ease of doing business.” But there is much more to be done. It will be up to the next government to implement the necessary policies to improve not only the macro but also the microeconomic situation in the country.

While his proposals have been justly criticized, Peña has surrounded himself with capable individuals such as his campaign coordinator, Luis Videgaray Caso, who holds a PhD in economics from MIT, and Emilio Ricardo Lozoya Austin, the former director of the World Economic Forum in Latin America. They will likely be part of Peña’s cabinet and be able to impact positively Mexico’s economic decisionmaking.