Analysis: Mexican reforms likely on ice until at least 2012

By Jason Lange

MEXICO CITY (BestGrowthStock) – Political deadlock will likely sink President Felipe Calderon’s bid for big economic reforms before 2012 polls, hobbling Mexico’s efforts to revive a calcified economy and catch up with Latin American rivals.

Mexico may be the region’s No. 2 economy, but it is falling behind countries like Brazil and Chile in part because feuding politicians have failed to pass reforms to an unwieldy political system and outdated tax, energy and labor laws.

“Growth won’t take off without reforms,” said Juan Bueno, a senator in Calderon’s conservative National Action Party (PAN). “Politics is holding us back.”

When he took office in 2006, Calderon vowed to modernize Mexico’s economy, but plans for big changes have been torpedoed by the PAN’s lack of a congressional majority and by growing political rancor as Calderon fights a bloody war against drug cartels that has so far killed more than 28,000 people.

Now, as Mexico’s three major parties turn toward the July 2012 polls, even lawmakers from the president’s party admit the odds a divided Congress will pass meaningful reforms are slim.

“No political party wants to push them,” says Julio Castellanos, the PAN’s second-in-command in the lower house, where members of Calderon’s PAN party are mulling protests and hunger strikes to raise awareness about political gridlock.

Decades of low investment in education, energy and public infrastructure have handicapped Mexico’s economy and prompted millions of Mexicans to seek work in the United States.

The economy grew an average annual 1.9 percent in the last decade, compared to 3.7 percent in Chile and 3.3 percent in Brazil.

The problems behind those figures are many: despite Mexico’s status as one of the world’s largest oil producers, businesses complain about the high cost of electricity and natural gas. Restrictions on layoffs make companies wary of hiring new workers. A handful of firms hold near-monopolies in sectors like telecommunications and cement.

Unlike Brazil’s state oil firm Petrobras, which trades on the stock exchange, Mexico’s unlisted oil monopoly Pemex struggles to invest enough to update antiquated technologies and keep production from falling.

Chile has built investor trust by saving copper export earnings to buttress public coffers, while Mexico was slapped with debt downgrades last year because it is about as good as Haiti at collecting taxes.

The Mexican economy also suffered a punishing recession in 2008 and 2009, caused by weak U.S. demand for its exports.

REFORMS ON ICE

Little has been done to reform Mexico economy’s since the PAN took over in 2000, ending more than 70 years of rule by the Institutional Revolutionary Party (PRI).

Next month when Congress reconvenes, Calderon may propose tax reform to head off worries about long-term solvency, but the PRI has pledged to kill any plan that taxes food and medicine, a central idea in Calderon’s fiscal agenda.

Even the PAN sees little chance of success. “Tax reform is lost … because the parties are all thinking about 2012,” says Bueno. “Why propose something that will be stillborn?”

The PRI, usually the largest block in Congress, says Calderon is to blame for the gridlock because he is putting party interests over those of the nation.

“The PRI is willing to push reforms, but only if the president stops working as a political operator for his party,” said Sen. Carlos Jimenez, the PRI’s Senate spokesman.

The PRI was inflamed when the PAN teamed up with a leftist party in recent state polls, fanning fears the PRI’s power base could be weakened ahead of 2012 presidential polls.

POLITICAL REFORMS

No matter who wins in 2012, Mexico may need political reform as well to create jobs and resuscitate its oil sector.

Analysts say a fundamental problem is a political rule book that does not hold politicians accountable, and a ban on reelection for everyone from city councilors to the president.

There are other obstacles, including a system that allows party leaders, rather than voters, to pick nearly a quarter of lawmakers. Some politicians go from the lower house to the Senate and back without winning an election, which makes for decisions that don’t always match voter interests.

“It creates incentives for politicians to look at the short run and not the long run because, in any case, they’ll soon be gone,” said political scientist Federico Estevez. “And in order to move on, it might be best not to butt too many heads.”

This feeds entrenched partisanship that stands in contrast to the coalitions routinely formed in Brazil and Chile.

Several proposals for political reform have kicked around in Mexico’s Congress for years, including at least one that calls for reelection for lawmakers and more direct elections. Bueno said prospects for political reform are also dim.

That looks like a roadblock for efforts to boost growth — an urgent task in a country where one out of five people doesn’t earn enough to eat properly.

“They need to set up new rules of the game so they can get things done,” said Luis Rubio, who heads Mexico City’s Center of Research for Development.

(Additional reporting by Miguel Angel Gutierrez; editing by Missy Ryan and Eric Walsh)

Analysis: Mexican reforms likely on ice until at least 2012