Mexico at an Impasse

THE EXPECTATIONS REVOLUTIONS

The July 2000 defeat of Mexico's Institutional Revolutionary Party (PRI) after more than 70 years of rule sparked a revolution in expectations. There were celebrations in the streets, glowing editorials in foreign newspapers, and expressions of undiluted optimism in investment and policy circles. Newly elected president Vicente Fox projected a triumphant image of strength and confidence that inflated hopes at home and abroad: private investment would flood in, the rule of law would prevail, the sins of the past would be punished, and the U.S.-Mexico relationship would flower. More profoundly, Mexico would elude its existential condition as an underdeveloped nation.

Three years into Mexico's democratic transition, few of these dreams have been realized. Mexican politics are more democratic but less governable and are suffering from gridlock between the executive and legislative branches. The economy is stable, but growth and competitiveness are lagging as the next generation of reforms—tax, energy, and labor—falls prey to partisan bickering in Mexico's Congress. And the friendship between Fox and President George W. Bush has cooled over differences about immigration and policy toward Iraq. Mexico shows no signs of an imminent crisis, but its triple political, economic, and diplomatic impasse is taking a toll. The price of unreasonably high expectations has been premature disillusionment. A breakthrough in at least one area must come fairly soon—lest Mexico's grand experiment with economic and political liberty fail to fulfill its potential.

UNGOVERNABLE DEMOCRACY

The principal concern of Mexico's political elite today is how to build governing majorities and achieve consensus. After three years of stalemate in Congress, there is debate over whether Mexico's political paralysis is the result of a constitutional structure that makes it inherently ungovernable or of weak leadership on the part of President Fox. The answer to this question is not insignificant. If the logjam is due to weak leadership, the presidential elections of 2006 might resolve the problem. If the logjam, however, is structural in nature, it will be much more difficult to overcome.

Fox's leadership style is unconventional and ideologically heterogeneous. Some commentators find him refreshing and authentic, whereas others complain that he has not established clear priorities or consistent legislative strategies. But whatever Fox's shortcomings, it is clear that any leader, no matter how gifted, would have struggled with the challenge of assuming the presidency at Mexico's singular moment of regime change. Fox won only 42.5 percent of the vote in the 2000 elections, and his National Action Party (PAN) controls just 30 percent of seats in the lower house of Congress (the Chamber of Deputies) and 38 percent in the Senate. In most instances of regime change, the old regime is defeated and dismantled definitively. In Mexico, the PRI was defeated but far from dismantled: it remains ensconced in Congress as a legitimate opposition party.

Many Mexicans believe that a democratic transition must include a punitive settling of accounts with the PRI. As a result, Fox has found himself on the horns of a dilemma: he needs a juicy corruption case from the PRI era to prosecute, but he also needs the PRI 's support to form congressional majorities. Fox has failed to reconcile these competing demands. His cabinet is divided between pragmatists who see accommodation with the PRI as inescapable and confrontationists who think that the president's legitimacy depends on destroying the PRI, root and branch. Fox has oscillated between these two approaches, launching vituperative attacks on the PRI one day and calling for congressional unity the next. The result has been stalemate: the government launched investigations of the PRI that were aggressive enough to undermine the chance of legislative cooperation but not decisive enough to satisfy the appetite for vengeance.

Striking a balance between governability and historical reckoning is most difficult during the early years of a democratic transition, as was the case in Argentina and Chile. Some will inevitably complain that Mexico's democratic transition did not settle accounts in any spectacular fashion, despite the fact that a special prosecutor is investigating former President Luis Echeverría for his alleged role in the 1968 Tlatelolco student massacre. Others will argue that the PRI never committed human rights abuses on the scale of Chile's Augusto Pinochet or Argentina's Jorge Rafael Videla, making an expurgation of past sins less necessary. But what is most important is that the first three years of Mexico's transition have not seen a single serious threat to democracy. This success speaks well of both President Fox, who has emphasized stability, and the PRI, which accepted its defeat with at least a modicum of grace. To the extent that the stalemate of the past three years is attributable to the unique dilemma of regime change, it is a small price to pay for democratic survival. When such one-time tensions have faded, Mexico's parties may be able to put aside the past and cooperate on national business.

Today's gridlock, however, also stems from structural flaws that make Mexico particularly susceptible to the frustrations of a divided government and a limited presidency. Traditionally, governability was ensured only by the PRI's ability to deliver overwhelming majorities in both houses of Congress, as the politician Manuel Camacho has noted. There is no constitutional mechanism to guarantee that a president can successfully govern in the face of an opposition Congress. Without a majority in either house, therefore, the Fox presidency was instantly cut down to size by PRI legislators more than willing to exercise the constitutional prerogatives accorded to them in their new role as the opposition (the PRI's Senate leader recently declared that his party would govern from Congress).

It is improbable that any Mexican political party will be able to reconstruct the electoral majorities formerly enjoyed by the PRI. The historic 2000 elections did not produce realignment in favor of the PAN, nor did the 2003 midterm elections result in a PRI majority in Congress. Instead, three major parties of roughly equal strength vie for dominance: the PRI, the PAN, and the left-wing Democratic Revolutionary Party (PRD). Each party, moreover, is riven by personal and ideological faults that undermine the negotiating capacity of party leaders in Congress. The system is further divided by three small parties that survive thanks mostly to the use of proportional representation (based on a party's percentage of the national vote tally) to elect a portion of Congress.

Looking ahead to the 2006 presidential election, one can envision a scenario similar to that of the 2000 election: weak parties and strong candidates who lack electoral coattails. Mexico City Mayor Andres Manuel López Obrador, one of the country's most popular potential presidential candidates, consistently polls in the neighborhood of 52 percent even though his party, the PRD, has never won more than 25 percent of the vote in a national election. In the event that a ticket-splitting Mexican electorate gives him a victory but only 17 percent of Congress to his party, forming a governing alliance would be immensely difficult. Similarly, a PRI or PAN candidate could win a weak victory in the presidential race while his or her party achieved a tepid plurality in Congress.

Some analysts have advocated a major constitutional overhaul to install a parliamentary regime and guarantee majority support for the executive. But many Mexicans, understandably disconcerted by the impasse between the president and Congress and fearful for the viability of democracy, instead look back nostalgically on the days of a strong president. Accustomed to a pyramidal presidency so powerful that it was once described as a six-year Aztec monarchy, they are bewildered by this upside-down world. But the possibility of restoring an all-powerful presidency is remote, and reengineering the Mexican constitution to implant a parliamentary system is similarly unlikely.

Disillusionment with the political parties may account for historically low voter turnout (42 percent) in the 2003 midterm elections and could cause the electorate to seek out more charismatic figures. Jorge Castañeda, formerly Fox's foreign minister, launched an exploratory bid for the presidency on this logic, arguing that Mexican voters go to the polls only when presented with a charismatic individual who offers hope of change. As one senior Mexican diplomat has wryly commented, "In Mexico we have egos, not institutions." This trend toward personalism and weak parties may be nothing to worry about. Mexico might simply go the way of the United States: weak but persistent parties that field strong candidates. In a more ominous scenario, however, the decay of party institutions and congressional gridlock could restore the authoritarian temptation and pave the way for wild-card leadership.

Under current conditions, there are only two ways to create majorities in Mexico: alliance building or modest political reform aimed at consolidating the party system. Without strong parties that can achieve electoral majorities across the board, the negotiating skills of future presidents will be crucial. Mexican political culture has little experience with compromise, and the road to democracy has been paved with insult and calumny. Give-and-take is central to a well-functioning democracy, but the spirit of retribution has bogged down relations between Fox and the PRI-dominated legislature. In time, the public may blame all parties for such gridlock, thereby creating incentives to compromise. The elimination of proportional representation, meanwhile, would encourage the gradual consolidation of the party system. Instituting campaign finance reform, congressional reelection, and "second round" provisions in presidential elections (to guarantee majority victories) would further enhance party legitimacy.

If there is hope for ending gridlock in the remaining three years of the Fox administration, it stems from the fact that all three major parties have a shot at winning the presidency in 2006. None wishes to inherit an ungovernable nation, and none wishes to be accused of obstructionism. The hunger for power, therefore, may encourage a flurry of congressional activity toward the end of Fox's tenure.

Mexican democracy is not fated to be dysfunctional. But without some reform, it may end up in a peculiar state of institutional limbo and semipermanent gridlock: a constitutionally mandated presidential system that operates more like a majority-less parliamentary system.

THE COMPETITIVENESS DEFICIT

The 2000 presidential election was the first in close to 30 years to take place unaccompanied by a massive devaluation of the Mexican peso—thanks to former President Ernesto Zedillo's commitment to fiscal discipline and a free-floating currency. Three years later, Mexican democracy has passed an important economic test: both Congress and President Fox have resisted the temptation to engage in deficit spending and foreign borrowing in the face of a stubborn, painful recession. In fact, Fox's economic team has achieved unprecedented price and monetary stability—treasury bond rates are below five percent, and inflation is around four percent. Meanwhile, the federal deficit has fallen to less than one percent of GDP, foreign debt represents less than 20 percent of GDP, and Mexico's balance of trade is stable. Macroeconomic stability has permitted real wages to rise for three consecutive years, and, if growth returns in a low-inflation environment, Mexico will increase its per capita GDP for the first time in nearly 30 years.

In the meantime, however, Mexico is caught in a grinding stagnation that has led to a net loss of 2.1 million jobs, average GDP growth of less than one percent in the first three years of the Fox administration, and a surge in illegal immigration to the United States. The onset of recession in the United States hit Mexico hard, especially in the manufacturing sector. But there are signs that the Mexican recession is the result of a growing competitiveness deficit, not simply a matter of bad luck to be solved by an uptick in the U.S. economy. Mexico faces pressures from Chinese exports in the U.S. market and from foreign assembly plants moving to the Caribbean, China, and other Latin American nations.

The current congressional impasse over economic reform is especially damaging in this context. The stalemate is not simply partisanship run amok; it is a symptom of regime change, of fundamental disagreement over how much to preserve from the old order. Many of Mexico's market reforms were imposed from above by the PRI 's ruling technocracy in the 1990s. Ironically, opposition to them now comes not from President Fox and the PAN but from the PRI itself—the continuation of a long-simmering conflict within the party that has erupted into an open rebellion since the PRI lost the presidency. (Many PRI-istas, however, have started to push for early passage of some reforms to ease the task should the party recapture the presidency in 2006.) Although there is a cost to delaying reform, Mexico does need time to build a foundation of democratic support for its market economy. Competitiveness-enhancing reforms run headlong into taboos and have steep political costs.

Energy policy provides a good example of this deadlock. Energy has long served as a sacred symbol of Mexican sovereignty, and the constitution explicitly prohibits private ownership in energy sectors, even though the government does not have sufficient resources to finance its own oil and natural gas exploration. As a result, cheap energy does not offer the natural advantage to the Mexican economy that it should. Electricity costs there are, on average, higher than those in the United States, and there are frequent energy shortages that, among other things, keep investment away from many northern industrial parks. Although Mexico sits on one of the world's largest natural gas reserves, it has to import natural gas from the United States. (In fact, federal efforts to develop privately run, competitively priced electrical capacity have slowed to a crawl due to scarce gas supplies.) "A Mexican businessman can go to Texas and invest in natural gas production to sell to Mexico, but that businessman is unable to do the same at home in Mexico," one economic official has scoffed. Still, mustering the two-thirds congressional majority needed to change the constitution and liberalize the energy sector is a daunting task.

Reform of the judicial system, another crucial step in improving Mexico's economic situation, will not be easy either. Foreign investors are wary of wobbly courts (plagued by frivolous litigation and corrupt judges) and the capriciousness of the rule of law. The Dutch financial services company ING has been sued three times in three separate criminal courts for alleged underpayment on an insurance policy held by Fertinal, a nearly bankrupt company hoping to save itself with a huge reward. Senior ING executives have been arbitrarily jailed, and ING even saw its assets frozen on the order of a Mexico City court—a move that sent chills through the foreign financial community.

Raising taxes, also a necessary reform, is another political bombshell. Mexico's tax collection rate hovers around 11 percent of GDP—the lowest among the members of the Organization for Economic Cooperation and Development, which average collection rates of almost 27 percent. Future competitiveness depends on long-term investment in physical infrastructure and human capital, and Mexico's efforts in these areas will lag so long as its tax collection rate remains so low. Windfall resources from privatization and high oil prices have made it possible to postpone tax reform over the past two decades, but the moment of truth is fast approaching. Mexico is running out of public companies to privatize, oil prices are falling, and revenues derived from commercial tariffs have declined with the advent of free trade.

A coming demographic shift will only exacerbate these spending pressures. Although Mexico is typically considered a young country, the percentage of the population aged 65 and over is projected to increase to 13 percent in 2030 and to almost 25 percent by 2050 (from a low of 2.6 percent in 1930). In absolute terms, this means that there will be 17 million people older than 65 in 2030 and more than 30 million in 2050. The implications of this shift for health and pension costs are staggering. If Mexico cannot soon achieve economic modernity and tax efficiency, it will face a social catastrophe. As Richard Jackson, director of the Global Aging Initiative, puts it, Mexico must grow rich before it grows old.

Mexico has made enormous strides toward fiscal and monetary stability, but its economy cannot afford to idle while the rest of the world speeds ahead. Stalled reforms have dampened investor enthusiasm, costing Mexico $5 billion in direct foreign investment (which fell from $16 billion in 2000 to $11 billion in 2002). The failure to generate the more than one million jobs needed for new entrants into the labor market, meanwhile, could thrust hundreds of thousands of Mexicans out of their homes and toward the U.S. border. Still, some long-term investors are betting that the backlash against liberalization will fade as the wheels of generational change turn. Youthful Mexican politicians from all parties express positive convictions about the need for continued economic opening. Mexico may be closer than it seems to a true consensus on an open economy, but a breakthrough must occur soon if the competitiveness deficit is to be eliminated and the hemorrhage of Mexicans into the United States stanched.

BEYOND NAFTA

Mexico's democratic revolution raised hopes of a revolution in U.S.-Mexican relations. But ever since the North American Free Trade Agreement went into effect in 1994, the two countries have been searching for the next great advance in bilateral relations. Jorge Castañeda proposed transforming NAFTA into a European-style "North American Community," complete with free movement of labor and social development funds for poorer nations. Fox, enamored of Europe's success in helping to develop the formerly poor countries of Spain and Portugal, hoped that the United States might be willing to do the same for Mexico. He also asked that the Bush administration provide de jure recognition of the de facto residence of millions of Mexicans working illegally in the United States, the first step toward a free labor market.

A Mexican foreign policy that demanded sizeable amounts of aid and the legalization of millions of immigrants, however, was the last thing the Bush administration had expected. Washington tends to associate the European model with overregulation and excessive supranational bureaucracy, and Mexico underestimated U.S. sensitivity to job competition and downward pressure on wages in the face of a looming recession. The free movement of labor remains unrealistic as long as Mexican wages are a fraction of wages in the United States. Plenty of U.S. policymakers remember that the last amnesty offered by Congress—the Simpson-Rodino Immigration Reform and Control Act of 1986—resulted in ever-larger waves of illegal immigration and undermined the credibility of U.S. law enforcement. Ultimately, the events of September 11 allowed the White House to gracefully sidestep the inconvenient requests of its southern neighbor.

Such setbacks do not mean that integration cannot continue or that nothing has been accomplished. Mexico has successfully broadened U.S. focus beyond its prior preoccupation with drug trafficking (thanks in part to the progress it has made in arresting cartel leaders, which allowed the U.S. Congress to modify its controversial certification process). The Partnership for Prosperity, a creative initiative launched by Bush and Fox in September 2001 to foster investment in Mexico's underdeveloped regions, has brought the Overseas Private Investment Corporation and the Peace Corps to Mexico for the first time. There is hope for coordination in developing border infrastructure and North American standards and certification procedures. Even in immigration policy, incremental progress is possible if care is taken to protect certain sensitive service and manufacturing sectors.

Three lessons of enduring importance emerge from the experience of Bush and Fox thus far. The first is that it does not pay to hinge the success of the entire relationship on a single issue, as Mexico did when it defined success exclusively in terms of a comprehensive immigration accord. The second is the need for prior agreement when one partner seeks a sea change in relations. When the Fox administration announced its desire for changes in U.S. immigration policy without any prior negotiation, it created expectations that plague the relationship to this day. The third lesson is that issue linkage can prove fatal for bilateral harmony. With such a complex bilateral agenda, linking issues allows a fire in one area to spread to others, leading to multiple breakdowns in bilateral relations. Mexico tried to link the entire agenda to immigration; the United States has done the same with Iraq. As a result, U.S.-Mexican relations are tied up in knots: each nation expects the impossible of the other.

The next great shift in bilateral relations is within sight, but it awaits a more propitious moment. The United States and Mexico must first erect a new North American security architecture. Protection of the North American perimeter is essential to the security of both nations. (Consider the effects on Mexico of a contagious biological attack on Los Angeles or Dallas, or the economic costs should a terrorist attack on the United States be launched from Mexico.)

Nonetheless, they have had no formal defense relations since the end of World War II, and, given Mexico's recent diplomatic choices, there is little chance that a strategic alliance will be forged in the short term. A few days before the first anniversary of September 11, Mexico withdrew from the Rio Pact, the western hemisphere equivalent of the NATO charter's provisions for collective self-defense. This move was a stunning blow from a neighbor presumed to be a friend. Mexico had taken to lambasting the pact as a militaristic relic of the Cold War, and the United States never actually expected that Mexican troops would participate in a Rio Pact-sponsored action. Nonetheless, Washington interpreted Mexico's withdrawal as a sign that the United States, in its darkest hour, could not expect even symbolic solidarity. So crippled was Mexico by its historic insecurity that, when confronted with the diplomatic challenges of September 11, it could not see the genuine vulnerability of its northern neighbor, let alone respond compassionately, without equating compassion with subordination.

Mexico's position in the run-up to the war on Iraq was also troubling. Its decision not to support the U.S. position can be attributed to domestic opposition and pressure from other allies, but it also had a tendency to indulge in what one senior U.S. official described as diplomatic "dancing in the end zone." Mexico may feel the need to burnish its anti-American credentials to play to a home audience upset by the lack of a new immigration accord. The result, however, has been a setback in bilateral relations.

Fortunately, U.S.-Mexican security cooperation is in better shape than such symbolic actions indicate. Mexico has pursued what one Mexican diplomat calls a "Janus-faced" policy: privately working to secure borders while publicly declaring diplomatic distance and issuing stern demands for immigration reform. In reality, a quiet revolution has begun. Both countries have stepped up efforts to secure the North American perimeter, sharing sensitive intelligence and jointly monitoring shared airspace. If there is anything to criticize, it is that the United States has not been quick enough to give Mexico the resources and technology it needs to upgrade its security infrastructure. Washington should grant Mexico observer status in the North American Aerospace Defense Command (NORAD, currently run with Canada's help) and create a joint bioterrorism task force to coordinate the epidemiological efforts and border health resources of both countries. Ultimately, the goal should be to build the institutional architecture necessary to turn bilateral relations into a strategic partnership, complementing the economic partnership established by NAFTA.

STOPPING THE DRIFT

There is frustratingly little that the United States can do to enhance Mexico's economic competitiveness or to consolidate Mexican democracy; these are issues that Mexico must resolve on its own. But Washington can and should stop the drift in bilateral relations. The Bush administration must put Mexico back on its priority list, despite its recent disappointment with Mexican foreign policy.

President Bush should renew his commitment to the Partnership for Prosperity by naming a special envoy to marshal private investors and philanthropic interest to the high-migration regions of Mexico. Currently, less than one percent of foreign investment goes to rural Mexico; even a modest increase would make a meaningful difference for the almost 25 million Mexicans who live in these areas. The partnership is a bright spot in bilateral relations, but even it runs the risk of getting lost in the shuffle.

Washington should also take action on immigration policy, even though the interests of Mexico and the United States are not always perfectly aligned. Policymakers should begin with the agricultural sector, in which Mexican and U.S. workers do not compete. Mexican farm laborers should not have to face death in the desert to perform a vital function for the U.S. economy. Rather than wait for Congress to act on the politically thorny issue of immigration, Bush could increase the number of visas issued through the already existing agricultural worker program. The United States should also improve the consular services offered by its embassy in Mexico City. Consular and customs officers are the face of the United States to millions of Mexicans; too often, those faces are scowling and unfriendly, and demand for consular services far outstrips capacity. An infusion of money is necessary to increase the number and quality of officers.

As for Mexico, there is no better way to win the affection of the United States than to make it feel that it has a true partner in matters of mutual defense. Mexico should engage the security issue head-on as an equal partner, without hiding behind multilateral distractions and anachronistic shibboleths about losing national sovereignty.

Such steps, modest but not insignificant, will benefit both nations. The next three years will determine the outcome of Mexico's historic transition. Mexico and the United States, out of self-interest and mutual concern, must work to make the most of them.