Challenges and Promises for Mexico’s Future

mex summit

by Daniel Fisk,   George W. Bush Institute

shutterstock_115189144As it entered its third year in power on December 1, 2014, the government of Mexican President Enrique Peña Nieto was facing a crisis of confidence in official institutions.  The September disappearance and reported deaths of 43 students from Guerrero state at the hands of municipal police and criminal gangs, along separate allegations of corruption touching the First Family, have focused national and global attention on the state of governance.  Combined with on-going concerns about police abuses and simmering skepticism about the breadth of the benefits from recent reforms, these latest episodes have provided a catalyst for individuals and civil society organizations to urge action towards more transparent and accountable governmental entities.

This comes after two years of an unprecedented number of structural reforms that could fundamentally transform Mexico.  These include changes in the energy sector, as well as political reform and modernizations within the education, labor, telecommunications, legal, and fiscal systems.

All represent fundamental changes in Mexico’s operating model.  As a recent report noted, “Mexico’s ambitious structural reform agenda is creating prospects for higher growth, an expanding middle class, and a better-educated and more productive workforce.”

Of the reforms, those in the energy sector have received the most attention. The opening of that sector is a potential game-changer in North America and in global energy calculations.

GWBPC_Main_P_4c_borderWith 10 straight years of decline in oil production, reinvigorating the energy sector and reining in Petróleos Mexicanos (PEMEX), the state-owned energy company, were overdue steps.  PEMEX’s monopoly is ended, although it will continue to dominate Mexican energy production.  Equally of note, the reform limits the presence of the oil workers’ union on PEMEX’s board (long a source of the union’s power) and provides for the creation of the Mexican Petroleum Fund to manage oil revenues with Bank of Mexico oversight.

The modernization opens selected areas of the energy sector to private investment, with subsoil resources remaining the property of the state.  (Mexico retains a dual system whereby the state owns the resources in the subsoil and the surface is owned by individuals or communities.)  Service contracts, some profit sharing, production-sharing, and licensing activities in the areas of exploration and drilling will now be allowed.  As Reuters reported, implementation of the energy reform has taken “one of [its] first concrete steps stemming from the historic energy reform” with the announcement that winning tenders from private oil companies for 14 exploration and production contracts could be announced by mid-summer 2015.

In addition to revitalizing existing fields, expanding production through the development of new fields, and enhancing oil revenues, another objective of the energy changes is to expand the national electricity grid and transition.  The goal in the medium-term is to move from reliance on diesel and fuel oil for electricity generation to natural gas, which– it is believed — will lower electricity prices.

High electricity costs have been one factor impeding increased investment in Mexican manufacturing.  Ultimately, the energy reform seeks to enhance Mexico’s competitiveness, create jobs and boost the nation’s GDP.

Another noteworthy reform is in the telecommunication sector.  This reform aims to break up monopolies, a move that has been greeted positively by Mexicans across the spectrum.  The process is underway.

Reforms in education and the political arena also are being pursued.  Implementation of the education reform, which in general terms involves giving more power to the individual states, remains uneven.  Local leaders, especially the powerful teachers unions, are influencing the shape and pace of implementation.  Education reform faces the prospect of falling short of its objectives and public expectations.

Changes in Mexico’s electoral system and administration of justice are scheduled to be complete by 2018. The end of the long-standing “no re-election” rule for lawmakers and mayors has received the most attention.

Under the new process, members of congress and mayors will be able to run for re-election with term limits.  Senators can now serve two 6-year terms, and representatives can hold office for four 3-year terms; mayors will be permitted to run for re-election once.  The president and mayor of the Federal District of Mexico (Mexico City) remain limited to one term in office.

While the reform agenda has been impressive, the Mexican public’s reception has been mixed.  The energy reform, in particular, remains controversial with many Mexicans.

Energy remains a sensitive, historic issue for significant segments of Mexican society.  The reforms also have been accompanied by a simmering skepticism about whether they will produce broad economic growth that benefits all Mexicans, not just the current economic elite.

Adding to an uncertain reception for the reforms is continued sluggish economic growth.  GDP growth in 2013 was just over one percent. The government has revised its forecast for economic growth in 2014, from an initial projection of 3.9 percent growth to a range of 2.0-2.5 percent.

Many Mexicans, including those who support the reforms, are impatient for visible results.  Expectations for stronger growth in 2015 are running high and largely rest on the implementation of energy reform.

Considering its history, Mexico under President Peña Nieto has overseen the enactment of an impressive set of policies, compiling a remarkable number of accomplishments in the first two years of his six-year term.  The energy reform alone ensures his place in Mexican history and offers the greatest potential for the country’s prosperity.

However, as Mexico’s foremost historian and commentator Enrique Krauze has noted, President Peña Nieto must directly address the recent events that threaten to undermine his accomplishments:  “No strategy of reforms, even the most rational, can replace the legitimacy of ethical leadership, especially in times of crisis.”

Structural reforms, together with citizen trust in governmental institutions and those holding public positions of responsibility, will be the foundation for lasting prosperity and public confidence in governing institutions.

Daniel Fisk is a fellow with the Bush Institute’s economic growth initiative

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