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Mexico: Real Reform, or Smoke and Mirrors?

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Since his election in late 2012, President Enrique Peña Nieto has enacted reforms impacting Mexico’s political, economic, and social landscape. Whether or not these reforms have fully lived up to expectations is another matter entirely. 

Nieto Final 2Have President Enrique Peña Nieto’s reforms been effective? The jury is still out. The reforms—to the fiscal, education, telecom, and energy sectors, among others—were designed to strengthen the country’s economy, democratize politics, and expand social rights, but they have received a mixed reception from both public and private sectors.

FOR AND AGAINST
In one corner stand the pro-reformers, who point to gains both achieved and prospective. Policy analysts argue that increased competition and transparency were necessary for growth in today’s global marketplace. In January 2017, OECD economists judged that tax policy, energy market openness, telecom deregulation, and competition policy, among others, were well on their way to success. Telecom prices are down while broadband access has skyrocketed, the energy market is open to competition for the first time in 75 years, and tax revenue is increasing, moving the country away from its dependence on oil revenues. 

I believe the most important messages that energy reform sends to the international community are about transparency and efficiency—transparency in that all the processes of this system, from upstream visitation to the electricity auctions, turned out really well. Competitors are treated equally, and I believe it generates long-term relationships.” —Guillermo I. García Alcocer, President, CRE

“Mexico has made enormous strides under President Peña Nieto with the reforms,” says William Waggoner, President & CEO of Mexico Petroleum Company. He expects the nation to become a world powerhouse over the next 25 years and ticks off a list of advantages: commodities, technology, a strong tertiary education system, transparency, a vibrant automobile industry, a large base of positive young people. Says Waggoner, “Mexico has all the ingredients.” 

On the opposite side are those who see the reforms as, among other criticisms, a series of smoke and mirror strategies from Peña Nieto. An initial lack of communication about new policies led to suspicion and doubt among the Mexican populace, while some observers believe that the nation’s most urgent reform—the rule of law—has not been adequately addressed. Naysayers maintain that the current administration is more interested in promoting the public face of the nation as a successful economic power, while such issues as human rights, corruption, and security are ignored.

January 9, 2014, México City, Mexico. Mexican President Enrique Peña Nieto (R), Minister of Finance Luis Videgaray (L), and the President of the Board of the Permanent Commission of the Congress Ricardo Anaya (2nd from L) take part in the signing of financial reforms at the Los Pinos presidential residence.

January 9, 2014, México City, Mexico. Mexican President Enrique Peña Nieto (R), Minister of Finance Luis Videgaray (L), and the President of the Board of the Permanent Commission of the Congress Ricardo Anaya (2nd from L) take part in the signing of financial reforms at the Los Pinos presidential residence.

 

Meanwhile, gas prices rose by 20 percent in January 2017, the peso has given fiscal policy a bumpy ride since the president took office, and inflation has jumped more than a point, to 6.2 percent, since January of 2017. The public sees these indicators as evidence that the reforms are not working, and Peña Nieto’s approval rating, at 12 percent in January, reflects that sentiment. 

Enrique Vilatela Riba, the President and CEO of InvestaBank, believes that most Mexicans are working hard to “do things right” where reforms are concerned. His priorities are education, the judiciary, and taxes. “With those three reforms, the country will really change for the good.”

TAXING TIMES
One of the most significant—and controversial—changes Peña Nieto has introduced is fiscal reform. The modifications seek to address two major thorns in Mexico’s side: the country’s over-reliance on its oil reserves and its significantly low level of tax revenue. 

Mexico has the lowest tax revenue levels of any of the 35 members of the OECD. In 2012, pre-reform, the tax-to-GDP ratio stood at 13.6 percent, compared to an OECD average of 33.4 percent. By 2015, the latest period for which data is available, that number for Mexico had risen to 17.4 percent. Still, 20 percent of total government revenue comes from oil reserves, although oil-related activities had fallen from 13 percent of GDP in the mid-2000s to 8 percent in 2016. 

The leading private-sector advocacy organization and industry trade groups are not convinced that tax reform will be effective. The International Monetary Fund, for its part, acknowledged the progress the reforms represent but called for even greater efforts to reduce Mexico’s reliance on oil reserves. 

A LESSON IN CHANGE
“Teamwork, entrepreneurship, creativity, and innovation are the qualities we want to evaluate in our education system,” says Dr. Raúl Medina Mora, CTO of technology solutions company TEC360. He asserts that Mexico reacts too slowly to innovations in education and fears that the demographic bonus may slip away. He stresses the need to develop capacities, abilities, and competencies in order to capitalize on that demographic advantage. 

 

President Peña Nieto’s education reforms are designed to do just that. The government intends to channel US$2.7 billion into the public school system. The investment will boost the lagging infrastructure and lack of resources that have plagued the nation’s public schools for a century.

Despite reforms, Mexico continues to perform last among OECD countries in educational attainment, with a score of 33.7; that compares to, for example, 46.4 for Brazil, 61.4 for Chile, and 89.6 for the United States. Assessment scores in reading, mathematics, and science have improved since 2000 but have essentially flatlined since reforms were put in place. 

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