Republication, copying or redistribution by any means is expressly prohibited without the prior written permission of The The Economist November 18th 2006 A survey of Mexico 1

Time to wake up Also in this section

Pregnant pause The old political model has died; a new one has yet to be born. Page 3

Mexico’s mezzogiorno What is needed to bridge the gaping north- south divide. Page 5

Spider in the web All roads lead to Mexico City. Page 6

Plodding on Economic stability is all very well, but where’s the growth? Page 7

Monopoly money Competition is not Mexico’s strongest point. Page 9 Mexico’s new president, Felipe Calderón (right), must resume reforms and set the economy freeor risk backsliding, says Michael Reid The joy of informality Working in the ocial economy has its draw- AKE up, wake up, my dear, the Canada. Mr Fox, a former head of Coca backs. Page 10 Wdawn has broken, the birds are Cola’s Mexican operations, pledged fur- singing and the moon has set. Thus go the ther economic liberalisation and reform. lyrics of Las Mañanitas, the Mexican Mr Fox’s government can look back on Policing the police equivalent of Happy Birthday, belted out a number of achievements for which his The rule of law is an aspiration, not a reality. every day in restaurants and homes across many domestic critics give him insu- Page 12 the country, often by troupes of mariachi cient credit. In recent years the country has musicians in full regalia. The verse seemed enjoyed greater political than per- So close and yet so far particularly appropriate as Mexico cele- haps at any other time in its history. The brated its 196th birthday on September government has maintained economic Making the most of NAFTA requires change at 15ththe anniversary of the day when Mi- and nancial stability, with ination for home. Page 13 guel Hidalgo, a parish priest, called for in- this year estimated at 3.7%. Easier bank dependence from Spanish colonial rule. credit, together with a vast housebuilding Mexico gives every impression of sleeping programme promoted by the government, while the world changes around it. Having is slowly bringing tangible benets to an seemed to embrace globalisationfa- expanding . Social policies voured by its geography, on the doorstep have helped to cut poverty. of the world’s largest consumer market the country risks slipping back into inter- Asleep in a hammock of oil necine conict and introversion. Even so, many of the hopes raised by Mr Six years ago the election as president Fox were dashed. He lacked a majority in of Vicente Fox (pictured left) completed a Congress and proved unable to win ap- Acknowledgments As well as those mentioned in the text, many other people long transition to , ending 72 proval for any big reforms. Instead of the gave freely of their time and ideas to help prepare this sur- years of authoritarian rule under the Insti- annual growth of 7% he had promised, the vey. The author would like to thank them all, and particu- tutional Revolutionary Party (PRI). It also economy has limped along at an average larly Luis Rubio, Ambassador Juan José Bremer, Kevin Middlebrook, Laurence Whitehead, Michael Walton and seemed to set the seal on the economic of just 2.5% since 2000. The government’s several others who asked to remain anonymous. modernisation of the world’s largest Span- nances look better than they are, helped GDP A list of sources can be found online ish-speaking country, with a population by extra oil revenues equal to 2% of . of 106m. After Mexico went bankrupt in Fox has fallen asleep in a hammock of oil www.economist.com/surveys the debt crisis of 1982, the last three PRI money, says Liébano Sáenz, who was An audio interview with the author is at presidents cast aside protectionism and chief of sta to , the last of www.economist.com/audio state , most notably Carlos Sali- the PRI presidents (1994-2000). nas (in oce 1988-94), who led his country Labour productivity is low and grow- A country brieng on Mexico is at into the North American Free-Trade Agree- ing only slowly. Oil apart, Mexico’s ex- www.economist.com/mexico ment (NAFTA) with the and ports to the United States are losing market1 2 A survey of Mexico The Economist November 18th 2006

2 share to ’s. Some of the social poli- dent, Hugo Chávez. Mr Fox, along with dor recalled a long history of electoral cies have reduced the incentive for mil- Mexico’s richest businessmen, weighed in fraud under the PRI. He drew a particular lions of small businesses to put them- on Mr Calderón’s behalf. parallel with 1988, when Mr Salinas was selves on a proper legal footing. That is So when the vote unexpectedly went declared president after the computers only one symptom of a wider absence of against him, Mr López Obrador and his counting the votes had crashed while the rule of law. Another is mounting vio- backers felt robbed. They cried fraud, showing an early lead for his leftist chal- lence from drug gangs. though they never produced any convinc- lenger, Cuauhtémoc Cárdenas. As Mr Fox’s term draws to its close, ing evidence, and called for civil resis- The parallel was askew. In 1988 the Mexico is starting to look like two dierent tance against the electoral authorities. For electoral authority was the Minister of the countries. Thanks in large part to NAFTA, seven weeks the beaten candidate’s sup- Interior. But a decade ago, with the agree- much of the north is making visible pro- porters camped out in the centre of Mexico ment of all the parties, Mexico set up inde- gress. By contrast, the populous south re- City, occupying the Zócalo, the great pendent electoral institutions. According mains locked in poverty, backwardness square that has been the heart of the city to those independent bodies, two counts and neglect. Meanwhile, each year some since Aztec times, and blocking Reforma, of the ballots (and a partial recount of 9% 500,000 or so young Mexicans cross the its grandest avenue. To hell with your in- of them) all showed the same narrow lead country’s northern border to the United stitutions, declared Mr López Obrador. for Mr Calderón. The election produced States in search of a better life. Even the independence celebration on the best-ever haul of congressmen for Mr On top of all this, Mexico’s politics have September 15th was overshadowed by the López Obrador’s centre-left Party of the suddenly become much more compli- post-election conict. Mr Fox chose to Democratic (PRD). The elec- cated and confrontational. The campaign mark the occasion in his (and Hidalgo’s) toral tribunal did nd that the interven- ahead of the presidential election on July home state, leaving the traditional venue, tions of Mr Fox and the business groups 2nd was dominated by Andrés Manuel Ló- the Zócalo, to Mr López Obrador’s people were technical violations of the electoral pez Obrador. As mayor of Mexico City, he for the evening. After a nal rally of his law, but no other democracy would worry had made himself popular by providing supporters at which he vowed to proclaim about such things. pensions for the elderly and public works. himself the legitimate president, Mr Ló- Most of the people camped on Re- Standing for a centre-left coalition, he took pez Obrador suspended his protests. But forma, far from constituting an indepen- his ery oratory to the public plaza in a he said he would not recognise Mr Calde- dent social movement, were cogs in the country where politics has long been rón when the new president formally political machine built by the former dominated by backroom deals. But he was takes over on December 1st. mayor. The protest had the backing of the pipped at the post by Felipe Calderón, the Mexico City government. It’s not the peo- candidate of Mr Fox’s conservative Na- Crying foul ple v the powers that be. It is the powers tional Action Party (PAN). Mr Calderón In The Labyrinth of Solitude, his classic that be, quipped Jorge Castañeda, a politi- won 35.9% of the vote against Mr López study of the Mexican character, Octavio cal scientist who was the rst foreign min- Obrador’s 35.3%, a margin of just 233,831 Paz noted that his countrymen habitually ister in Mr Fox’s government. votes out of almost 42m. The PRI’s Roberto mask painful realities, hiding more than The biggest irony of all is that as former Madrazo polled a meagre 22.2%. they reveal. Mr López Obrador’s claim to members of the PRI, several of Mr López To many Mexicans, the election ap- be leading a mass social movement for de- Obrador’s closest collaborators were com- peared to highlight their country’s divi- mocracy against a usurper, Mr Calderón, plicit in the fraudulent campaigns of the sions and to call its growing globalisation ts in with that tradition. Mr López Obra- past. The protests were the rebellion the1 into question. Mr López Obrador spent his formative years in the PRI. He left it in the late 1980s when the economic nationalists in the party lost out to the free-market tech- nocrats. Though many of his economic policies were mild enough, he inveighed strongly against poverty and privilege. To his detractors, he seemed to stand for a re- turn to the authoritarian populism prac- tised by the PRI in the 1970s. Nothing in his life suggested any interest in or knowledge of the world beyond Mexico. Apart from one brief wobble, in the run-up to the election Mr López Obrador was always ahead in the opinion polls. But he made mistakes, insulting Mr Fox and staying away from the rst of two cam- paign debates. Some of the economic poli- cies he proclaimed stirred fears of a return to nancial instability. He was also the tar- get of a smear campaign. Mr Calderón dubbed him a danger to Mexico, com- paring him to ’s populist presi- The president they did not get The Economist November 18th 2006 A survey of Mexico 3

2 PRI didn’t do in 2000 when it lost power paign laid bare many Mexicans’ deep democratic progress and rapid economic to Mr Fox, says Héctor Aguilar Camín, a sense of dissatisfaction with the status growth. This survey will argue that, con- historian. Alternation in power had hap- quo. And Mr Calderón, having won the trary to appearances, he has an extraordi- pened very cheaply for us. It’s the rst prot- narrowest of victories, has had to rear- nary opportunity to do bothbut only by est against this young democracy, done by range his priorities. He now lists these as being far bolder than his predecessor in the ex-Priistas of the PRD. job creation, the ght against poverty and tackling the many vestiges of the old order Mr López Obrador’s attempt to emulate public security; at the start of the cam- that are still holding the country back. Evo Morales, the Bolivian president who paign they came in the reverse order. Many of these involve monopoly power, toppled two predecessors by organising Pragmatically, I’m interested in winning public and private, political and economic. street demonstrations, seems to have back- over a part of the electorate that wasn’t They cover a broad range: from the teach- red. Polls show that if the election were with me and whose concerns were much ers’ union to Pemex, the state oil monop- held today, Mr Calderón would win by a more centred on poverty, he said in an in- oly, and Telmex, a private telecoms near- comfortable margin. On October 15th the terview for this survey. monopoly. It is these bastions of unac- PRD lost a gubernatorial election in Mr Ló- The rst question raised by the election countable power, rather than Mr López pez Obrador’s home state of Tabasco even and its messy aftermath is whether Mr Obrador’s antics, that are the real threat to though he went to campaign for his party. Calderón can govern Mexico. The second Mr Calderón’s government and to Mexico All that said, Mr López Obrador’s cam- is whether he can restore it to a path of as a whole. 7 Pregnant pause

The old political model has died; a new one has yet to be born

EMOCRACY did not come easily to the (still unresolved) murder of Mr Sali- application of laws. Contrary to the revo- DMexico. Whereas most South Ameri- nas’s hand-picked successor, Luis Donaldo lution’s rallying cry, surage was not eec- can countries nurtured a democratic tradi- Colosio. Shortly afterwards, just as Mr Ze- tive and fraud was common. But by hon- tion through their swings between dic- dillo took over from Mr Salinas, the peso ouring the principle of no re-election the tatorship and civilian rule, Mexico over the collapsed and the banking system with it. PRI ensured regular changes of leadership, past two centuries has seen long periods The subsequent deep recession under- and with it the exibility to move left or of authoritarian government punctuated mined public support for market reforms, right. On paper under the 1917 constitution by three civil wars. The one brief interlude which had included privatisations as well the presidency was rather weak. In prac- of liberal government came in the mid- as NAFTA membership. As a result, the PRI tice it was omnipotent. 19th century, under Benito Juárez, a Zapo- lost its majority in Congress in 1997. Mexi- But Mr Fox, the rst non-PRI president tec Indian and elected presidenta period can politics has seemed close to gridlock for more than seven decades, had only his known as la reforma and commemorated ever since. Where there was one dominant paper powers to rely on. He seemed an in the avenue of that name. The last and party there are now three, none of which ideal candidate: thick-skinned, deter- bloodiest of the civil wars was the Mexi- can command a majority (see chart 1). The mined, bluy charming and a natural me- can revolution of 1910-17 (some historians deeper reason for Mexico’s political pa- dia performer. But he has been a disap- argue that it did not end until 1940). It be- ralysis is that is has yet to replace many of pointing president. He never understood gan as a crusade for liberal democracy, un- the institutions of one-party rule. the nature of presidential authorityhe der the cry of Eective Surage, No to Re- One reason why the PRI regime was so confused leadership with popularity as if election, but ended up with the corporate durable was that it used coercion only as a he were a lm actor, and he didn’t know state run by the PRI. last resort. Wherever possible it preferred how to negotiate politically, says Enrique The blocking of Reforma for seven long to buy loyalty, be it of professors or peas- Krauze, a historian. weeks was an apt metaphor for Mexico’s ants, with state largesse or the selective Certainly he was naive in allowing1 condition over the past decade. Transform- ing an inward-looking corporate state into a liberal democracy with an outward- The age of minority 1 looking market economy was never going Election results, seats to be straightforward. Besides, Mr Salinas’s Chamber of Deputies, 2006 (2003) Senate, 2006 (2000) bold economic reforms in the early 1990s 2006 2006 were meant to give new life to the PRI sys- PRI PRI 122 (239) 39 (60*) tem rather than end itand some were less PAN PAN liberal than they looked. Just as NAFTA 206 (151) 52* (51) PRD coalition PRD coalition came into eect in 1994, the semblance of 159 (96) 36 (17) political order was shattered rst by the 2003 Others 2000 Others short-lived uprising by the Zapatista re- 13 (14) 1 (7) bels, led by Subcomandante Marcos, a ski- masked Marxist philosopher; and then by Source: Federal Electoral Institute *In coalition with PVEM 4 A survey of Mexico The Economist November 18th 2006

2 Marta Sahagún, his ambitious former press secretary and second wife, to give the appearance of sharing presidential power. And his approach to reform was far too laid-back: ignoring his party’s congres- sional caucus, led for a time by Mr Calde- rón, he seemed to think his job was done merely by sending a bill to the legislature. Wags say he has a Montessori cabinet because each minister does his own thing. He also shrank from applying the law where protests went beyond it. Early in his presidency his authority was terminally undermined when he permitted a few thousand machete-wielding far-left de- monstrators to kill o a plan for a new air- port for Mexico City. Mr Fox himself coun- ters this last criticism by saying that it comes from those who yearn for the old which he is closer than Mr Fox, he has of- None of this is unbridgeably distant authoritarian presidentialism. Maybe so. fered to lead a coalition government. But from the proposals put forward by Mr Cal- Yet whether in land-use planning or the Mexico has no experience of formal coali- derón himself. Unlike Mr Fox, he speaks of policing of protests, Mexico nds itself in tions. What Mr Calderón is working on, he the central place of Congress in making limbo. The old ways of presidential diktat says, is a common agenda with other policy. That is to recognise reality. Jerey no longer work, but new ways based on parties. He is also likely to oer several Weldon, a political scientist at ITAM, a consultation, consensus and the exercise ministries to people with ties to the PRI. Mexico City university, points out that of democratic authority have yet to be Much will depend on the PRI’s attitude. more than 70% of the 824 measures ap- created. Into this vacuum Mr López Obra- Though Mr Madrazo, its presidential can- proved in the legislature in the past three dor deantly stepped in the weeks after didate, suered a humiliating defeat, the years were proposed by the legislators July 2nd. party still governs 17 states (against nine rather than by the government, against held by the PAN and six by the PRD). These fewer than one-third under Mr Salinas. Governing from the centre days most of its members are closer in Power has rapidly seeped away from To all appearances, Mr Calderón faces a their instincts to Mr López Obrador than to the presidencyto governors, mayors, much more dicult task than his predeces- Mr Calderón. But the PRI is evolving into party leaders and the media as well as sor. His mandate is narrower, and his le- an alliance of powerful regional barons. Congress. That may be a good thing, but gitimacy is questioned by a substantial mi- Several important gures in the party there are no rules to encourage collabora- nority of Mexicans. Where Mr Fox could stress that Mexico needs reforms. There tion between these dierent actors. Many count on a democracy dividend, Mr Cal- are very professional politicians in the PRI political scientists think that this new plu- derón is faced with demands that democ- who understand that the country needs ralism would be better served by a par- racy deliver swift and tangible improve- changes, says Luis Téllez, who was energy liamentary system than a presidential one. ments, according to Miguel Székely, who minister under Mr Zedillo and is tipped for But Mexico has been accustomed to a has advised both men on social policy. a job in Mr Calderón’s cabinet. powerful gure at the top since Aztec days. But Mr Calderón also has several ad- Several pending structural reformsfor vantages. Unlike Mr Fox, who came to pol- example in energy supply, trade unions, More accountability itics late in life, he is a professional politi- the labour market and the policewill re- A better option might be to help the presi- cian and a party man. He was born into the quire constitutional changes that call for a dent mobilise majorities and give him National Action Party, of which his father two-thirds majority (as well as the backing some tools to negotiate with Congress. For was a local ocial. He is a lawyer with of a majority of state legislatures). This example, Congress could be required to technocratic know-how, having studied will be hard to muster without the support deal with a bill proposed by the govern- and, at Harvard, public admin- of at least part of the PRD. That is not out of ment within a given time limit. When no istration. Aged only 44, he has had little ad- the question. Even as Mr López Obrador candidate in a presidential election wins ministrative experiencehe was Mr Fox’s was denouncing the country’s institu- outright, the introduction of a run-o bal- energy minister for just nine months be- tions, many PRD leaders were quietly op- lot would strengthen the victor’s mandate. fore resigning to stand against the presi- erating within them, in Congress and in That could be balanced by a shorter term dent’s nominee to be his party’s presiden- the party’s state governments. Several of of oce. For its part, Congress would be- tial candidate. But he has plenty of those leaders, including Mr Cárdenas, come more accountable if legislators were experience of Congress, which may count have more or less openly distanced them- able to stand for immediate re-election. for more. A liberal on economics and a selves from Mr López Obrador. Jésus Or- There is support in all three parties for a moderate conservative on social matters, tega, a senior gure in the PRD, talks of us- change that would allow senators two he is a pragmatist and a skilled negotiator. ing Congress to introduce political consecutive terms (12 years in all) and dep- I must be a president who seeks the politi- reforms, a change of economic model to uties three (nine years). cal centre, he said in victory. one of stability with growth, a tax re- More needs to be done to bring To secure a congressional majority, to form and measures against . accountability and openness to politics at1 The Economist November 18th 2006 A survey of Mexico 5

2 all levels. Mr Fox, impelled by a media The same goes for many state govern- paign. In May, teachers in the state began campaign, pushed through a freedom-of- ments. Some are models of reform, others an indenite strike. This quickly turned information law. It’s very imperfect, but are throwbacks to the old regime. Take Oa- into a quasi-insurrection in the state’s capi- even so it’s a leap forward of 50 years, xaca, in the south, where the PRI has never tal, aimed at ousting Mr Ruiz. The city’s says Alejandro Junco, a pub- lost power. In 2004 Ulises Ruiz, the PRI tourist industry has collapsed. In late Oc- lisher who led the campaign. Congress, candidate, only narrowly won an election tober, after a total of 17 people had been however, remains a closed book: votes are for state governor. His opponent’s claim of killed, Mr Fox sent the federal police to re- secret, assets do not have to be declared fraud was better-founded than Mr López take the city centre from the protestors. and there are no rules for resolving con- Obrador’s, because in Oaxaca the PRI con- This stand-o is a special case, but in icts of interest. I can know what the pres- trols the local electoral authority. His op- many ways Oaxaca exemplies the pro- ident’s towels cost but not what my con- ponents accuse Mr Ruiz of funnelling state blems of southern Mexico, which voted gressman does, Mr Sáenz says. money to his party’s presidential cam- heavily for Mr López Obrador. 7 Mexico’s mezzogiorno

What is needed to bridge the gaping north-south divide

ANTIAGO TLAZOYALTEPEC is less bution in Mexico has long been extremely S than two hours’ drive from the city of Calderón’s challenge 2 unequal. Perhaps nowhere is inequality Oaxaca, up a precipitous dirt road anked Poverty and inequality more shocking, noted Alexander von by cool forests of pine and evergreen oak. It % of population: Humboldt, an aristocratic German scien- is one of the 570 separate municipalities Extreme poverty* tist and traveller, in his essay on colonial † ‡ contained within the state of Oaxaca, a Broadest measure of poverty Gini coefficient Mexico published back in 1811. Despite the 90 0.55 corrugated land of forested mountains protestations of many critics of the econ- and brown rivers. Like many of the settle- 70 0.50 omic reforms, income inequality now is ments established by the Mixtec (meaning no greater than it was 20 years ago, but re- people of the clouds), Tlazoyaltepec 50 0.45 gional dierences are becoming increas- straggles along the tops of sinuous moun- 30 0.40 ingly marked. There is one Mexico more tain ridges: a clutch of separate ribbon vil- like North America and another Mexico lages with a total population of some 10 0.35 more like Central America, is how Mr Cal- 10,000 people. The world owes the do- derón puts it. It is a very clear challenge mestication of the turkey to the Mixtecs. 1950 60 70 80 90 2005 for me to make them more alike. *Unable to meet basic food needs †Income insufficient to cover But today they scratch a living from small basic living needs such as clothing,transport and education Ocial gures show that one Mexican milpas (maize elds). Ask how things are ‡Measure of income inequality where 1=maximum inequality in two still lives in some degree of poverty; going, and the answer is a repetitive la- Sources: Secretaría de Desarrollo Social; in much of the south that gure rises to ment: No hay trabajo (there’s no work). three in four. For most of the past century Even so, people are living a little better ernment and expanded and renamed southern Mexico has been worse o than nowadays, concedes Panlo Santiago, the Oportunidades by Mr Fox. It pays mothers the north, but NAFTA is helping to widen municipal councillor in charge of educa- a monthly allowance provided they keep the gap. Average growth since 1995 in tion, his Spanish delivered in a thick Mix- their children in school and take them for many northern states has been running at tec accent. The rst reason is that many of regular health checks. In Tlazoyaltepec, 4-5%; in most of the south and centre it has them have gone north, to the United States around 70% of families receive help from been more like 1-2%. or to work in the tomato elds of Baja Cali- Oportunidades, says Mr Santiago. fornia. They either return richer or send Across Mexico Oportunidades helps Southern cross back money. The Inter-American De- some 5m families (or around a quarter of The nine states of the south and south-east velopment Bank estimates that remit- the total) at a cost of $2 billion a year. While account for almost a quarter of Mexico’s tances from Mexicans abroad will total $24 alleviating poverty, the programme’s total area and population. They are more billion this year, about a third more than main aim is to prevent it in the next genera- rural, more Indian and poorer than the rest the ow of foreign direct investment. The tion. The idea is to expedite Mexico’s tran- of the country. Almost 45% of their popu- relative prosperity of such families is dis- sition to a labour force that has nished lation live in settlements of under 2,500 played in the status symbols of the Mixtec secondary school, says Santiago Levy, people, compared with 20% elsewhere. highlands: a big Ford or Chevrolet pick-up who as a nance ocial in Mr Zedillo’s Twice as many people lack electricity and parked outside the door and, increasingly, government invented the programme. piped water, and half as many can read a two-storey concrete house in place of a Thanks to remittances and Oportuni- and write. Much of the south is aicted by wooden shack. dades, extreme poverty has declined un- poor schooling, poor communications, The second reason why people are bet- der Mr Fox, despite mediocre economic lack of investment and, often, reactionary ter o is a means-tested anti-poverty pro- growth (see chart 2). But as in many other political leadership. gramme, pioneered by Mr Zedillo’s gov- Latin American countries, income distri- Successive governments have made a1 6 A survey of Mexico The Economist November 18th 2006

(OECD), the rich-country club it ambi- tiously joined when Mr Salinas was riding high, and did no better than Brazil and other Latin American countries, even though it spends proportionately a lot more on education.

Reclaiming the classroom In the past much education spending was lavished on public universities because the PRI saw students and academics as an important constituency. Recent govern- ments have spent more on schools, but nearly all of the money has gone on teach- Not much of a future in Santiago Tlazoyaltepec ers’ salaries. That is a tribute to the stran- glehold the Educational Workers’ Union, 2 big eort to get children into education. other Latin American countries (see chart Latin America’s largest trade union, has on Since 1960 the number of years the aver- 3, next page). Moreover, the quality of Mexican education. In eect, it is the pro- age Mexican child spends at school has schooling is poor and the education sys- vider; the federal government merely gone up from 2.6 to nearly eight. But that tem fails to oer equality of opportunity. hands out the money. Its 1.4m members still means some 35m adults have failed to Mr Zedillo’s government bravely de- include not just classroom teachers but complete the nine years of basic primary cided that Mexican children should sit in- head teachers and school inspectors too. and lower secondary schooling. They nd ternational tests. Mexico came bottom of In practice it is the union, not head it hard to get decent jobs. Enrolment at up- all the countries of the Organisation of teachers, parents or state governments, per-secondary level is lower than in many Economic Co-operation and Development that decides on the hiring and (very rarely)1

Spider in the web All roads lead to Mexico City

PART from better schools and alterna- Pacic Coast from Chiapas to the port of The south-east produces most of Mex- Atives to subsistence farming, the Lázaro Cárdenas. Expansion of the port at ico’s oil and hydro-electricity, and gets south needs better transport links. Salina Cruz and the railway to it across most of its rainfall. But until recently the NAFTA has made this more urgent. Mex- the Isthmus of Tehuantepec would help government ensured that electricity and ico’s crucial competitive advantage in the too. Mr Levy reckons these projects feedstock for petrochemicals cost the United States over distant countries such would require federal investment of $2 same across the country. Another sub- as China is lower transport costs. But that billion-3 billion a year over the next ve sidy to the north is more explicit: that for advantage diminishes the further south years. Once completed, they would cut electricity for irrigation, which costs you go. Distance thus inhibits the south transport costs by up to 25%, as well as around $450m a year (more than the from taking advantage of its lower pro- boosting tourism. The plan was rst pro- country’s entire main rural development duction costs. Public policy has aggra- posed in the late 1990s. Mr Fox unveiled programme). Fruit- and vegetable-grow- vated the problem. an even more ambitious scheme to im- ing is therefore concentrated in the north, Most railways and roads were built in prove infrastructure in southern Mexico even though the south is naturally better a radial pattern, with Mexico City as the and Central America. Not much hap- suited to it. With improved transport spider in the centre of the web. That pat- pened, despite Mexico’s oil windfall. links, its Pacic coastal strip could export tern met the needs of centralised political In 1994 a motorway from Mexico City such products to California and Japan. control and the policy of import substitu- reached the city of Oaxaca, cutting the Mr Calderón says he is working on a tion pursued until 1982. At the peak in journey time from nine hours to ve. As a huge programme of public works for the 1970, half of the country’s industrial pro- result Oaxaca’s metropolitan area now south, including a scheme to mobilise duction took place in Mexico City alone. accounts for around a third of the state’s federal and international money for Goods from the south bound for the economy, up from 10%in 1994, according drinking-water and sanitation schemes. United States must pass through the to José Ramón Ramírez, the rector of the Mr Téllez suggests measures such as tax bottleneck of Mexico City, climbing to local Vasconcelos University. Tourism as breaks for rms that set up in the south. 2,500 metres (8,200 feet) above sea level. well as commerce has grown. But feeder But such remedies have been tried else- What is needed is to build or to complete roads to smaller townswhich are the where, without much success. Whatever motorways from the south-east along the responsibility of the states, not the federal form it takes, Mexico certainly needs a re- Gulf Coast to the border, and along the governmentare still lacking. gional policy for the south. The Economist November 18th 2006 A survey of Mexico 7

and then its regional branches try to extract prove rural schooling. Mr Fox speaks Money misspent 3 a bit extra from the states. Few decisions proudly of having put a computer into ev- Total public education spending as % of GDP, 2003 are taken at school level. ery school, opening it up to Enciclomedia, John Scott of CIDE, a Mexico City uni- a pioneering programme of digital text- 0123456 versity, points out that only 1% of students books. The Tecnológico, a not-for-prot Mexico in higher education are from the poorest university based in Monterrey, is working OECD average 20% of the population. As things stand, with the government on a scheme to de- Brazil echoes Miguel Limón, who was Mr Ze- liver upper-secondary schooling via the Chile dillo’s education minister, education re- internet in 1,000 communities in the produces regional inequalities. Although south. But in Tlazoyaltepec, as in many ru- Student performance and enrolment rate, 2003 coverage in the south is catching up, qual- ral towns in the south, there is no internet ity lags, partly because richer northern connection. Rafael Rangel, the Tecnológ- Britain 110 Spain states top up federal funds. ico’s rector, says the scheme’s success de- 100 Greece Across the south other factors conspire pends on government investment in a Chile S. Korea 90 against good schooling. Poverty is itself wireless internet network. United States 80 one reason why children drop out of Peru Brazil 70 school early, as the Oportunidades pro- Lessons for teachers gramme recognises. The region is home to That leaves the question of what to do 60 Mexico Enrolment rate at age 15* many Mexicans of indigenous descent. At about the teachers. At present 95% of edu- 50 primary level 1.2m pupils receive bilingual cation spending goes to the producers and teaching in 54 dierent tongues, but there only 5% to the consumers in the form of 300 350 400 450 500 550 600 Student performance† are few competent bilingual teachers. And scholarships. A really bold president *Public and private institutions †Combined average where the population is thinly scattered, as might try to break the union’s grip on the performance in reading, maths and science, 2003 in the Mixteca, primary-school classes take classroom by giving the money to parents Source: OECD (higher number = better performance) in children of widely diering ages. in the form of vouchers. But Elba Esther In Tlazoyaltepec the Velascos, a peasant Gordillo, the union’s general secretary, 2 ring or redeployment of teachers. It re- family, provide an illustration of educa- has transferred her political support from sists outside evaluation of teachers, many tional progressand of the obstacles that the PRI to Mr Calderón, for whom she was of whom are untrained. Enrique Rueda, still remain. María Elena Velasco’s father an important electoral ally. the leader of the Oaxaca teachers, con- had only two years of schooling and her Mr Calderón insists that the only way cedes that the union has been better at pur- mother none. She and her brother to change education is with the union suing salary demands than at improving dropped out of secondary school after a rather than against it. The key is to intro- schooling. Control of bad teachers is very year. She is determined that her children duce the right incentives, he says. He has limited, he says. will do better. I’ll have to take them to the proposed to the union that instead of As education minister in Mr Salinas’s valley. Who knows how I’ll do it, but I have paying more to those who press hardest, government, Mr Zedillo devolved formal to. Mr Santiago, the education councillor, as in Oaxacalet us pay more to those responsibility for schooling to the states says the town council has asked the state who teach better, who raise the level of and modernised teacher-training and text- government for an upper secondary their class, who prepare more and who books. But in practice the system remains school so that the young people don’t meet required standards. If he can get this centralised: the union negotiates salaries have to migrate to the United States. idea past Ms Gordillo, it would be a big with the federal government each year, Technology may be the only way to im- step forward. 7 Plodding on

Economic stability is all very well, but where’s the growth?

R FOX had barely installed himself in caused three years of economic stagnation oil prices. But it is also because the private MLos Pinos, Mexico City’s modernist in Mexico and the loss of some 700,000 sector has made a big eort to cut costs and presidential complex, in December 2000 formal jobs, most of them in the maquilad- regain its competitive edge, as Alfredo when his country was dealt two blows ora plants producing goods for export. Thorne of JPMorgan, an investment bank, that stopped economic growth in its tracks. Some of those jobs moved to China. points out. The dotcom bubble burst, triggering a In the second half of Mr Fox’s term The car industry is doing especially slowdown in industrial production on growth has picked up. This year it is head- well, with output in the rst half of this both sides of the border. And China joined ing for 4.5%, the highest gure since 2000. year up 36% on the same period in 2005. the World Trade Organisation, marking the In the rst nine months of this year some Detroit’s troubled carmakers may be clos- arrival of a powerful competitor to Mexico 900,000 formal jobs were created, almost ing factories in the United States, but they for footloose manufacturers hoping to ex- keeping pace with the growth in the la- are quietly expanding in Mexico. So are port to the United States. Those twin blows bour force. That is thanks in part to higher Nissan, Toyota and Volkswagen. Mexican1 8 A survey of Mexico The Economist November 18th 2006

2 suppliers of car parts account for a much higher portion of the nished cars than in the past. Mexico cannot match China’s cheap labour, but it can compete in higher- value goods and where transport costs are important. Many of the jobs it lost were in textiles; some of the new ones are in elec- tronics, which now accounts for around one-fth of the country’s total exports. There is a familiar cloud on the horizon: the economy north of the border is once again threatening to slow down. But Mex- ico is much better placed to weather an American recession than it was in 2000. That is because ination is low, the public- Racing against China for a share of the American market sector decit is close to zero and the cur- rent-account decit is much smaller than it from 80% in 2000. That has helped every- such lending in Mexico, new rules are was six years ago. Nor is growth coming one else to borrow more cheaply. Big com- needed to make it easier for banks to call in only from exports. Mexican banks are panies are now issuing ten-year peso loan guarantees. lending again. bonds at a xed rate of around 8%, accord- Mr Ortiz reckons that excessive interest- ing to Damian Fraser of UBS, a Swiss in- rate spreads and fees dampen demand for The end of original sin vestment bank. credit. Bankers reject the criticisms. Com- A few years of single-digit ination have The banking system seems poised for petition is erce and is driving down mar- transformed the nancial markets, says growth, after a turbulent quarter-century gins, says Sandy Flockhart, HSBC’s manag- Guillermo Ortiz, governor of the Bank of that began with its nationalisation in 1982. ing director for Latin America. Mexico, the . What’s surpris- Mr Salinas privatised it but unwisely Mr Fox’s government has been mark- ing is that this has happened so quickly. barred foreign banks from bidding. Having edly more eective at reforming the nan- Mexico’s began to lent recklessly, sometimes to insiders cial system than at dealing with its own - achieve investment-grade status in 2000 and/or in dollars, the banks got into di- nances. Since 1999 the public-sector bor- with dramatic eects. In 1999 the maxi- culties when the peso plunged and interest rowing requirement has fallen from 6.3% mum term of government bonds was one rates leapt in 1994-95. of GDP to around 2%, despite a modest in- year; most were denominated in dollars or But just as the bankers had beneted crease in public spending. But the govern- linked to ination. In 2003 the government from lax regulation under Mr Salinas, so ment has been helped by falling debt pay- issued a 20-year bond in pesos; last month they received generous treatment from Mr ments and bumper oil revenues. Oil it launched a 30-year peso bond not in- Zedillo when they got into trouble. In eect accounts for more than a third of total gov- dexed to the ination rate. they were allowed to pass their non-per- ernment revenue. There are two problems So Mexico has overcome what Ricardo forming loans to the government, which with that. The rst is that it bleeds Pemex, Hausmann, a Venezuelan economist at also oered unlimited deposit insurance. the national oil company, of investment Harvard, dubbed original sinemerg- In all, the bank bail-out cost the taxpayer funds. The second is that oil revenues are ing-market countries’ traditional inability around 20% of GDP. The Zedillo govern- likely to fall in the coming years. to borrow long-term in their own cur- ment did belatedly tighten supervision rency. Because of its relatively conserva- and accounting standards and lifted the The taxman cometh tive scal policy, the government now ab- ban on foreign commercial banks. Now Mr Calderón will need to spend moreon sorbs only 16% of national savings, down foreign banks make up more than four- infrastructure, education, health and prob- fths of the system. ably on job-creation measuresif Mexico Until recently the banks did very little is to make the most of NAFTA, and indeed Steady state 4 lending, but credit is now expanding. Mex- if it is to remain governable. Yet Mexico is % increase on a year earlier in Mexico’s: icans are able to take out mortgages again notoriously bad at collecting taxes. Total GDP consumer prices and loan interest rates are coming down tax revenues in 2004 (excluding oil in- fast. Such is the boom in house construc- come) amounted to only 11.4% of GDP. 8 40 tion that Cemex, Mexico’s biggest cement That is not only much less than the average company, in September announced its for the OECD countries (36%), but also be- 4 30 largest capacity expansion in a decade. low the average for Latin America (13.7%). + Consumer credit too is growing rap- One reason is that large chunks of the nil 0 20 idly. But small and medium-sized busi- economyfood, medicines, agriculture, – nesses have been slower to take advantage sheries and land transportare either ex- 4 10 of lower interest rates. Jaime Guardiola of empt from value-added tax or zero-rated. Bancomer, the Mexican aliate of Spain’s The OECD estimated that the exemptions BBVA, notes that although his bank has a cost up to 2% of GDP in lost revenueand 8 0 1990 95 2000 06* smaller market share in its home country also make evasion easier. than it does in Mexico, in Spain it lends ten But Congress twice rejected the eorts Sources: National statistics; IMF; JPMorgan Chase *Forecast times as much to such businesses. To boost of Mr Fox’s government to broaden VAT. 1 The Economist November 18th 2006 A survey of Mexico 9

2 Mr Calderón says he wants to simplify tax not about to collapse. Growth averaging strong banking system. rates and increase the number of taxpay- around 3.5-4% a year for the next few years The trouble is that Mexico needs to do ers, on which Mr Fox’s government has al- may still be possible. Indeed, Francisco Gil, better than Spain if it is to reduce poverty ready made some progress. He names s- the nance minister, argues that Mexico and raise its living standards by enough to cal reform as one of his top two legislative could follow Spain’s example. Like Mex- stop its young people from leaving for the priorities because it will allow him a ico, Spain opened up its economy and cast United States. Mr Ortiz says bluntly that greater margin for manoeuvre. The other o authoritarian rule. Like Mexico, Spain growth is completely insucient. With priority is energy policy, one of a raft of suers from weak productivity but has better public policies, we could grow at structural reforms that Mexico’s economy achieved sustained economic growth by 5.5-6% a year. That is the challenge. The an- needs if it is to become more competitive combining manufacturing exports to a swer is basically to make the economy and grow faster. large and rich neighbour with dynamic more exible. But that will mean tackling Even without reforms, the economy is construction and tourist industries and a some powerful vested interests. 7 Monopoly money

Competition is not Mexico’s strongest point

HE most powerful man in Mexico is mex has repeatedly used the courts to Tnot Mr Calderón, nor Mr López Obra- block or delay regulatory rulings telling it dor. It is Carlos Slim, the world’s third-rich- to cut its prices. If Mexico were the United est individual, with a net worth put by States, Telmex would have been broken up Forbes at $30 billion (the equiva- years ago. lent of 3.7% of Mexico’s GDP). His tentacles But Mexico is Mexico. Telmex is merely extend across large swathes of the econ- one of the more egregious examples of the omy. At their head is Telmex, the telecoms widespread rule of oligopoly. An ordinary company privatised by Mr Salinas in 1990, citizen who wants to import and distribute of which Mr Slim’s family holds 48% of the beer, cement, textiles or bread will soon capital and 71% of the voting shares. The nd that he cannot do so. In the midst of cash from Telmex has nanced relentless the election campaign, Congress approved diversication. Mr Slim’s América Móvil is a law giving free wireless spectrum to Tele- the largest mobile-phone operator in Latin visa and its only rival, TV Azteca. Only in America. His family also holds a string of the airline industry has there been timid industrial and retailing businesses, includ- progress: Mexicana and Aéromexico have ing the Mexican operations of Sears. He is been demerged, and two tiny low-cost the biggest tenant in the country’s shop- ventures have started up. ping centres. His latest venture is Ideal, an Mexico lacks a competition culture, infrastructure company working mainly says the OECD. The Federal Competition in the oil industry. He is also the second- Commission is fairly toothless, though a largest shareholder in Televisa, Mexico’s There’s no stopping Slim new law is supposed to give it more bite. dominant media business. What distin- Some analysts are hoping that technologi- guishes him from and Warren tion is all the more pertinent because tele- cal innovation will undermine Telmex’s Buet, the only two men richer than him, coms costs in Mexico, though falling, re- monopoly. But it is seeking to expand into is the parsimony of his philanthropy. main above the international average (see new businesses, such as cable television. There is no doubting the business acu- chart 5, next page). Mexico also has fewer By common consent, any increase in men of Mr Slim. His defenders portray him phones per person than any other OECD competition depends on the president’s as a national champion and a bulwark country or Brazil, which privatised eight willingness to use the legal instruments against foreign (probably American) con- years later but encouraged competition. available. Mr Ortiz has denounced the trol of the economy. But he has had a lot of The answer is that Telmex still exercises costs Telmex imposes on Mexico. Mr Gil help from the government. signicant monopoly power. Its competi- says he pressed Mr Fox in vain to open the As with the banks, Mr Salinas priva- tors tell a Kafkaesque tale of regulatory telecoms market. Mr Calderón can aord tised Telmex badly: the new owners were capture. Pedro Cerisola, the minister of to be bolder. The political monopoly of granted an outright monopoly for six transport and communications, was a Tel- the PRI has ended but all other monopo- years. Since then the market has been mex manager of long standing, and one of lies remain. There’s a public demand to open. Several competitors have poured his deputies is a former manager of Tele- change that, because it carries a high cost billions of dollars into rival networks. So visa. In breach of its legal duties, the minis- for consumers, notes Mr Aguilar Camín. why does Telmex still have 94% of land- try has dragged its feet in approving li- But private monopolies pale in com- lines, 78% of mobile services and 70% of cences for would-be competitors and parison with the state monopoly of en- the broadband internet market? That ques- shown Telmex their business plans. Tel- ergy. Pemex’s stranglehold on the oil in-1 10 A survey of Mexico The Economist November 18th 2006

tion. But in practice Pemex is still the sole only a third as productive as those in the Talk is expensive 5 importer. Mr Téllez, who as energy minis- United States. Foreign direct investment, Telephone charges, August 2006 ter introduced that reform, says that the apart from a couple of big bank takeovers, $ at purchasing-power parity need for change is much more widely ac- has fallen from 3.5% of GDP in 1994 to less Residential calls* cepted now. He recommends gradual re- than 2% a decade later. 400 450 500 550 600 650 form, starting with private investment in Mexico does have a handful of big Mexico rening. Next, he would require Pemex to world-class rms. Cemex has grown to be- OECD average operate along more commercial lines, and come the world’s third-biggest cement United States then allow private investment in explora- company, with factories in 50 countries, tion. But the rst thing that is needed is to thanks to professional management, a International business calls† give Pemex greater nancial autonomy. highly ecient production system and a 0 0.5 1.0 1.5 2.0 The electricity industry is dominated string of acquisitions. Mexican beer has Mexico by two state-owned monopoly distribu- become a big export industry: Corona and OECD average tors, the Comisión Federal de Electricidad Sol are two of the country’s few interna- United States and, in Mexico City, Luz y Fuerza. Mr Ze- tional . Grupo Maseca, a tortilla *Composite basket of annual usage including international calls dillo changed the constitution to allow maker, has opened a factory in China and and calls to mobile networks †Average charge for private investment in generation; Mr Fox is planning others. But most Mexican rms Source: OECD single call, weighted by traffic, excluding VAT has secured further investment through seem to lack ambition. Between January public-private partnerships. But electricity 2004 and June 2006 there were just 19 2 dustry, from exploratory drilling to is expensive, despite subsidies equivalent share oerings in Mexico, with a total rening to deliveries to petrol stations, to around 1% of GDP (which benet the value of $5.7 billion. Mr Fraser of UBS goes back to 1938, when President Lázaro rich more than the poor). Luz y Fuerza is in points out that the equivalent gures for Cárdenas expropriated British and Ameri- thrall to its powerful trade union. Brazil are more than three times higher. can oil companies, asserting that El petró- The PAN used to be suspicious of the North of Mexico City there are outposts leo es nuestro (the oil is ours). But rather PRI-dominated trade unions. But Mr Fox’s of innovation. On a patch of shrubland than working for the Mexican people, Pe- government has appeased the most pow- next to Monterrey’s airport, the Tecnológ- mex works for the government treasury erful unions, such as the teachers, the em- ico, with government partners, is building and for its own union. With almost ployees of the Social Security Institute, the a technology park. Since 2003 it has set up 140,000 workers, it is wildly overmanned. Pemex workers and the electricians. Some 30 campuses across Mexico that are oer- Its pre-tax earnings last year were around argue for constitutional ing degrees in engineering and computing, $50 billion, but it invested only $13 billion. amendments to reform the unions and the linked to small business incubators. Mr As a result, oil production is already falling labour market. In practice labour in many Rangel, the Tecnológico’s rector, points out and will decline rapidly unless new dis- industries is quite exible already. A better that Mexico trains more engineers each coveries are made. Pemex is replacing only way of taking on the over-mighty unions year than the United States, China or . a fth of the reserves it is depleting, and would be to tackle the monopoly power He sees great potential for Mexico in indus- Mexico already imports 30% of the petrol that sustains a number of them. tries such as aerospace, white goods, food, and 23% of the natural gas it consumes. In view of all these economic rigidities, biotechnology and pharmaceuticals. Mr Zedillo’s government made a rst and of the poor quality of the judicial sys- That may be tomorrow. But today the attempt at loosening Pemex’s monopoly tem, it is little wonder that Mexico does not vast majority of Mexican companies are by allowing others to import natural gas, do well in league tables of international small businesses, many of them operating which required a change in the constitu- competitiveness. Mexican workers are in the . 7 The joy of informality

Working in the ocial economy has its drawbacks

N THE afternoon, try walking past the According to a recent estimate by the sophisticated one. Unlike the European Istately headquarters of the Bank of Mex- World Bank, this sector accounts for Union, it does not require the wholesale ico, across the Alameda from the massive slightly more than half of total employ- import of regulatory regimes and legal in- new foreign ministry tower in the heart of ment in Mexico. That is about par for the stitutions. Mexico City. Your progress along the pave- course in Latin America. Contrary to some The size of the informal sector goes a ment is slowed by a thick mesh of street claims, informal work has not expanded long way to explaining why Mexican pro- vendors. Throughout the centre of Mexico in the dozen years since NAFTA came into ductivity is so low: small businesses in this City they hawk Chinese clothes and elec- eect, but nor has it shrunk, says Bill Ma- sector nd it hard to expand or to innovate. tronics, or pirated DVDs produced closer to loney at the World Bank, who is preparing It is also one of the reasons why the tax home. They are just the most visible seg- a book on the subject. And perhaps there is take is so meagre. But there is no simple rec- ment of a huge informal economy of un- no reason why it should have done: ipe for change. Mr Maloney nds that registered businesses. NAFTA is just a trade agreement, albeit a many people consciously choose to work1 The Economist November 18th 2006 A survey of Mexico 11

health for workers in the informal sector will total 131 billion pesos ($12.1 billion), against 107 billion pesos for those in the IMSS. Since 1998 public spending on social protection for informal workers has ex- panded by 110%; the gure for the social- security system is only 21%. Meanwhile, general public investment in infrastucture and the like has risen by just 0.8%.

Better at the bottom Thanks to Oportunidades and the expan- sion of social protection, the poor are get- ting much more out of social spending than they did in the past. But rather than a minimum safety net, social protection is No Stalinist monopolies here becoming a powerful competitor to the of- cial social-security systemand one that 2 in the informal sector, not least because it long-term peso bonds. will increasingly provide better health care is hard for those who never completed But the reform did not apply to the So- for informal than for formal workers. It their basic education to get a well-paying cial Security Institute’s own employees thus amounts to a tax on formality. As Mr job in the formal sector. (nor to other public-sector workers who Levy puts it, we tax unskilled labour Tangles of red tape have made it unnec- have a separate social-security institute). through the social-security system. Work- essarily hard for informal businesses to go So of each peso of contributions, 17 centa- ers prefer to wash cars if they get free bene- legal. That is starting to change. A reform vos go to the institute’s own pensioners. In ts. Mr Calderón has promised that the last year cut the average time it takes to set ten years’ time this gure will rise to 30 government will pay the rst year of con- up a new business in Mexico City from 58 centavos, says Mr Levy, who was Mr Fox’s tributions for every new job registered to 27 days. Together with cuts in federal rst IMSS director. He piloted a bill with the IMSS. But that will not solve the corporate income tax and a new capital- through Congress that would have problem: many low-income workers regis- markets law that improved corporate-gov- switched new employees at the institute to tered with the IMSS drift into the informal ernance standards, this lifted Mexico 19 a pension scheme similar to the one used sector later on. places to 43rd (out of 175 countries) in the in the private sector. But the union went on The solution is not to dismantle social World Bank’s latest annual survey on the strike in protest, and Mr Fox caved in. So protection but to merge it with a reformed ease of doing business around the world. the health system for formal-sector work- social-security system. A rst step would Even so, recent innovations in social ers continues to be short-changed. More- be to separate the pension and health-care policy may be making it more attractive to over, thanks to the union, there are too functions of the IMSS. A second step remain in the informal economy. Formal many cleaners and clerks and not enough would create a universal non-contributory private-sector workers are obliged to con- doctors and nurses. basic pension, supplemented by a freely tribute to the Mexican Institute of Social Meanwhile, Mr Fox’s government, negotiated contributory scheme. This Security (IMSS), which provides pensions with the best of intentions, has launched would recognise that in Mexico, unlike in and health care, as well as to a housing or expanded a range of non-contributory Brazil, the elderly tend to be poorer than fund. Between them, workers’ and em- social-protection schemes for workers out- the population as a whole, notes Mr Scott ployers’ contributions add up to a hefty side the IMSS. The IMSS covers only 13m of CIDE. A third step would be to create a 35% of wages. workers, or 30% of the workforce. The universal health-care system nanced out The institute is yet another of Mexico’s schemes include Oportunidades, the anti- of taxes (and/or by means-tested social in- union-driven Stalinist monopolies. It ad- poverty programme that replaced a series surance). This would replace the present ri- ministers the state pension scheme and is of less eective transfers and subsidies. val systems, one contributory and the perhaps the largest single provider of This year the government added a pension other in eect paid for from oil revenues. A health care in North America. Its trade un- scheme to Oportunidades under which it fourth step would reform the labour mar- ion is the second-biggest after the teach- contributes slightly more generously than ket, reducing payroll taxes and severance ers’, with 380,000 members. Mr Zedillo re- it does to formal-sector pensions. Mr pay. That would still oer to those who formed pensions, switching from a Székely, a former ocial at the social-de- work in the informal sector more rights if pay-as-you-go system to Chilean-style velopment ministry, says that more than they were to go legal. individual capitalised accounts for new 95% of those who get Oportunidades have Given that state governments are workers, but with one embellishment. The never worked in the formal sector. Mr increasingly involved in the delivery of so- government makes a contribution to each Levy fears that if more benets are added cial policy, all this would involve complex account (at a total cost of $1.5 billion a year) to the scheme, they never will. negotiations. But the prize would be worth because otherwise many pensions would Mr Fox’s government also launched a having: to provide incentives for formalis- be too low to live on. The Afores, as the health-care programme called Seguro Pop- ing work, thus boosting tax revenues; and new pension funds are called, now man- ular for those outside the social-security perhaps even to increase productivity and age $61 billion in assets and have provided system. In practice, this is non-contribu- economic growth. Social policy is econ- a natural market for the government’s tory. All told this year public spending on omic policy, concludes Mr Levy. 7 12 A survey of Mexico The Economist November 18th 2006

Policing the police

The rule of law is an aspiration, not a reality

HE informal economy is one of the this work is done by the army, but some political dissent. Laws were to be applied Tmore benign manifestations of law- also by the Federal Investigation Agency with discretion, as a mechanism for doling lessness in Mexico. In recent years there (AFI), a new police force modelled on the out political reward and punishment. Cor- have been many more frightening signs FBI. Where once there was total mistrust ruption was the oil that lubricated the sys- that the state, its police and its courts are between law-enforcement authorities in tem. In Mexico the law is an aspiration, unable to keep the peace and protect or- the two countries, now there is active co- not the norm, says Bernardo León, a law- dinary citizens. The biggest challenge has operation, at the top at least. yer who advised Mr Fox on judicial re- come from drug gangs. Brutal murders, of- The problem, as Mr Fox implies, is that form. We made many laws to look good, ten of policemen, are reported almost ev- the government’s actions have unleashed not to obey them. There is no public con- ery day. Drug-related killings last year a turf war between two of the main gangs, demnation of lawbreakers. were running at twice the rate in 2004, and one based on the Gulf coast and the other numbers have been rising further this in Sinaloa. It’s like breaking a wasp’s Which side are they on? year, to 1,500 in the rst eight months. In nest, says Jorge Chabat, a political scien- As crime has risen, so have public de- recent weeks severed heads have been tist at CIDE who has long followed the mands for security. Government re- dumped on the dance oor of a night club drug issue. sponded by creating ad hoc police units. in Michoacán and outside a police head- Drug violence is only one aspect of a Today, Mexico has some 400,000 police in quarters in the Pacic resort of Acapulco. wider problem of public insecurity. Rising hundreds of dierent forces. On average Drug violence is particularly serious crime over recent decades owes much to policemen have spent just six years at along the northern border. The city of urbanisation and low economic growth, school, have received only two weeks’ Nuevo Laredo, the busiest border-crossing but in part it is also the legacy of authori- training and are paid just $370 a month for point for goods to and from the United tarian rule. After the revolution, policing the job, according to Mr León. Some 35% of States, is still without a police chief after was seen as a municipal matter. The job of them use drugs, and two-fths leave each two were murdered last year. In Septem- the federal security services was to repress year. Many municipal and even state ber armed men briey kidnapped 25 peo- forces work for the drug trade rather than ple in a where they were waiting for against it. Only the AFI is better-trained, an American visa to work for a company better-paid and better-motivated, though in Texas. That prompted a broadside from there are signs that some of its ocers may Tony Garza, the American ambassador to be falling from grace. Mexico: Violence in the US-Mexico bor- None of these police forces can investi- der region continues to threaten our very gate crime. That is the job of the Attorney way of life. In the past two years, he General’s oce, known as the PGR from its added, there had been dozens of unre- Spanish initials, and its equivalents in the solved kidnappings involving American states. So dismal is its reputation that three- citizens along the border. quarters of crimes are not even reported. What Mr Garza did not say is that the Of those that are, under 10% lead to pros- violence in Mexico is in large part a result ecutions. The courts are similarly dysfunc- of the continuing failure of drug policy in tional. In 97% of cases suspects are found the United States. Over the past decade the guilty, says Mr León. A confession is held locus of power in the drug trade, as in so to be unanswerable proof and so is often many other businesses, has moved closer extracted by . to the nal consumer. That means it has Mr Fox’s government set up a new pub- shifted from Colombia to Mexico, which is lic-security ministry and channelled more now the gateway for up to 90% of cocaine money to local police forces. It also in- entering the United States, as well as ever- tended to turn the PGR into an indepen- increasing amounts of marijuana and dent prosecution service and to reform the methamphetamine. judicial system, moving to adversarial oral Mr Fox says that the upsurge in vio- trials in place of the current inquisitorial lence reects his success in cracking down approach using written evidence. Some of on the trade. Certainly his government has this is starting to happen piecemeal at state proved more eective than any of its level. But the government’s plan to unify predecessors. It has caught several of the the police forces and create a single na- top gang leaders, extradited about 50 sus- tional code of criminal procedure was pected trackers to the United States and blocked in Congress. seized record quantities of drugs. Much of Underpaid, undertrained and often brutal Mr Calderón is likely to take up much of1 The Economist November 18th 2006 A survey of Mexico 13

2 this unnished agenda. He wants a judi- discussion and transformation. kind of injunction under which judges cial reform to avoid the brutal impunity What is missing from the discussion, routinely set aside the law. This was used, we have in Mexico. The instinctive oppo- says Marcelo Bergman, a sociologist also at for example, by Mr López Obrador when sition of the states may make it hard to in- CIDE, are proposals to make the police he was mayor of Mexico City to allow troduce a national police force. But in re- more accountable through performance thousands of pirate taxis to operate freely sponse to drug violence, a group of state measures and external evaluations. Mak- there, in return for which their drivers turn governors has recently called for a com- ing the PGR autonomous without rst re- out for him in his frequent demonstra- plete rethink of policing, the judiciary and forming it seems counterproductive. Bet- tions. The second is to set up a national po- the prison system. We don’t reject any- ter, says Mr Bergman, to end its monopoly lice unit with skills in public order and thing but will have to look carefully, says of prosecution. crowd control, capable of ensuring that Natividad González Parás, the PRI gover- Two other changes are urgently protests remain within the law without nor of Nuevo León. It’s the start of a long needed. The rst is to curb the amparo, a shedding blood. 7 So close and yet so far

Making the most of NAFTA requires change at home

HE two cowboy-booted ranchers, one deaths at the border rose from 254 in 1998 States are very constructive on dozens of Tfrom Guanajuato and the other from to 472 in 2005. issues in hundreds of ways every week, Texas, were quick to call each other amigo That angers many Mexicans. But they as Mr Davidow puts it. Economic integra- when Mr Fox visited George Bush at the also know that there are limits to the bor- tion is binding the two countries more White House in 2001. The American presi- der crackdown. If wages start to rise in the closely together every day. In Ciudad Juá- dent declared that the United States has United States, American businessmen are rez, across the border from El Paso, indus- no more important relationship in the likely to press for more legal migration. trial parks, shopping malls and -new world than the one with Mexico. Mr Fox The reality is that we have an integrated housing estates in faux-colonial style and Jorge Castañeda, his foreign minister, labour market and we ought to nd ways stretch out endlessly into the Chihuahua wanted a bilateral treaty on migration, and to manage it, says Jerey Davidow, the desert. Monterrey, the industrial hub of Mr Bush seemed receptive to the idea. American ambassador in Mexico City north-east Mexico, has become a hand- Yet as Mr Fox reaches the end of his from 1998 to 2002. some North American city of swirling free- term, Mexico’s relations with the United Because migration has become such a ways and glass oce blocks, just the place States are clouded in disappointment. The divisive issue, it is easy to overlook that re- to hold international conferences. terrorist attacks of September 11th 2001 lations between Mexico and the United Mexicans were encouraged to believe and their aftermath changed Mr Bush’s that NAFTA would deliver instant prosper- priorities. Mexico used a rotating seat at ity. It has not done that, but it has certainly the United Nations Security Council to ex- boosted Mexico’s exports and made it press its opposition to war in Iraq. And Mr more attractive to foreign investors. It’s Fox’s hopes for a migration agreement been a huge success on both counts. You were swamped by a rising tide of anti-im- can’t ask much more, says Jaime Serra migrant feeling in the United States. Puche, who negotiated the treaty as Mr Sa- Mr Bush proposed to combine tighter linas’s trade minister. border security with easier legal migration But the treaty has also thrown up some and steps to legitimise the 11m migrants tricky issues. In January the tari on im- (6.3m of them Mexican) thought to be in ported American maize will be cut from the United States illegally. But only the rst 27% to 16%, and a year later to zero. The Un- part is being implemented. In the run-up ited States subsidises its maize farmers lav- to this year’s mid-term elections, Congress ishly. South of the border, growing maize voted to add another 700 miles (1,100km) ineciently in tiny milpas is not just a way to the fences that currently stretch for 75 of life for several million poor Mexicans, as miles along the border. Earlier this year Mr it has been since long before the Spanish Bush sent 6,000 National Guard to police conquest; it is part of Mexico’s national the area. None of this will stop the ow of identity. So the issue is politically explo- migrants, but it might reduce it by raising sive. It prompted Mr López Obrador to say the risks and the price of crossing. Since that he would renegotiate the relevant May this has doubled to $5,000, according chapter of NAFTA. to Rafael Fernández de Castro of ITAM, a Opinion is split on whether the pro- university in Mexico City. The United blem is more than symbolic. Mexico’s im- States Government Accountability Oce ports of maize have risen since 1993, but so reported recently that the number of The ones who did not make it has production. The United States pro-1 14 A survey of Mexico The Economist November 18th 2006

2 duces mainly yellow corn; the Mexican post-election turbulence, it is easy to forget of authoritarian rule has discouraged risk- sort is white. Mr Serra points out that Mex- that away from the centre of Mexico City taking. People are used to being told what ico has had 15 years to help its farmers and (for dierent reasons) Oaxaca, the to do, and in return they expect the state to adapt, and has done nothing. Mexico country quietly got on with its business. provide for them. This is especially true in should be the market garden of North The peso and the stockmarket sailed Mexico City and the south. Mr Téllez says America, producing fruit and vegetables, through the election with barely a blink. that in his job as head of the Mexico oce which are labour-intensive and can be This economic stability provides a robust of Carlyle, an American private-equity grown on small plots. In the end demand basis for faster growth. group, he visits Monterrey once a month to for ethanol may push up maize prices. Moreover, Mexico is a much more see rms who need capital, but has never Some Mexicans argue that their coun- democratic, pluralist and open society had cause to travel south of Mexico City. try needs European-style regional aid to than it was under Mr Salinas and his The dierence, he says, is that the north adapt to NAFTA and halt the ow of emi- predecessors. This transition has been has specialised in business rather than grants. But it is hard to see why the Ameri- achieved without serious violence. Most government. In the south suspicion of can taxpayer should pay up when his Mex- Mexicans shunned Mr López Obrador’s private, and especially foreign, investment ican counterpart contributes so little. The call to revolution. The electoral machinery remains widespread. Throw in a history of politicians are trying to deepen NAFTA in has passed a severe test. mistrust of the United States, and Mexican more humdrum ways, such as setting com- ambivalence towards globalisation is un- mon standards and rules. To go north, rst head south derstandable. If the PRI had a lasting ideol- Despite increasing security concerns, But it would be unwise to conclude that all ogy, it was . Yet ordinary Mexi- trac has continued to ow more or less is well. The clearest sign that it is not are cans are noticeably less anti-American smoothly across Mexico’s northern bor- those 500,000 young Mexicans who each than the political elite. der. Mr Fox’s government has co-operated year turn their backs on their country in But the main thing holding Mexico closely with the United States on security, search of better opportunities. Demogra- back is that partial reform has produced sharing counter-terrorist intelligence, says phy will eventually reduce that ow, but partial results. As long as our income dis- Armand Peschard-Sverdrup at the Center time is not on Mexico’s side. tribution is as bad as it is, many people for Strategic and International Studies, a NAFTA no longer gives Mexico a un- don’t see the benets of globalisation, think-tank in Washington, DC. But there is ique competitive advantage. Central says Mr Derbez. The country is split more scope for more. America now has a free-trade agreement or less evenly between those who have Some Mexicans are also starting to with the United States, and Peru and Co- beneted from the changes of the past two think that tighter border security is in their lombia may soon follow suit. China and decades and those who have not. own interests. Of the 1m people who cross India are sucking in a lot of the foreign in- Economic stability, NAFTA and democ- the northern border each year without a vestment that Mexico had hoped for. racy are three great achievements. But they visa, only half are Mexicans; the rest are Manufacturing wages in Mexico are only should be the starting point for more eec- mainly from Central and South America. one-tenth those in the United States, but tive public policies, not an excuse to go If the northern border is porous, the south- more than three times those in China. If it back to sleep. It is time for the government ern frontier with Guatemala is a huge wants to keep ahead of China, and stop its to sweep away the remnants of crony cap- sieve, says Arturo Sarukhan, who advises own people from leaving for better jobs italism, set the economy free and liberate Mr Calderón on foreign policy. north of the border, Mexico must move to the south from its backwardness. Mr Cal- Under Mr Fox Mexico’s foreign policy higher-value manufacturing. derón does seem determined to turn Mex- became less defensive than it had been un- Yet the country often seems less ambi- ico into a prosperous and global capitalist der the PRI. That led to quarrels with tious than its own migrants. A long history democracy. Wish him luck. 7 and Venezuela. The international agenda of Mexico is to support human rights. If you apply that to Cuba, it gets called inter- Oer to readers Future surveys Reprints of this survey are available at a price of ference, says Luiz Ernesto Derbez, the for- £2.50 plus postage and packing. Countries and regions eign minister. Mr Calderón’s foreign pol- A minimum order of ve copies is required. Britain February 3rd 2007 icy will pay more attention to Mexico’s America’s South March 3rd 2007 relations with Latin America, particularly Corporate oer Business, nance, economics and ideas Central America, says Mr Sarukhan. Customisation options on corporate orders of 100 The brain December 23rd 2006 Further aeld, Mexico has signed free- or more are available. Please contact us to discuss Executive pay January 20th 2007 trade agreements with the European Un- your requirements. European business February 10th 2007 Oshore nance February 24th 2007 ion and Japan, and has become an asso- Send all orders to: ciate member of Mercosur. But trade with EU The Rights and Syndication Department the has been disappointing. Mexican 26 Red Lion Square products increasingly tend to be North WC1r 4HQ American products, which makes them in- Tel +44 (0)20 7576 8000 eligible under the rules of origin in the EU Fax +44 (0)20 7576 8492 agreement. Geography dictates that Mex- e-mail: [email protected] ico’s most important relationship will al- Previous surveys and a list of forthcoming ways be with the United States. surveys can be found online Look back a dozen years, and Mexico www.economist.com/surveys has indeed achieved much. Amid all the