Mexico’s President-Elect Faces High ExpectationsPublished: August 16, 2000 in Knowledge@Wharton
Vicente Fox, a conservative former Coca-Cola executive with a fondness for cowboy boots, has already earned a secure place in the history books. He did this on July 2 by winning Mexico’s election for president, ending the 71-year, one-party grip on that office by the Institutional Revolutionary Party (PRI).
The actual history of the Fox administration has not been written yet, of course, because the president-elect will not take office until Dec. 1. Nonetheless, Wharton faculty and Mexican business executives say the likely headings of some chapters are already clear: Embracing Free Markets, Reforming Taxes, Deregulating Industry, Managing a Fast-Growing Economy, and Fighting Crime, Corruption and Cronyism. The epilogue may be: Was Fox Able to Govern Without Promising Too Much?
"I think Fox’s biggest problem is to manage expectations," says Wharton management professor Mauro F. Guillen, who studies multinational corporations and has a special interest in Latin America. "Most of the people who voted for him, and even those who didn’t, have high expectations for change. He’s going to have to deliver a lot of things to meet those expectations."
"I’m very optimistic and I think Mr. Fox will be very positive," adds Alejandro Garza Laguera, a member of the executive committee of Seguros Comercial America S.A. de C.V., a major insurance company. "But there is one danger: People are so optimistic that they might feel a bit disappointed that so many things cannot be changed so fast."
There is no denying, though, that Fox’s election has been a positive development for the business community, says Adrian Sada Gonzalez, chairman of Grupo Vitro, Mexico’s top-ranked glassmaker and a conglomerate with more than 50 subsidiaries. "The markets have already responded positively to Mr. Fox’s election and we have seen a boost in the stock market and a strengthening of the peso from $10.25 to $9.40. I believe in Mr. Fox’s intention to be very close to the Mexican business community and take their advice into account when developing economic policies in the coming years. That’s also a good sign."
In addition, Sada predicts more foreign investment coming to Mexico "because business will feel more secure in a country that has proven it can behave in a democratic way."
Fox himself appears aware of the hunger for change on the part of much of the electorate and of the need to proceed carefully during his single, six-year term in office. A few weeks after the election, he told a group of foreign investors that he would not rush reforms because moving too fast would be risky so soon after the PRI lost power, according to the Financial Times of London.
Regardless of whether Fox, a 58-year-old rancher and former state governor, moves quickly or cautiously, the list of items on the agenda of Fox and his National Action Party (PAN) is lengthy. One is to simplify and revamp the tax system. According to Garza, taxes are poorly collected and poorly distributed. "Everything is federalized. Money first goes to Mexico City, then back to the states." Garza suggests that states and municipalities be given the power to tax, so that revenue is sent up to the capital after local governments meet their own needs, rather than the money "going up and coming down" via redistribution by the federal government.
What is more, Garza says, not all taxpayers pay their fair share. "Right now, the captive payers [such as corporations] are the ones incurring the main bulk of the fiscal policies. Tax evasion is a big problem, but taxes are collected in a complicated way that makes it impossible for small business to comply. It’s been designed to collect from large companies and almost forget small business."
Guillen says a "culture of tax evasion" has arisen in Mexico — a culture that is entrenched and will be difficult to dismantle.
Another critical issue is how to deal with such industries as electricity, cement, transportation and telecommunications, where companies are either actual or virtual monopolies, and to lessen the country’s dependence on revenue from Pemex, the state-owned oil company. Partly as a result of the North American Free Trade Agreement (NAFTA), Mexico is less dependent on Pemex for revenue than it used to be. But the petrochemical company remains central to the nation’s identity, and talk of privatizing it is highly sensitive.
"Mexican presidents over the years have felt that Mexican sovereignty and pride could only be served with a state-owned oil company," Guillen says. "But it’s a very corrupt company and it would be better to privatize it."
In broad economic terms, it will be Fox’s job to build on the benefits of NAFTA — to be a proponent of free markets and to encourage entrepreneurship. "The future of Mexico lies with closer integration with the United States," Guillen says, noting that 85-90% of Mexico’s exports such as cars, toys, and electronics products and other assembled goods are sold north of the border. "Ten years ago, Mexico thought it should isolate itself from the U.S. and restrict trade. Now, they’ve opened up the economy and it has grown a lot." Indeed, the economy has grown at an average rate of 5.1% a year over the past four years and at an annual rate of 7% in the first quarter of 2000.
Voters also want Fox to bridge the gulf between relatively prosperous northern Mexico and the poorer south and to fight common street crime and the cronyism and corruption long associated with the PRI. "One of the problems of the southern part of Mexico is that the level of education is very low," Garza says. "Most of the population is Native and they are far behind in education compared with the northern and central states. We have to educate those people and bring them into modern times." Sada adds that Fox should use economic incentives to encourage businesses to locate in the south.
Crime reduction is imperative, not only for the well being of Mexican citizens but to attract foreign investment. "One of the biggest problems faced by foreign companies in Mexico is persuading managers to move there with their families because of crime," Guillen explains. "Hundreds of managers and business owners are kidnapped every year."
Meanwhile, management professor Adrian Tschoegl, who follows the banking industry, points to two examples - one small, one large - of how Mexico’s business climate is changing for the better. On July 25, just a few weeks after Fox’s election, a Mexican bond issue was oversubscribed, an indication that investors "seem to be accepting the changes in Mexico," Tschoegl says. In March, Mexico was ranked investment grade by Moody’s Investors Service.
But what Tschoegl finds even more noteworthy as an example of change in Mexico’s business climate that may bode well for Fox, was a decision by authorities to approve the recent acquisition of Banco de Comerco, a major Mexican bank known informally as Bancomer, by Madrid-based Banco Bilbao Vizcaya Argentaria. The acquisition created the largest bank in Latin America. In approving the acquisition, the Mexican government brushed aside an attempted takeover of Bancomer by Banco de Nationale de Mexico (Banamex), a private financial services institution that historically had close ties to the government.
"It seems like Mexico now has the self-confidence to step away from giving Banamex the mantle of official flagship bank," Tschoegl says. "Second, until this takeover, and that of third-ranked Serfin by another Spanish bank, Banco Santander Central Hispano, the Mexican government was, at least on the face of it, not ready to permit foreign banks to own a substantial portion of any of the three largest Mexican banks. It’s salutary that the Mexican government now has the self-confidence not to worry about that."
One impediment to success by Fox is a bureaucracy laden with PRI appointees totally unaccustomed to the coming and going of civil servants as parties go in and out of office, as they do in the United States. Another shortcoming is PAN’s relative inexperience. "PAN has been around a while, but only in state governments and only to a limited degree," says Tschoegl.
In the end, Fox’s ultimate success or failure could largely hinge on his leadership. "In unprecedented situations like this, a lot depends on the character of the leader," Tschoegl says. "A good leader who’s more interested in building up the country more than his own wealth and power can mobilize support and set a country on the right track."
"One advantage Mr. Fox will have," Garza says, "is that people are very positive he will be able to carry out good government and would back him all the way." Adds Sada: "Maybe some people are expecting too much, but in general I think he will surround himself with a very strong and professional administration team that will help him bring significant improvements to the country and its people as well as setting a standard for the next administration."