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Back to the Future for Mexico

Youthful presidential candidate Enrique Peña Nieto appears set to lead the once-dominant PRI back to power. Can the party spark a similar turnaround in Mexico’s fortunes?

MEXICANS HAVE ALWAYS ACCEPTED that life demands that they embrace the starkest contradictions, the late author and poet Octavio Paz once said. As the country’s presidential election campaign nears its conclusion, Mexicans have much to embrace. Consider the following Paz-like contradictions. Mexico’s growth rate has lagged those of the BRIC nations, millions of its citizens are jobless, and millions more work illegally across the border in the U.S., yet the country has become one of the world’s great manufacturing exporters, shipping more flat-panel TV screens abroad than South Korea. A five-year, drug-related war has left more than 50,000 Mexicans dead, many of them slaughtered brutally, their torsos scattered on public highways, yet the country last year drew record numbers of foreign tourists. In this country of contradictions, perhaps the ultimate irony is the Institutional Revolutionary Party. The PRI (its Mexican acronym) is one of the most corrupt ruling parties in Latin American history. Its leaders stole untold billions of pesos, rigged hundreds of elections and muzzled or bribed opponents to rule for most of the 20th century — almost as long as the Soviet Union’s Communist Party — before public disgust finally drove it from power and into disgrace a dozen years ago. Yet today the largely unreformed party is on the verge of winning a resounding victory in July’s presidential and congressional elections.

The party’s presidential standard-bearer is Enrique Peña Nieto, a PRI princeling who combines the deft political skills of a party insider with the youthful good looks of a matinee idol. Last month Peña Nieto took his campaign to San Luís Potosí, a former silver-mining capital in the heart of the country, some 225 miles north of Mexico City. In the searing desert heat, the shirtsleeved candidate was drenched in sweat as he pressed the flesh with a bused-in crowd of some 500 campesinos and urban workers at an outdoor restaurant on the city’s outskirts. In an address to the gathering, Peña Nieto promised free medicine but said nothing about how a new government would end widespread pharmaceuticals shortages. Later that day, addressing an audience of 400 criminal experts at a downtown foundation, Peña Nieto, dressed in a suit and tie, vowed “an end to impunity” for the drug-cartel-linked murderers, kidnappers and extortionists who terrorize the country, but he offered no real alternative to the current military offensive against narcotics traffickers, the signature policy of outgoing President Felipe Calderón, whose failure has undermined support for his conservative ruling National Action Party (PAN). Such is the yearning for change — even for a return to power by a PRI that shows no evidence of having reformed itself — that Peña Nieto can dispose of troublesome questions about his party’s history with the same ambiguity he reserves for such key issues as law and order, health and economic reforms. Asked by Institutional Investor after a campaign speech what assurances he could provide that there will be no return to corruption under a PRI government, Peña Nieto insisted that the sins of a bygone era would never be tolerated today. “It should be clear to anybody that there have been dramatic political changes in this country since then,” he says. When the question comes up again at a press conference the same day, this time alluding to criticism by Calderón and other PAN government officials, Peña Nieto is clearly more riled and shoots back, “It’s a sign of desperation by a governing party that has failed the country over the last dozen years.” Ahead of the July 1 election, opinion polls offer ample reason for the PAN to feel desperate. Peña Nieto, an articulate and personable centrist who looks a decade younger than his 45 years, has maintained a consistent lead of more than 20 percentage points over the PAN candidate, Josefina Vázquez Mota, 51, and Andrés Manuel López Obrador, 59, perennial standard-bearer of the left-wing Party of the Democratic Revolution (PRD). The PRI, which nearly broke up after its second defeat six years ago, is on the verge of achieving a stunning comeback. The resurgence of the PRI is taking place at a time when investor optimism about Mexico is soaring. Last year $19.4 billion of foreign direct investment poured into the country, including $10.7 billion from the U.S. Among emerging markets, only China, Brazil and Russia attracted more FDI. Mexico has evolved into an emerging-markets superstar in manufactured exports, with one of the world’s most open economies and a freely floating exchange rate supported by a stable monetary policy that has kept the central bank interest rate at 4.5 percent since January 2010. Many investors hope that the PRI will not only take the presidency but also gain a majority in both houses of Congress that will allow it to carry out much-needed reforms in tax and competition policy, labor rules and the energy sector. Mexico has one of the largest underground economies in Latin America, depriving the government of huge tax revenues. Though blessed with some of the most abundant hydrocarbon reserves in the world, the state-owned monopoly, Petróleos Mexicanos, or Pemex, is among the most inefficient oil and gas producers on the globe. And with a handful of giant monopolies and oligopolies, such as Carlos Slim’s América Móvil, dominating much of the economy, Mexican consumers pay high prices for many basic goods and services. During the campaign Peña Nieto has urged a role for private companies in the energy sector, but he has backed away from any suggestion that the state should relinquish an iota of ownership in Pemex. He has advocated enrolling more workers in the formal economy by reforming social security and labor legislation, thus raising new sources of tax revenue, but he has offered few meaningful details. The PRI, like the PAN, has talked for years about beefing up regulatory agencies to ensure fairer competition, but neither party has ever achieved significant results. Above all, the PRI knows it is benefiting from deep popular disappointment with the PAN. That party ousted the PRI from power in 2000 by promising to bring genuine accountability to government and to pursue economic reforms. But two successive PAN governments — first under president Vicente Fox (2000–’06) and then under Calderón — failed to deliver much in the way of reform and proved unable to stem the surge in criminal violence in the nation. The lack of meaningful economic reforms largely accounts for the country’s mediocre economic performance over the past decade. The Mexican economy has grown at an average annual rate of 2.5 percent over that period, leaving the country trailing far behind the BRIC nations. Especially hard to take for many Mexicans, Brazil has displaced their nation as the unquestioned leader of Latin America, thanks largely to a China-fueled global commodity boom that has brought windfall profits to Brazilian agrarian and mining companies. Yet in a trend largely unnoticed by many Mexicans and the rest of the world, Mexico has been beefing up its export-oriented factories even as its overall economic performance has been lackluster. “Mexico hasn’t been as glamorous a story as Brazil,” says Sergio Martín, a Mexico City–based economist for HSBC Holdings. “The commodity boom dominated world news, while the story in Mexico is manufacturing.” And a remarkable story it is. With the full effects of the 1994 North American Free Trade Agreement kicking in, Mexico’s exports rose 15.5 percent last year, to a record $350 billion, with manufactured goods accounting for 81 percent of the total. Mexico is the world’s fifth-largest exporter of cars, behind Germany, Japan, France and South Korea; it ranks first in exports of refrigerators and flat-screen TV panels, third in cell phones and second in beer. According to an HSBC research report released in March, Mexico could overtake China and Canada to become the top trade partner of the U.S. by 2018. The U.S. is now the destination for almost three quarters of Mexican exports. To be sure, the incoming government — whether PRI, PAN or PRD — faces formidable problems. The drug war shows no signs of abating; in mid-May, in an all-too-common incident, 49 headless corpses were strewn along roadsides on the outskirts of Monterrey. Anti-immigrant sentiments and a sluggish economy in the U.S. have stemmed the growth in undocumented Mexicans living north of the border, now estimated at roughly 7 million, and threatened to reduce the $22.7 billion in remittances they sent back home last year. The closing of opportunities in the U.S. is exacerbating the so-called ni-ni phenomenon — the 7 million Mexicans aged 16 to 25 who neither go to school nor have jobs (“ni escuela ni trabajo”). Then there is an underground economy of staggering proportions that deprives the government of revenues and keeps wages low. Last but not least, the energy sector desperately needs input from the private sector to restore productivity and profits at Pemex, which actually runs losses. Despite these major impediments, Mexico’s manufactured exports have grown rapidly — none more so than automobiles, which account for 28 percent of all industrial products sold abroad. The foreign companies that dominate the sector, led by Nissan Motor Co., General Motors Co., Volkswagen and Ford Motor Co., have increased the scale and efficiency of their Mexican plants, and in the process roiled trade relations with Brazil. Mexico exported 147,000 vehicles to Brazil last year, a fivefold increase from 2007, reflecting both improved quality and the weakness of the peso against the Brazilian real. After Brazil threatened to end a 2002 agreement on tariff-free car trade, Mexican automakers agreed in March to reduce the $1.7 billion car-trade surplus in their favor last year to $1.4 billion in 2012 and to not allow it to rise above $1.6 billion until after 2014. About 70 percent of the 2.14 million cars exported by Mexico last year were sent to the U.S., a market that China has yet to crack. A narrowing wage gap helps explain that success. Only a decade ago Mexican blue-collar wages were five times higher than Chinese salaries. Today the gap has been cut to 30 percent and continues to narrow as Chinese incomes have skyrocketed while Mexican incomes have risen barely 1 percent annually, in dollar terms. And Mexican labor is abundant. Between now and 2035 most of the country’s population will be of working age, while China’s labor force is aging fast as a result of its one-child-per-family law. “Mexican workers are skilled enough, and engineers can follow instructions,” says Martín, who predicts auto manufacturing in the country will double by 2015. Mexico is pressing other comparative advantages over its mammoth Asian rival. High fuel prices have added to the expense involved in shipping Chinese goods vast distances to U.S. markets. The widespread adoption of just-in-time production and distribution methods by U.S. businesses large and small has also given manufacturers in nearby Mexico a growing edge over their faraway Chinese competitors. Even traditional Mexican businesses like shoemakers are benefiting from these trends. Along the Pan-American Highway some 350 miles south of the U.S. border is León, Mexico’s footwear capital and headquarters of family-owned Emyco, the country’s biggest shoe manufacturer. Emyco has boosted its exports by 25 percent a year over the past two years. Exports, which go almost entirely to the U.S., now account for 17 percent of sales. Domestic revenue, by contrast, has increased by only 2 percent a year during the same period. “Sure, we’re big and we’re growing, so we can shift from the domestic to the export market,” says Felipe Martínez, sales manager and heir apparent to his father, also named Felipe, the chief executive and owner. “Unfortunately, the smaller manufacturers cannot.” These small and medium-size shoemakers — there are more than 150 such companies in León — are getting whipsawed by the open economy. Because they exist largely outside the formal economy, they have no access to the bank credits that would allow them to invest and compete with Asian imports. Despite its increasingly modern economy and booming manufacturing sector, Mexico has one of the smallest banking penetration rates in Latin America. Commercial bank lending to the private sector amounts to just 15 percent of GDP, compared with 45 percent in Brazil and 40 percent in Colombia. Because so many small and medium-size businesses operate underground, Mexican manufacturers and retailers have not exerted the influence of their Brazilian peers in lobbying for more protection from imports and currency volatility. In Brazil the central bank has reduced rates recently, at least partly in a bid to weaken the real. “By contrast, the Mexican peso has been completely liquid and convertible, and trades 24-7,” says L. Bryan Carter, portfolio manager with Boston-based Acadian Asset Management, which has about $400 million in peso holdings. “Over the past 15 years, there has been no intervention at all, no matter who the Mexican president or central bank governor has been.” Elections usually mean currency volatility in Mexico — but not this time. A major reason has been the growth of the middle class, which may have reached a tipping point in electoral strength over the past dozen years. According to a January report published by the Washington-based Woodrow Wilson International Center for Scholars, 53 percent of urban Mexicans are now middle class. Since 2000 some 6.5 million Mexican families have taken out mortgages, giving them real assets, access to consumer credit lines and an aversion to volatility. “A large middle class is voting for candidates who are committed to political and economic stability,” says one of the report’s co-authors, Luís Rubio, who heads Cidac, a think tank in Mexico City. The major parties have responded to that demand. There was never any doubt that the conservative PAN and its presidential candidate, Vázquez Mota, championed the middle class. But Peña Nieto has shed the tired populist slogans of the 1910–’21 Mexican Revolution, which were always part of the PRI’s campaign rhetoric. And the PRD’s López Obrador is insisting this time that he is the candidate of “love, lots of love.” If, as the polls indicate, the PRI regains the presidency and a congressional majority after 12 years out of power, it will have pulled off a remarkable return from near-oblivion. Born from an amalgam of the surviving factions of the Mexican Revolution, the party formally organized itself in 1929 and ruled for the next seven decades as “the perfect dictatorship,” a phrase coined by Peruvian novelist and Nobel laureate Mario Vargas Llosa. Despite a veneer of democracy, elections were often fraudulent, intellectuals were coopted through government stipends, the state took a dominant economic role, and corruption was rampant. When elections finally became transparent in 2000, the PAN’s Fox won the presidency. Six years later he was succeeded by his fellow party member Calderón. The PRI ran a distant third in that 2006 election, behind the PRD’s López Obrador, and risked fragmentation. Yet in last year’s state elections, the PRI gained 20 of the 31 governorships, giving it a huge advantage in the contest for the biggest prizes: the presidency and a majority in Congress, whose members are also up for election in July. How did the PRI get back in the game? For one thing, its opponents proved inept. Calderón was unable to stop the drug-related violence and, like his ineffective PAN predecessor, Fox, failed to negotiate any notable labor, tax or energy reforms through Congress. The current PAN presidential candidate, Vázquez Mota, a former businesswoman, journalist and Education minister under Calderón, hasn’t maintained the excitement she initially generated in becoming the first female presidential candidate of a major party. The PRD’s López Obrador, a former Mexico City mayor who narrowly lost the 2006 election, spent the next five years quixotically declaring himself the legitimate president of Mexico and refusing to recognize the legality of the Calderón government. “The PAN is perceived as bumbling — as just not having the horsepower to get things done,” says former U.S. ambassador to Mexico James Jones, who now runs Manatt­Jones Global Strategies, a Washington-­based firm that advises businesses on Latin America. “Meanwhile, the old guard of the PRI certainly didn’t like all those years in the wilderness and started to develop younger people like Peña Nieto to give the party a new face.” The PRI’s old guard evokes images of big-city ward heelers and rural caciques, or bosses — still weighty presences throughout Mexico. But it also includes brainy, upper-middle-class pols like former congresswoman Esther Césarman, known to almost everyone as “Mocita,” who has a political science doctorate. “During the past dozen years, those of us left standing continued the fight to save the PRI,” says Mocita as she drives through her blue-collar ward in Cuajimalpa, a gritty district of repair shops and shabby one-story homes in southwestern Mexico City. What made the task easier was the inability of the PAN or the PRD to keep grassroots networks in place beyond election campaigns. In her ward Mocita continued to convoke PRI partisans once or twice a month to discuss politics. “People also kept calling me to ask for assistance or advice,” she says as her car edges up a steep, rutted street named Las Chinches Bravas (the Vicious Bedbugs). Former constituents wanted her help in getting a scholarship for a child or placement at a better school, in arranging a secretarial job for a recently graduated daughter or in gaining admittance to a decent hospital for an ailing relative. More often than not, Mocita could deliver or at least suggest a well-placed PRI member who could. “The PRI was a great school to develop political leaders,” she says. Peña Nieto is a prime example. He was born in the state of Mexico, just north of Mexico City, into a family of PRI politicians; a cousin of his parents, former governor Alfredo del Mazo, was once considered a possible PRI presidential candidate. Peña Nieto decided on a political career when he was barely in his teens. Unlike politicians of earlier generations who launched themselves with law degrees from the once-prestigious National Autonomous University of Mexico, a public institution, Peña Nieto graduated with an MBA degree from Mexico’s MIT: the Monterrey Institute of Technology, a private university. During the 1980s and ’90s, he moved up the PRI’s ranks while holding a succession of economic and political posts in the Mexico state government and winning election to the state legislature. Hardworking and deferential, Peña Nieto gained a reputation as a talented organizer and negotiator who could help advance bills and programs for more-senior PRI politicians. With their backing, he beat out several more-experienced officials to become the PRI gubernatorial candidate for the state of Mexico and won election in 2005. Five years later Peña Nieto, a widower with three children, married a former television soap opera star, Angélica Rivera. As governor of the country’s most powerful state, Peña Nieto emerged early on as the favorite to become the PRI presidential candidate in 2012, and he has remained the front-runner throughout the campaign. He has portrayed himself as the candidate of competence and succeeded in making inroads even among the deep-­pocketed entrepreneurs who used to favor the PAN. “The vast majority of businesspeople I talk to say they now back the PRI because it knows how to run a government,” says former U.S. ambassador Jones. But there is no compelling evidence that the PRI has reformed itself. In fact, the party’s campaign slogan — “We know how to govern” — has a subtext that many voters translate as “We may not be clean, but we will get things done.” All too many Mexicans recall PRI presidents, governors, Congress members and mayors who entered politics with middle-class incomes and retired as millionaires. Some of the worst scandals occurred under president Carlos Salinas de Gortari (1988–’94), who was initially hailed in Mexico and abroad for modernizing and privatizing large parts of the economy. But corruption and malfeasance under his presidency was so rampant that his brother, Raúl Salinas, spent ten years in prison while being investigated for the murder of his brother-in-law, rising politician José Francisco Ruíz Massieu, as well as charges involving hundreds of millions of dollars in money laundering, drug trafficking and kickbacks. The PRI insists that in this era of free, transparent elections, the threat of being booted from power again is incentive enough to keep the party from engaging in scandalous acts of corruption. “Today we live under a democracy that requires politicians to deliver on their promises, and if they don’t, they will be voted out,” says Peña Nieto. Of course, the PRI doesn’t have a monopoly on corruption. The current Wal-Mart Stores scandal, involving the alleged payment of $24 million in bribes to speed the openings of new stores in Mexico, happened under the PAN’s watch. But the PRI’s sorry record extends over many more decades and billions of dollars. The biggest litmus test on corruption facing a new PRI administration would be its dealings with the drug cartels. Even after more than 50,000 drug-war-related deaths over the past five years, few Mexicans believe that President Calderón is any closer to taming the cartels. Public opinion polls consistently show that violent crime ranks at or near the top of voter concerns. The frustrations and fears of Mexicans are understandable: The vast majority of drug demand is north of the border, in the U.S., as is the supply of firearms used in much of the killing. A Peña Nieto government might attempt to return to the PRI policy of the 1990s, when the cartels cooperated with parts of officialdom to the benefit of both sides. In those years there were charadelike dragnets against gangs that had fallen out of favor, but they convinced nobody on either side of the Mexico-U.S. border. In the worst of many scandals, only ten weeks after his appointment in 1997 as Mexico’s highest-ranking antidrug official, general José Gutiérrez Rebollo was arrested on charges that he had accepted bribes in exchange for protecting a high-level Mexican drug trafficker. But it would be difficult for the PRI to reset the clock to an era when it could protect or negotiate with organized-crime lords. Calderón’s offensive has crippled and decentralized some cartels, creating many smaller, less organized gangs. “So who can the new government negotiate with?” asks David Shirk, director of the Trans-Border Institute at the University of San Diego and an expert on the Mexican drug cartels. “You can’t just call everybody to a table like in The Godfather.” Even if the new government decides to suspend the military offensive against the cartels, it will not necessarily lead to a reduction in violence. The majority of drug-war-related killings result from fights among rival gangs over turf rather than from their battles with the security forces. And the collateral damage against civilians is rising. Large corporations can afford to spend heavily on security. But according to the Mexican Employers’ Association, known as Coparmex, intimidation by organized crime forced 160,000 small, family-owned businesses to shut down last year. “If a group doesn’t have access to drug-trafficking routes, it will go after the low-hanging fruit and move into kidnapping and extortion,” says Shirk. “That’s already happening with ordinary Mexicans, though not yet with Americans.” Nowhere is this more apparent than in Michoacán, Calderón’s home state in central Mexico. Despite the very visible presence of army troops and ski-masked federal police agents, three major gangs — the Sinaloa cartel, Los Zetas and La Familia Michoacana — are battling one another. In Zitácuaro, an attractive, hilly, Spanish colonial–style town, the violence has scared away only some of the American tourists who use the community as a base for tours of nearby fir forests, where hundreds of millions of monarch butterflies migrate annually from the U.S. and Canada. In fact, despite U.S. State Department warnings about certain parts of Mexico, a record 22.7 million foreign tourists visited the country last year. The InterContinental Hotels Group, headquartered in the U.K., is one of the largest foreign investors in Mexican tourism, with 120 hotels and 40 more due to open over the next five years. “Our development activity in Mexico remains robust,” says Kirk Kinsell, IHG president for the Americas. “We are seeking growth of revenue and occupancy rates.” Mexicans remain fearful, though. In January, 15 headless corpses appeared on Zitá­cuaro’s outskirts, apparent victims of gang warfare. Shuttered storefronts offer evidence of the kidnapping and extortion of ordinary citizens. One dry-goods store owner moved to Morelia, Michoacán’s capital, in March because, according to a cousin, he was forced to pay a ransom “that wiped him out — his capital, his savings, his inventory, everything.” In a referendum of sorts on the government’s handling of the drug wars, the president’s sister Luisa María Calderón lost her bid last November for Michoacán governor to the PRI, whose candidates swept much of the state. But local politicians, no matter what their party affiliation, largely avoid confrontations with the gangs and often receive bribes rather than bullets for doing so, in strict observance of the cartels’ warning: “plomo o plata” — “lead or silver.” Though vague about how they would reduce the levels of criminal violence, PRI officials have suggested that security forces focus less on trying to stamp out drug traffic and direct their efforts at improving the safety of ordinary Mexicans. “The priorities will be ending impunity for murders, kidnappings and extortion,” Peña Nieto tells II. He has called for the creation of a new federal gendarmerie to support smaller communities with inadequate security forces of their own. Critics point out that such a force will take time to build and would probably fare no better than the current combined forces of the army and the federal police. Experts on the cartels have little optimism that violence will soon diminish. “Even if the government stops going after the cartels, it will not necessarily lead to a reduction in violence, because there is too much competition between all those smaller gangs,” says the Trans-Border Institute’s Shirk. In the end, a war of attrition against the cartels and a total reconstruction of the judicial system, which convicts less than 1.5 percent of all criminals brought to trial, appear to be the only solutions and will likely take the determined efforts of two or more future governments to accomplish. With bitter humor, Mexicans point out that drug trafficking is one of the few major business sectors not under monopoly control. From tortillas to television to telecommunications, the economy is dominated by monopolies and duopolies, most of them created in the 1980s and ’90s, when PRI governments privatized many state enterprises. The lack of competition has cost consumers dearly. According to a January report by the Organization for Economic Cooperation and Development, Mexico loses $25 billion annually, equivalent to 2.2 percent of its GDP, because of the high cellphone rates, low Internet penetration and expensive connectivity charges to smaller phone companies imposed by the virtual telecom monopoly enjoyed by Carlos Slim, the world’s richest person. His companies control 70 percent of the cell phone market, 75 percent of fixed broadband service and 80 percent of landline phone service. Yet monopolies are barely mentioned in the current campaign. “To me it’s incredible that most politicians, intellectuals and analysts haven’t placed monopolies at the top of their list of needed reforms for the country,” says Fernando Turner, a Monterrey businessman and economic adviser to López Obrador. “Maybe we need a Teddy Roosevelt.” Ironically, the issue has recently received a widespread airing because of a tiff of titans involving Slim and Emilio Azcárraga, chairman and CEO of Grupo Televisa, which has a 70 percent share of the broadcast television market and owns the largest cable company. The convergence of telecom and broadcasting sparked the dispute. Over the past year both sides have sought to poach on each other’s territory by bundling phone, Internet and TV services. “The level of personal bitterness that has surfaced is surprising,” says Eduardo García, owner of Sentido Común, a Mexico City–based online business news site. So is the pettiness: A recent commercial broadcast by Televisa portrays its new phone-and-Internet company as a gorgeous, agile woman holding at bay a fat, clumsy man, a clear dig at América Móvil and its overweight owner, Slim. Both sides have recently suffered setbacks at the hands of regulators. In February, Mexico’s Federal Competition Commission (Cofeco) rejected an investment by Azcárraga’s Televisa in Iusacell, a cell phone provider with a 4 percent market share, on the grounds that the latter is largely owned by TV Azteca, the other major television company, and that the two broadcasters would in effect be colluding in a telecom venture. Then in May, Slim agreed to reduce interconnection charges to other Mexican phone operators to avoid a 12 billion peso ($855 million) fine that Cofeco was about to impose. In agreeing to withdraw the fine, Cofeco said Slim’s concession could save Mexican consumers as much as $6 billion a year. As reticent as Mexican governments have been to move against private sector monopolies, they are even more reluctant to do anything about state-owned Pemex, the country’s oil and gas monopoly. Early in his campaign Peña Nieto said he hoped to see more private sector involvement, including foreign investment, in Pemex activities. But analysts say that any significant opening is unlikely. “Oil is in the bloodstream of Mexicans, and it would be easy to get them out on the streets to protest against any attempt to open oil to private investment,” says Gabriel Casillas, Mexico City–based economist for J.P. Morgan Securities. The nationalization of U.S. and Anglo-Dutch petroleum assets in Mexico in 1938 by a PRI government is a source of patriotic pride, an event taught to every schoolchild. Pemex and its labor union became almost independent political and economic fiefdoms, with budgets and business arrangements hidden from scrutiny in return for large tax payments that greased the machinery of state and the palms of powerful politicians. Today, Pemex revenues cover roughly 40 percent of the government’s budget. More shockingly, the company — the world’s fourth-largest oil producer and eighth-largest by proven reserves — is officially in the red, with 2011 losses of $6.5 billion on revenue of $111.5 billion. “Pemex has no risk-taking culture,” says José Alberro, former CEO of Pemex Gas and Basic Petrochemicals, a subsidiary of the oil giant, and now director of Berkeley Research Group, a business consulting firm in Emeryville, California. “It doesn’t have the expertise to develop on its own shale oil fields or deepwater reserves in the Gulf of Mexico. And it doesn’t have the industry knowledge or negotiating ability that Brazilian, Norwegian or Canadian oil companies have to deal with international subcontractors, who can be real sharks.” Pemex has generated some good news lately. After experiencing a drop in oil production from a 2004 peak of 3.4 million barrels a day, its output has stabilized at about 2.5 million barrels. Early this year the proven reserves replacement rate reached 100 percent after many years of decline. Private investment also dipped a toe in the oil last year: Two companies, the U.K.’s Petrofac and Mexico’s Administradora en Proyectos de Campos, won operating contracts to exploit several mature or abandoned Pemex wells. The two companies will receive $5 per recovered barrel of oil, which Pemex can then resell on the open market for more than $100. The exceptional profit margins muffled nationalist criticism of the deals. In his campaign Peña Nieto has suggested that a PRI government might permit more private sector involvement in the oil sector. The economist who is favored to become Finance minister in a PRI government, Luís Videgaray, notes that natural gas — less controversial than oil — is the most likely venue for private investment. “The energy reform that Peña Nieto is advocating will allow Pemex to open its doors to both domestic and foreign private capital without posing any risks to its ownership by the state,” Videgaray tells II, pointing out that Mexico has abundant shale gas reserves along its border with the U.S. But few observers believe that a new government will waste its political capital trying to transform Pemex into a state-controlled entity with a minority of private shareholders — the formula that has proved so successful for Brazil’s Petróleo Brasileiro. A much more promising, though less eye-catching, economic reform would be an overhaul of outdated labor regulations that encourage off-the-books hiring and tax evasion. With 112 million inhabitants, Mexico has a total workforce of 45 million people, but only 15.5 million are registered for social security and thus part of the formal labor sector. The other 29.5 million workers are in the underground economy and pay no taxes. “Labor reform is necessary to expand the taxpayer base” and lessen fiscal dependence on Pemex revenue, says J.P. Morgan economist Casillas. According to Videgaray, a new PRI government would have to reduce the onerous contributions — up to 20 percent of income — imposed on employees to pay for their social security benefits and instead increase the payments made by the state into the system. “Labor reform in this country can only take place if it is accompanied by social security reform,” says Videgaray. By expanding the number of workers in the social security system, the government will shrink the underground economy, and income tax revenue will eventually rise. But again, as with much of the PRI platform, crucial details are lacking.

All these reforms — increasing the formal workforce, finding new sources of tax revenue, creating a more productive energy sector — were championed by President Calderón to finally propel Mexico into the ranks of the BRICs. They foundered largely because of opposition from the PRI in Congress. But if the PRI emerges from July’s elections with enough power to claim the same reforms as its own and ram them through Congress, then investors, and maybe a lot of Mexican voters, won’t be too particular about their paternity.  •  •

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