Structural reforms in Mexico

09/19/2013

On September 8, Mexican President Enrique Peña Nieto presented his fiscal reform initiative to Congress—with significant changes. The unpopular value-added tax on food and medicine was, surprisingly, removed from the proposal, using arguments from the left that it further undermines the ability to buy basic food for 80 percent of the population, who live on $25 or less a day. The minimum wage in Mexico is $5 a day. 

His underlying idea is to increase the amount of money the government receives through taxes. In 2011 that amount was barely 19.7 percent of the GDP, the lowest of the countries in the Organization for Economic Co-operation and Development, followed by Chile at 21.4 percent and Turkey at 25 percent. At the head of the list was Denmark, with 48.1 percent, and Belgium with 44 percent. 

Peña claims his policies will bring Mexico to the level of developed countries, because although Mexico ranks among the top 10 or 15 GDP’s in the world, it ranks near the bottom in education, formal employment, application of law, transparency, distribution of income and wealth, social equality and violence, among other things.

Peña’s proposed fiscal reform includes other ideas from the left: unemployment insurance that would bring “informal” workers, which constitute 60 percent of the workforce, into formal employment, thereby making them taxpayers; universal health insurance; and pensions for those over 65. The proposal eliminates a tax consolidation program that has allowed huge Mexican consortiums to balance income against losses for all their companies—many of which are “ghost” corporations—resulting in no taxes and even refunds. This scheme permits enterprises like those of Carlos Slim, Mexico’s richest man, to pay no taxes and receive large refunds. Nothing could be less fair.

Nevertheless, the proposal, when combined with other reforms, only increases tax income by 1.8 percent of GDP. Experts are asking whether the expected increase will actually pay for the aforementioned economic and social programs. This and other reforms must be voted on by Congress—controlled by Peña’s Institutional Revolutionary Party (PRI) and its allies—which will probably approve the reforms. The effects will play out over the medium to long term, and, given poor economic performance this year and protests from diverse groups, one can foresee possible social problems for the country.

Critics say Peña has not spoken of the major cancer that frustrates Mexico’s development: corruption at all levels of the government and in everyday life, amounting to almost 20 percent of GDP. Not only was the issue ignored in the presentation of the new reforms, another “transparency bill” was almost defeated in Congress. It was saved thanks to enormous pressure from civil groups; however, although the government, its employees and other authorities are legally held accountable, most of them ignore the law by way of devious arguments. There is no punishment for open thievery by those who see government positions as a sort of patrimony or an opportunity for excessive profiteering. This is especially prevalent among state governors. We are told that without radical change, the reforms are doomed.

Peña’s administration recognizes that the reforms could have been implemented neither during the last 30 years, given the political climate developed during the PRI’s 71 years of semi-dictatorship, nor during the 12 years of the National Action Party (PAN). The PRI created powerful support groups during its long reign. These included unions, minority parties, private businesses and state-owned businesses that were later privatized. They all received enormous handouts and don’t want to lose them now. During the PAN governments of Fox and Calderón, PRI congress members opposed these reforms, fearing those governments would receive credit for them. They are now trying to implement them. For many, it is already too late.

Working to Peña’s advantage are division and internal shifts in the two major opposition parties: PAN, which fell to third place in the 2012 election, and the Revolutionary Democratic Party (PRD), which lost the 2006 election to Calderón by 0.5 percent of the vote. López Obrador, the PRD candidate in that election, continues to claim the election was stolen, and after losing to Peña in 2012, he separated from the PRD to form the National Regeneration Movement, which he is trying to turn into a genuine party to compete in the 2018 election. He is opposed to almost all the proposed reforms, especially energy reform, creating an enormous split in the left.

Peña, recognizing weakness of the two other major parties, some months ago invited those parties to be part of a “Pacto por México.” This informal coalition government has helped him advance reforms while allowing the opposition to remain politically viable and participate in the process of achieving the changes that everybody considers urgent, paving the way for their approval in both legislative houses. Mexico will have reforms, but if the powerful and corrupt special interest groups gut them, their viability will be questionable. 

 

Victor Reyes is a Sonoma-based translator, language teacher and writer, and a native of Puebla, Mexico, with decades-old ties to the Point Reyes Light. The Spanish language version of this column is available at ptreyeslight.com.