The Impending Return of the PRI to Power and What It Means for Business in Mexico

The Impending Return of the PRI to Power and What It Means for Business in Mexico

 

Despite ruling country for 71 years between 1929-2000, Mexico’s Partido Revolucionario Institucional (PRI) has been out of power for almost 12 years and has only recently regained its footing in national politics. The right-of-center Partido Acción Nacional (PAN) has been at the helm since taking over the presidency in 2000 in what was declared to be Mexico’s first democratic elections. While the PAN has been in power for two consecutive terms, first under Vicente Fox Quesada (2000-2006) and then under Felipe Calderón Hinojosa (2006-2012), Mexico’s Presidency is likely to revert back to the PRI in this year’s presidential elections. The PRI’s candidate, Enrique Peña Nieto, a former Governor of the State of Mexico, is the clear favorite among the top three contenders, and the election is his to lose. How did the PRI regain prominence after over a decade out of power and what would a return to the presidency mean for the country and the economy?

The resurgence of the PRI under Enrique Peña Nieto

The prospects of the PRI’s return to power in July’s presidential elections has as much to do with the erosion of support for the other two main parties—the PAN and the leftist Partido de la Revolución Democrática (PRD)—as it does with the strong candidacy of Enrique Peña Nieto.

The erosion of support for the ruling PAN party

In the case of the PAN, there is an overall feeling of disappointment in the way the party has led the country for the past 12 years. Mr. Fox, whose campaign promised a "government of change," was in effect a lame-duck president who lacked the ability and political shrewdness to pass Mexico’s most needed structural reforms, which languished in the opposition-controlled Congress. Mr. Calderón scraped into office on the narrowest of margins in what remains a highly controversial election against his then-rival, Andrés Manuel López Obrador of the PRD. Calderón chose to focus his term on the fight against organized crime, and has been highly criticized for his administration’s tactics against the country’s principal drug cartels, which have yielded mixed results at best and have coincided with a rise in violence in several parts of the country (not to mention a significantly higher death toll than in years past, which has included many civilians).

The growing feeling of insecurity within the country has been compounded by a perceived increase in poverty and unemployment. And while nominal GDP growth reached 4% in 2011, Mexico needs much faster growth to absorb the sizeable number of unemployed workers and new job applicants entering the labor market every year—not to mention to make a dent in the sizeable informal sector. Moreover, the Calderón administration has been equally as unsuccessful in passing key reforms Mexico depends on to grow at its full potential and enhance its economic and business environment, mainly due to a lack of consensus among parties and the PAN’s lack of congressional majority. Stalled reforms include, among others, much-needed changes to the tax system (to broaden the tax base and reduce reliance on PEMEX for government revenue); labor markets (to ease expansion and contraction of the labor force and reduce the influence of certain unions); the energy sector (to enable PEMEX to operate like a business and collaborate with private-sector firms); market competitiveness (to reduce the influence of monopolies and remedy critical skills shortages); and law enforcement (to improve the professionalization of the police, prison, and court systems in particular). As a result, it is unlikely that Josefina Vazquez Mota, the PAN candidate, will be able to keep her party in Los Pinos.

The decline of López Obrador

Meanwhile, Mr. López Obrador returns as the candidate for Mexico’s PRD. While Mr. López Obrador is a formidable campaigner and has traveled extensively across the country to canvas support for his candidacy after being declared the runner-up in 2006, his chances of getting elected this time around remain slim. He lost much goodwill and political capital with his harsh reaction to losing the 2006 election—which included condoning the takeover and organized sitin on Mexico City’s Paseo de la Reforma (one of the capital’s most prestigious and symbolic avenues) with paid protestors for over a month, and declaring himself the “legitimate president” in defiance of Calderón’s swearing-in as the new head of state. His actions at the time left him looking a like a sore loser and compromised political figure in the eyes of swing voters—a key electoral constituency in the upcoming vote (comprising an estimated 20% of voting-age adults in the latest polls). Furthermore, while Mr. López Obrador has recently—and somewhat belatedly—begun courting the private sector and key business leaders, many question how some of his political promises will withstand economic scrutiny and the pressure to honor longstanding trading relationships and open market principles.

The rise of Peña Nieto

In contrast to the relative weakness of the PRD and PAN campaigns (which were the two leading parties who fought a neck-to neck race in 2006), The PRI has returned from the political wilderness with a strong, focused, and politically unified campaign centered around Enrique Peña Nieto as the sole, undisputed standard bearer of the party’s fortunes in the upcoming election. Bringing a rejuvenating face to the party that ran Mexico for over 70 years, Mr. Peña Nieto rose through the ranks of the PRI as the protégé of powerful party leaders, and has been groomed for high office ever since rising to prominence as Governor of Mexico State from 2005- 2011. Under the guidance of the PRI’s power brokers and the party elders he is aligned with, Mr. Peña Nieto has rallied other factions to his cause—in an unusual show of party unity—with the sole purpose of bringing the party back to power. Moreover, his staggering good looks, his marriage to a popular Mexican soap-opera actress, and his tightly scripted public appearances have made him into a celebrity public icon. His campaign staff quickly came to realize that these assets, combined with smart positioning of their candidate as the antidote to the general disappointment with the ruling PAN party, are the PRI’s best allies for a winning campaign.

So far, Mr. Peña Nieto has been shrewd about not making outlandish commitments; he remains at the top of the polls, with a 20-point lead over his nearest rival. Barring some dramatic missteps in the final 2-month stretch, he is likely to win by a significant margin. The question is, what will happen once the PRI returns to power? Can Mexico expect a return of old-school PRI politics or will Mr. Pena Nieto assert himself and chart a new course for the country?

What to expect under the PRI

That the PRI will return to power is not in and of itself indicative of the economic policies that a PRI administration would likely adopt for the coming six years. Indeed, no single economic philosophy defines the party: during its 71-year rule, the PRI—and the country—experienced a dramatic shift from left-wing, socialist economic orthodoxy to business-friendly, market-opening politics typically associated with right-of-center parties. President Lázaro Cárdenas del Río (in power from 1934-1940), for instance, promoted the nationalization of the oil industry and the creation of Petróleos de México (PEMEX)—the state-run oil company, which to this day still account`s for 33% of the federal government’s revenues. At the other end of the spectrum, President Carlos Salinas de Gortari (in office from1988-1994) promoted the privatization of state-run companies such as Teléfonos de México (Telmex) and the banking services, as well as Mexico’s entry into the North American Free Trade Agreement (NAFTA). That said, it must be noted that Mr. Peña Nieto is very close to Mr. Salinas de Gortari, who is commonly referred to as his political godfather, which may suggest he will remain aligned with the market-oriented policies of the former president (and his successors from both the PRI and the PAN in Los Pinos).

Policy areas likely to remain unchanged

Indeed, in many regards, a Peña Nieto administration would mean continuity for general economic conditions and the prevailing business environment:

  • From the macroeconomic perspective, Mexico will likely experience continuity of its current policies, favoring a positive economic environment, low inflation rates, and an autonomous central bank.
  • As per foreign policy, the fight against organized crime and drug cartels would remain the center of bilateral relations between the United States and Mexico. The United States will remain Mexico’s leading trade partner, though Mr. Peña Nieto’s administration will likely seek to diversify exports, notably to other Latin American countries as well as China and Europe. He will rely on Mexico’s wide network of free trade agreements and will likely urge greater investment by China to facilitate the recovery of exports, especially as consumer demand strengthens in the United States. His administration will continue to reduce tariff and non-tariff barriers, but quotas will most likely persist for sensitive products such as clothing, footwear, the publishing industry, and agricultural products.
  • Mexico will continue to have open policies towards foreign investment, especially in manufacturing. The financial services industry is likely to continue growing, attracting foreign direct investment, especially from private pension funds, as well as in debt and equity markets.
  • While Mr. Peña Nieto recognizes the shortfalls of the education system, his administration would offer little-to-no prospect of substantive education reform, mainly because of the continued political clout of the powerful teachers’ union. The result will be continued skills shortages, favoring the proliferation of low-skill manufacturing jobs at the expense of R&D or other jobs requiring highly skilled workers.
  • Mr. Peña Nieto also recognizes the need for comprehensive labor reform, and has campaigned for broadening social security, pensions, and unemployment insurance. However, his administration is unlikely to address such a politically sensitive reform.

Select changes that could affect business

The more likely changes would likely come in select sectors and would be consistent with Mr. Peña Nieto’s previous priorities as Governor and representative of his ties to specific business interests:

  • Infrastructure development will likely play a key role within Mr. Peña Nieto’s agenda, as his administration would seek to collaborate with private firms for the construction of multimodal infrastructure corridors, replicating an approach he widely used during his tenure as Governor.
  • On the business front, Mr. Peña Nieto could well direct the competition commission to crack down on monopolistic practices, on the grounds that it will promote higher levels of competitiveness. Yet, in truth, his administration’s priorities in this regard would be dictated by his strong ties to select business interests. If he chooses to focus on breaking up monopolies, Mr. Peña Nieto will likely begin with an incremental liberalization of the telecommunications industry, which is currently dominated by TELMEX for landlines (80% market share) and Telcel for mobile lines (71% market share), but given his close ties to Televisa, the liberalization of media—and, specifically, television—markets will likely be a second-tier priority. It is unlikely that Mr. Peña Nieto will confront PEMEX; however, he may push for a greater degree of collaboration with foreign firms towards the end of his term (but only if he has sufficient political capital to warrant it).
  • With regard to stimulating the business environment, there is good chance that Mr. Peña Nieto will press to reduce bureaucratic procedures for business startups, cutting back on red tape and promoting the expansion of fast-track schemes. This would be part of a more complete fiscal package that would seek to simplify the tax system, broaden the tax base, and place greater emphasis on VAT collection. Nevertheless, short-term tax collections will continue to rely on large companies and revenues from PEMEX.

Continuity is more likely than dramatic change

The PRI is unlikely to secure a congressional majority within the next six years, which means that just like his two PAN predecessors, Mr. Peña Nieto will have to negotiate passage of key reform bills with opposition parties—most likely the PAN (especially on the economic front). Yet while the PAN may agree with some of these reforms on ideological grounds, the party may choose to obstruct Mr. Peña Nieto’s agenda on political grounds—just as the PRI itself has done repeatedly with presidents Calderón and Fox. The result would be further gridlock and watered down bills that Mexico can ill afford. Mr. Peña Nieto’s political maneuverability will be put to the test.

In general terms, should the PRI win the 2012 presidential elections on July 1st, the next administration will hold more of the same for Mexico. Substantial changes in the business and economic environment will be slow to take hold. Nevertheless, “slow and steady” is sometimes welcome news, especially in a global market with high volatility.




Guillaume Corpart is the Managing Director of Americas Market Intelligence and a veteran of Latin American competitive intelligence and strategy consulting.


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