Mexico’s New Mission

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from TIME Magazine,

It’s the hot new emerging market. But can President Peña Nieto and his team of reformers really turn their country around?

Left to right: Miguel Ángel Osorio Chong, Interior Minister; Enrique Peña Nieto, President; Luis Videgaray Caso, Finance Minister

At 9 o’clock on a February night, Mexican President Enrique Peña Nieto was still working inside Los Pinos, his official Mexico City residence, where camouflaged soldiers with assault rifles stood guard outside. For the 47-year-old President, it was a reminder that the presidency is a deadly serious business–especially at this pivotal moment in Mexican history.

Five years ago, drug violence was exploding, the Mexican economy was reeling, and a Pentagon report likened the Aztec nation to the terrorist-infested basket case Pakistan, saying both were at risk of “rapid and sudden collapse.”

Now the alarms are being replaced with applause. After one year in office, Peña Nieto has passed the most ambitious package of social, political and economic reforms in memory. Global economic forces, too, have shifted in his country’s direction. Throw in the opening of Mexico’s oil reserves to foreign investment for the first time in 75 years, and smart money has begun to bet on peso power. “In the Wall Street investment community, I’d say that Mexico is by far the favorite nation just now,” says Ruchir Sharma, head of emerging markets at Morgan Stanley. “It’s gone from a country people had sort of given up on to becoming the favorite.”

Want proof? On Feb. 5, Mexico’s government bonds earned an A– rating for the first time in history when Moody’s revised its assessment of the country’s prospects, ranking it higher than Brazil, the onetime darling of international investors, and making it only the second Latin American nation after Chile to get an A.

“I believe the conditions are very favorable for Mexico to grow,” Peña Nieto told TIME in an interview at the Los Pinos compound. “I’m very optimistic.”

He’ll share that optimism with Obama when the U.S. President arrives in Mexico for a North American leaders summit on Feb. 19. Obama will likely nod in approval: a booming Mexico–integrated with the U.S. economy in myriad ways–would put wind in the sails of U.S. economic growth and further reduce an already declining flow of immigrants illegally crossing the shared 1,933-mile (3,110 km) border.

But “Mexico’s moment,” as many are calling it, could still disappoint. Corruption and mismanagement are endemic to Mexican politics. Some of Peña Nieto’s reforms are engendering fierce resistance. And drug trafficking, with its related crime and violence, remains a defining fact.

in a three-way race in the summer of 2012, Peña Nieto won just 38% of the vote–hardly a mandate for generational change. The secret to his recent success lies in the way he then built a powerful legislative coalition. After meeting secretly with the two leading opposition parties, he struck the kind of legislative grand bargain that has eluded his counterpart across the northern border. The resulting Pacto por México gave liberals higher taxes on the wealthy and conservatives an end to Mexico’s ban on the re-election of politicians, while Peña Nieto won support for a raft of other reforms, including opening up the country’s oil monopoly.

Even after the deal was announced, jaded observers doubted that Mexico’s political system could deliver. … “Traitors! traitors!” came the shouts from inside Mexico’s Congress on Dec. 12. Opponents of a measure allowing foreign investment in Mexico’s oil sector had barricaded and padlocked the lower house of Congress, forcing the debate into a nearby auditorium. One legislator stripped down to a pair of black underpants as he railed at the lectern about the stripping of his nation.

But national pride meant that Mexico missed out on the global energy boom. While oil prices have roughly quadrupled over the past decade, enriching big producers, Mexican oil production dropped by 25%, thanks to the sclerotic federal oil enterprise, Pemex, which lacks the capital and expertise to tap the country’s reserves. … Under the new law, foreigners will again be able to explore for oil in Mexico and extract Mexican crude for profit, even if the oil technically still belongs to the people–a point Peña Nieto is careful to underscore.

For all its drama, the oil reform might not even be Peña Nieto’s most important victory. In fact, the uproar against his education reform was even more intense than the battle over oil. A law overhauling Mexico’s absurdly deficient public-education system–in which teaching jobs are handed down through generations and are sometimes even sold–enraged the powerful teachers’ union, whose members paralyzed central Mexico City with mass street demonstrations last September.

Factor in a law that rejiggers the tax code and an end to single-term limits for all federal politicians, and you have what might be the most productive legislative session anywhere in recent history. “You have to give them extraordinary marks for both political instinct and management of the process,” says Tony Garza, a U.S. ambassador to Mexico under George W. Bush.

Camacho is suspicious that Peña Nieto’s agenda seems to be a bigger hit in Davos than in Xico. “Investors applaud. Newspapers outside the country applaud. So why does the image of the President keep falling?” asks Camacho, noting that Peña Nieto’s poll numbers have fallen several points below 50%.

Even Yeltsin’s Russia didn’t have the sort of sociopathic gangsters who plague Mexico today–and who threaten to stunt its potential. Drug smuggling boomed in the country in the late 1990s after a U.S.-led crackdown largely choked off Caribbean smuggling routes and forced traffickers to find new ones through Central America.

Later that year, Peña Nieto’s predecessor, Felipe Calderón, launched a massive crackdown on the cartels and a campaign to end drug trafficking. Bush and Obama backed up 50,000 Mexican army troops with over a billion dollars in funding, military equipment and surveillance drones. But apart from headlines touting the arrests of various kingpins, the effort produced little but more violence. Since the start of the Calderón offensive, the drug war has claimed more than 60,000 Mexican lives.

Peña Nieto promised to tackle the violence. But once in power he seemed to de-emphasize the drug war.

Not that security is the only obstacle to an economic boom. For one thing, last year’s reforms still require a wave of so-called secondary legislation to spell out their details. Passing it will take hard work, although the good news is that, unlike last year’s template-setting constitutional reforms, which required two-thirds majorities in Congress, these laws require only a simple majority.

Peña Nieto takes a long view. “We are not [working] only with a short-term goal,” he says. “We have a broader horizon, without thinking about what the polls are saying.”

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