Bad Signs from Mexico’s Incoming President

Last week I attended the annual meeting of the Economic Freedom Network organized by the Fraser Institute in Mexico City. But I was also on a mission: to find out what the deal is with Enrique Peña Nieto, the country’s incoming president.

After his election in July, many people asked me what to expect from Peña Nieto.  Is he committed to reforms? How’s he going to tackle drug violence? Is he an old dinosaur from the long-ruling and corrupt Institutional Revolutionary Party (PRI) with a fresh face and a good looking wife? I couldn’t come up with good answers even though I watched the presidential debates, followed the campaign closely, and read several good analyses on Peña Nieto and his team. Fortunately, I realized I wasn’t actually dropping the ball with my work. In Mexico, I could see first hand that nobody really knows what Peña Nieto is all about.

However, we might be getting some hints during this long five-month transition period. And it doesn’t look good. Reforma, a leading newspaper, reported yesterday that Peña Nieto and his team are studying the creation of six new cabinet departments for the following areas: telecommunications, women's issues, fishing, science, and government affairs. This would be part of the first legislative initiatives that Peña Nieto would submit to Congress. Many people hoped that the new president would prioritize reforms to make Mexico’s economy more competitive. But it looks like swelling the Mexican bureaucracy will be top of the order for the incoming administration.

Perhaps the biggest test to Peña Nieto’s reformist mantle is the labor law reform introduced by outgoing president Felipe Calderón, from the conservative National Action Party (PAN). The reform aimed to loosen the country’s stringent labor laws to make it easier for employers to hire and fire workers. The law also introduced more transparency and accountability to Mexico’s powerful unions (a historic constituency of the PRI). A good analysis from the Economist Intelligence Unit can be found here.

If Peña Nieto were truly committed to reform, he would rally his PRI caucus in Congress to support the bill. Unfortunately, the PRI scrapped the parts of the bill that limited the power of the unions and watered down those that introduced more flexibility to the labor market. The bill, which passed the Chamber of Deputies and now will be discussed in the Senate, is still a step in the right direction, but it could’ve been much better. And the PRI could still make it worse in the upper house.

Mexico badly needs reforms to make its economy more competitive. The country had the second lowest per capita growth rate in Latin America in the previous decade, less than one percent per year. The economy is now picking up, but it’s still far from its potential. Mexico will not be joining the BRICs any time soon.

The main obstacle to Mexico’s economic potential is the lack of competition in key sectors: telecommunications, transportation, cement, energy, among others. According to The Economist, “opening up oil [to foreign investment] and reforming labour markets and competition law could raise the rate of growth by up to 2.5 percentage points.”

Unfortunately, Peña Nieto’s first signs as president don’t look promising. He seems committed not to reform, but to the status quo.