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Mexico’s new president, Felipe Calderón (right), must resume reformsand set the economy free�or risk backsliding, says Michael Reid

Canada. Mr Fox, a former head of CocaCola’s Mexican operations, pledged fur-ther economic liberalisation and reform.

Mr Fox’s government can look back ona number of achievements for which hismany domestic critics give him insu�-cient credit. In recent years the country hasenjoyed greater political freedom than per-haps at any other time in its history. Thegovernment has maintained economicand �nancial stability, with in�ation forthis year estimated at 3.7%. Easier bankcredit, together with a vast housebuildingprogramme promoted by the government,is slowly bringing tangible bene�ts to anexpanding middle class. Social policieshave helped to cut poverty.

Asleep in a hammock of oilEven so, many of the hopes raised by MrFox were dashed. He lacked a majority inCongress and proved unable to win ap-proval for any big reforms. Instead of theannual growth of 7% he had promised, theeconomy has limped along at an averageof just 2.5% since 2000. The government’s�nances look better than they are, helpedby extra oil revenues equal to 2% of GDP.�Fox has fallen asleep in a hammock of oilmoney,� says Liébano Sáenz, who waschief of sta� to Ernesto Zedillo, the last ofthe PRI presidents (1994-2000).

Labour productivity is low and grow-ing only slowly. Oil apart, Mexico’s ex-ports to the United States are losing market

Pregnant pauseThe old political model has died; a new onehas yet to be born. Page 3

Mexico’s mezzogiornoWhat is needed to bridge the gaping north-south divide. Page 5

Spider in the webAll roads lead to Mexico City. Page 6

Plodding onEconomic stability is all very well, but where’sthe growth? Page 7

Monopoly moneyCompetition is not Mexico’s strongest point.Page 9

The joy of informalityWorking in the o�cial economy has its draw-backs. Page 10

Policing the policeThe rule of law is an aspiration, not a reality.Page 12

So close and yet so farMaking the most of NAFTA requires change athome. Page 13

The Economist November 18th 2006 A survey of Mexico 1

1

Time to wake up

�WAKE up, wake up, my dear, thedawn has broken, the birds are

singing and the moon has set.� Thus go thelyrics of Las Mañanitas, the Mexicanequivalent of Happy Birthday, belted outevery day in restaurants and homes acrossthe country, often by troupes of mariachimusicians in full regalia. The verse seemedparticularly appropriate as Mexico cele-brated its 196th birthday on September15th�the anniversary of the day when Mi-guel Hidalgo, a parish priest, called for in-dependence from Spanish colonial rule.Mexico gives every impression of sleepingwhile the world changes around it. Havingseemed to embrace globalisation�fa-voured by its geography, on the doorstepof the world’s largest consumer market�the country risks slipping back into inter-necine con�ict and introversion.

Six years ago the election as presidentof Vicente Fox (pictured left) completed along transition to democracy, ending 72years of authoritarian rule under the Insti-tutional Revolutionary Party (PRI). It alsoseemed to set the seal on the economicmodernisation of the world’s largest Span-ish-speaking country, with a populationof 106m. After Mexico went bankrupt inthe debt crisis of 1982, the last three PRI

presidents cast aside protectionism andstate capitalism, most notably Carlos Sali-nas (in o�ce 1988-94), who led his countryinto the North American Free-Trade Agree-ment (NAFTA) with the United States and

Also in this section

www.economist.com/audio

An audio interview with the author is at

www.economist.com/surveys

A list of sources can be found online

AcknowledgmentsAs well as those mentioned in the text, many other peoplegave freely of their time and ideas to help prepare this sur-vey. The author would like to thank them all, and particu-larly Luis Rubio, Ambassador Juan José Bremer, KevinMiddlebrook, Laurence Whitehead, Michael Walton andseveral others who asked to remain anonymous.

www.economist.com/mexico

A country brie�ng on Mexico is at

1

2 A survey of Mexico The Economist November 18th 2006

2 share to China’s. Some of the social poli-cies have reduced the incentive for mil-lions of small businesses to put them-selves on a proper legal footing. That isonly one symptom of a wider absence ofthe rule of law. Another is mounting vio-lence from drug gangs.

As Mr Fox’s term draws to its close,Mexico is starting to look like two di�erentcountries. Thanks in large part to NAFTA,much of the north is making visible pro-gress. By contrast, the populous south re-mains locked in poverty, backwardnessand neglect. Meanwhile, each year some500,000 or so young Mexicans cross thecountry’s northern border to the UnitedStates in search of a better life.

On top of all this, Mexico’s politics havesuddenly become much more compli-cated and confrontational. The campaignahead of the presidential election on July2nd was dominated by Andrés Manuel Ló-pez Obrador. As mayor of Mexico City, hehad made himself popular by providingpensions for the elderly and public works.Standing for a centre-left coalition, he tookhis �ery oratory to the public plaza in acountry where politics has long beendominated by backroom deals. But he waspipped at the post by Felipe Calderón, thecandidate of Mr Fox’s conservative Na-tional Action Party (PAN). Mr Calderónwon 35.9% of the vote against Mr LópezObrador’s 35.3%, a margin of just 233,831votes out of almost 42m. The PRI’s RobertoMadrazo polled a meagre 22.2%.

To many Mexicans, the election ap-peared to highlight their country’s divi-sions and to call its growing globalisationinto question. Mr López Obrador spent hisformative years in the PRI. He left it in thelate 1980s when the economic nationalistsin the party lost out to the free-market tech-nocrats. Though many of his economicpolicies were mild enough, he inveighedstrongly against poverty and privilege. Tohis detractors, he seemed to stand for a re-turn to the authoritarian populism prac-tised by the PRI in the 1970s. Nothing in hislife suggested any interest in or knowledgeof the world beyond Mexico.

Apart from one brief wobble, in therun-up to the election Mr López Obradorwas always ahead in the opinion polls. Buthe made mistakes, insulting Mr Fox andstaying away from the �rst of two cam-paign debates. Some of the economic poli-cies he proclaimed stirred fears of a returnto �nancial instability. He was also the tar-get of a smear campaign. Mr Calderóndubbed him �a danger to Mexico�, com-paring him to Venezuela’s populist presi-

dent, Hugo Chávez. Mr Fox, along withMexico’s richest businessmen, weighed inon Mr Calderón’s behalf.

So when the vote unexpectedly wentagainst him, Mr López Obrador and hisbackers felt robbed. They cried fraud,though they never produced any convinc-ing evidence, and called for �civil resis-tance� against the electoral authorities. Forseven weeks the beaten candidate’s sup-porters camped out in the centre of MexicoCity, occupying the Zócalo, the greatsquare that has been the heart of the citysince Aztec times, and blocking Reforma,its grandest avenue. �To hell with your in-stitutions,� declared Mr López Obrador.

Even the independence celebration onSeptember 15th was overshadowed by thepost-election con�ict. Mr Fox chose tomark the occasion in his (and Hidalgo’s)home state, leaving the traditional venue,the Zócalo, to Mr López Obrador’s peoplefor the evening. After a �nal rally of hissupporters at which he vowed to proclaimhimself the �legitimate president�, Mr Ló-pez Obrador suspended his protests. Buthe said he would not recognise Mr Calde-rón when the new president formallytakes over on December 1st.

Crying foulIn �The Labyrinth of Solitude�, his classicstudy of the Mexican character, OctavioPaz noted that his countrymen habituallymask painful realities, hiding more thanthey reveal. Mr López Obrador’s claim tobe leading a mass social movement for de-mocracy against a �usurper�, Mr Calderón,�ts in with that tradition. Mr López Obra-

dor recalled a long history of electoralfraud under the PRI. He drew a particularparallel with 1988, when Mr Salinas wasdeclared president after the computerscounting the votes had �crashed� whileshowing an early lead for his leftist chal-lenger, Cuauhtémoc Cárdenas.

The parallel was askew. In 1988 theelectoral authority was the Minister of theInterior. But a decade ago, with the agree-ment of all the parties, Mexico set up inde-pendent electoral institutions. Accordingto those independent bodies, two countsof the ballots (and a partial recount of 9%of them) all showed the same narrow leadfor Mr Calderón. The election producedthe best-ever haul of congressmen for MrLópez Obrador’s centre-left Party of theDemocratic Revolution (PRD). The elec-toral tribunal did �nd that the interven-tions of Mr Fox and the business groupswere technical violations of the electorallaw, but no other democracy would worryabout such things.

Most of the people camped on Re-forma, far from constituting an indepen-dent social movement, were cogs in thepolitical machine built by the formermayor. The protest had the backing of theMexico City government. �It’s not the peo-ple v the powers that be. It is the powersthat be,� quipped Jorge Castañeda, a politi-cal scientist who was the �rst foreign min-ister in Mr Fox’s government.

The biggest irony of all is that as formermembers of the PRI, several of Mr LópezObrador’s closest collaborators were com-plicit in the fraudulent campaigns of thepast. The protests were �the rebellion the

The president they did not get

1


2 PRI didn’t do in 2000� when it lost powerto Mr Fox, says Héctor Aguilar Camín, ahistorian. �Alternation in power had hap-pened very cheaply for us. It’s the �rst prot-est against this young democracy, done bythe ex-Priistas of the PRD.�

Mr López Obrador’s attempt to emulateEvo Morales, the Bolivian president whotoppled two predecessors by organisingstreet demonstrations, seems to have back-�red. Polls show that if the election wereheld today, Mr Calderón would win by acomfortable margin. On October 15th thePRD lost a gubernatorial election in Mr Ló-pez Obrador’s home state of Tabasco eventhough he went to campaign for his party.

All that said, Mr López Obrador’s cam-

paign laid bare many Mexicans’ deepsense of dissatisfaction with the statusquo. And Mr Calderón, having won thenarrowest of victories, has had to rear-range his priorities. He now lists these asjob creation, the �ght against poverty andpublic security; at the start of the cam-paign they came in the reverse order.�Pragmatically, I’m interested in winningover a part of the electorate that wasn’twith me and whose concerns were muchmore centred on poverty,� he said in an in-terview for this survey.

The �rst question raised by the electionand its messy aftermath is whether MrCalderón can govern Mexico. The secondis whether he can restore it to a path of

democratic progress and rapid economicgrowth. This survey will argue that, con-trary to appearances, he has an extraordi-nary opportunity to do both�but only bybeing far bolder than his predecessor intackling the many vestiges of the old orderthat are still holding the country back.Many of these involve monopoly power,public and private, political and economic.They cover a broad range: from the teach-ers’ union to Pemex, the state oil monop-oly, and Telmex, a private telecoms near-monopoly. It is these bastions of unac-countable power, rather than Mr LópezObrador’s antics, that are the real threat toMr Calderón’s government and to Mexicoas a whole. 7

DEMOCRACY did not come easily toMexico. Whereas most South Ameri-

can countries nurtured a democratic tradi-tion through their swings between dic-tatorship and civilian rule, Mexico over thepast two centuries has seen long periodsof authoritarian government punctuatedby three civil wars. The one brief interludeof liberal government came in the mid-19th century, under Benito Juárez, a Zapo-tec Indian and elected president�a periodknown as la reforma and commemoratedin the avenue of that name. The last andbloodiest of the civil wars was the Mexi-can revolution of 1910-17 (some historiansargue that it did not end until 1940). It be-gan as a crusade for liberal democracy, un-der the cry of �E�ective Su�rage, No to Re-election�, but ended up with the corporatestate run by the PRI.

The blocking of Reforma for seven longweeks was an apt metaphor for Mexico’scondition over the past decade. Transform-ing an inward-looking corporate state intoa liberal democracy with an outward-looking market economy was never goingto be straightforward. Besides, Mr Salinas’sbold economic reforms in the early 1990swere meant to give new life to the PRI sys-tem rather than end it�and some were lessliberal than they looked. Just as NAFTA

came into e�ect in 1994, the semblance ofpolitical order was shattered �rst by theshort-lived uprising by the Zapatista re-bels, led by Subcomandante Marcos, a ski-masked Marxist philosopher; and then by

the (still unresolved) murder of Mr Sali-nas’s hand-picked successor, Luis DonaldoColosio. Shortly afterwards, just as Mr Ze-dillo took over from Mr Salinas, the pesocollapsed and the banking system with it.

The subsequent deep recession under-mined public support for market reforms,which had included privatisations as wellas NAFTA membership. As a result, the PRI

lost its majority in Congress in 1997. Mexi-can politics has seemed close to gridlockever since. Where there was one dominantparty there are now three, none of whichcan command a majority (see chart 1). Thedeeper reason for Mexico’s political pa-ralysis is that is has yet to replace many ofthe institutions of one-party rule.

One reason why the PRI regime was sodurable was that it used coercion only as alast resort. Wherever possible it preferredto buy loyalty, be it of professors or peas-ants, with state largesse or the selective

application of laws. Contrary to the revo-lution’s rallying cry, su�rage was not e�ec-tive and fraud was common. But by hon-ouring the principle of no re-election thePRI ensured regular changes of leadership,and with it the �exibility to move left orright. On paper under the 1917 constitutionthe presidency was rather weak. In prac-tice it was omnipotent.

But Mr Fox, the �rst non-PRI presidentfor more than seven decades, had only hispaper powers to rely on. He seemed anideal candidate: thick-skinned, deter-mined, blu�y charming and a natural me-dia performer. But he has been a disap-pointing president. He �never understoodthe nature of presidential authorityheconfused leadership with popularity as ifhe were a �lm actor, and he didn’t knowhow to negotiate politically,� says EnriqueKrauze, a historian.

Certainly he was naive in allowing

Pregnant pause

The old political model has died; a new one has yet to be born

1

*In coalition with PVEM

The age of minorityElection results, seats

Source: Federal Electoral Institute

Chamber of Deputies, 2006 (2003) Senate, 2006 (2000)

PAN 206 (151)

PRI 122 (239)

PRD coalition 159 (96)

Others 13 (14)

2003

2006

2000

2006

PAN 52* (51)

PRI 39 (60*)

PRD coalition 36 (17)

Others 1 (7)

1


2 Marta Sahagún, his ambitious formerpress secretary and second wife, to give theappearance of sharing presidential power.And his approach to reform was far toolaid-back: ignoring his party’s congres-sional caucus, led for a time by Mr Calde-rón, he seemed to think his job was donemerely by sending a bill to the legislature.Wags say he has a �Montessori cabinet�because each minister does his own thing.

He also shrank from applying the lawwhere protests went beyond it. Early in hispresidency his authority was terminallyundermined when he permitted a fewthousand machete-wielding far-left de-monstrators to kill o� a plan for a new air-port for Mexico City. Mr Fox himself coun-ters this last criticism by saying that itcomes �from those who yearn for the oldauthoritarian presidentialism�. Maybe so.Yet whether in land-use planning or thepolicing of protests, Mexico �nds itself inlimbo. The old ways of presidential diktatno longer work, but new ways based onconsultation, consensus and the exerciseof democratic authority have yet to becreated. Into this vacuum Mr López Obra-dor de�antly stepped in the weeks afterJuly 2nd.

Governing from the centreTo all appearances, Mr Calderón faces amuch more di�cult task than his predeces-sor. His mandate is narrower, and his le-gitimacy is questioned by a substantial mi-nority of Mexicans. Where Mr Fox couldcount on a �democracy dividend�, Mr Cal-derón is faced with demands that democ-racy deliver swift and tangible improve-ments, according to Miguel Székely, whohas advised both men on social policy.

But Mr Calderón also has several ad-vantages. Unlike Mr Fox, who came to pol-itics late in life, he is a professional politi-cian and a party man. He was born into theNational Action Party, of which his fatherwas a local o�cial. He is a lawyer withtechnocratic know-how, having studiedeconomics and, at Harvard, public admin-istration. Aged only 44, he has had little ad-ministrative experience�he was Mr Fox’senergy minister for just nine months be-fore resigning to stand against the presi-dent’s nominee to be his party’s presiden-tial candidate. But he has plenty ofexperience of Congress, which may countfor more. A liberal on economics and amoderate conservative on social matters,he is a pragmatist and a skilled negotiator.�I must be a president who seeks the politi-cal centre,� he said in victory.

To secure a congressional majority, to

which he is closer than Mr Fox, he has of-fered to lead a coalition government. ButMexico has no experience of formal coali-tions. What Mr Calderón is working on, hesays, is a �common agenda� with otherparties. He is also likely to o�er severalministries to people with ties to the PRI.

Much will depend on the PRI’s attitude.Though Mr Madrazo, its presidential can-didate, su�ered a humiliating defeat, theparty still governs 17 states (against nineheld by the PAN and six by the PRD). Thesedays most of its members are closer intheir instincts to Mr López Obrador than toMr Calderón. But the PRI is evolving intoan alliance of powerful regional barons.Several important �gures in the partystress that Mexico needs reforms. �Thereare very professional politicians in the PRI

who understand that the country needschanges,� says Luis Téllez, who was energyminister under Mr Zedillo and is tipped fora job in Mr Calderón’s cabinet.

Several pending structural reforms�forexample in energy supply, trade unions,the labour market and the police�will re-quire constitutional changes that call for atwo-thirds majority (as well as the backingof a majority of state legislatures). Thiswill be hard to muster without the supportof at least part of the PRD. That is not out ofthe question. Even as Mr López Obradorwas denouncing the country’s institu-tions, many PRD leaders were quietly op-erating within them, in Congress and inthe party’s state governments. Several ofthose leaders, including Mr Cárdenas,have more or less openly distanced them-selves from Mr López Obrador. Jésus Or-tega, a senior �gure in the PRD, talks of us-ing Congress to introduce politicalreforms, a �change of economic model� toone of �stability with growth�, a tax re-form and measures against corruption.

None of this is unbridgeably distantfrom the proposals put forward by Mr Cal-derón himself. Unlike Mr Fox, he speaks ofthe central place of Congress in makingpolicy. That is to recognise reality. Je�reyWeldon, a political scientist at ITAM, aMexico City university, points out thatmore than 70% of the 824 measures ap-proved in the legislature in the past threeyears were proposed by the legislatorsrather than by the government, againstfewer than one-third under Mr Salinas.

Power has rapidly seeped away fromthe presidency�to governors, mayors,party leaders and the media as well asCongress. That may be a good thing, butthere are no rules to encourage collabora-tion between these di�erent actors. Manypolitical scientists think that this new plu-ralism would be better served by a par-liamentary system than a presidential one.But Mexico has been accustomed to apowerful �gure at the top since Aztec days.

More accountabilityA better option might be to help the presi-dent mobilise majorities and give himsome tools to negotiate with Congress. Forexample, Congress could be required todeal with a bill proposed by the govern-ment within a given time limit. When nocandidate in a presidential election winsoutright, the introduction of a run-o� bal-lot would strengthen the victor’s mandate.That could be balanced by a shorter termof o�ce. For its part, Congress would be-come more accountable if legislators wereable to stand for immediate re-election.There is support in all three parties for achange that would allow senators twoconsecutive terms (12 years in all) and dep-uties three (nine years).

More needs to be done to bringaccountability and openness to politics at

1


2 all levels. Mr Fox, impelled by a mediacampaign, pushed through a freedom-of-information law. �It’s very imperfect, buteven so it’s a leap forward of 50 years,�says Alejandro Junco, a newspaper pub-lisher who led the campaign. Congress,however, remains a closed book: votes aresecret, assets do not have to be declaredand there are no rules for resolving con-�icts of interest. �I can know what the pres-ident’s towels cost but not what my con-gressman does,� Mr Sáenz says.

The same goes for many state govern-ments. Some are models of reform, othersare throwbacks to the old regime. Take Oa-xaca, in the south, where the PRI has neverlost power. In 2004 Ulises Ruiz, the PRI

candidate, only narrowly won an electionfor state governor. His opponent’s claim offraud was better-founded than Mr LópezObrador’s, because in Oaxaca the PRI con-trols the local electoral authority. His op-ponents accuse Mr Ruiz of funnelling statemoney to his party’s presidential cam-

paign. In May, teachers in the state beganan inde�nite strike. This quickly turnedinto a quasi-insurrection in the state’s capi-tal, aimed at ousting Mr Ruiz. The city’stourist industry has collapsed. In late Oc-tober, after a total of 17 people had beenkilled, Mr Fox sent the federal police to re-take the city centre from the protestors.

This stand-o� is a special case, but inmany ways Oaxaca exempli�es the pro-blems of southern Mexico, which votedheavily for Mr López Obrador. 7

SANTIAGO TLAZOYALTEPEC is lessthan two hours’ drive from the city of

Oaxaca, up a precipitous dirt road �ankedby cool forests of pine and evergreen oak. Itis one of the 570 separate municipalitiescontained within the state of Oaxaca, acorrugated land of forested mountainsand brown rivers. Like many of the settle-ments established by the Mixtec (meaning�people of the clouds�), Tlazoyaltepecstraggles along the tops of sinuous moun-tain ridges: a clutch of separate ribbon vil-lages with a total population of some10,000 people. The world owes the do-mestication of the turkey to the Mixtecs.But today they scratch a living from smallmilpas (maize �elds). Ask how things aregoing, and the answer is a repetitive la-ment: No hay trabajo (there’s no work).

Even so, people are living a little betternowadays, concedes Pan�lo Santiago, themunicipal councillor in charge of educa-tion, his Spanish delivered in a thick Mix-tec accent. The �rst reason is that many ofthem have gone north, to the United Statesor to work in the tomato �elds of Baja Cali-fornia. They either return richer or sendback money. The Inter-American De-velopment Bank estimates that remit-tances from Mexicans abroad will total $24billion this year, about a third more thanthe �ow of foreign direct investment. Therelative prosperity of such families is dis-played in the status symbols of the Mixtechighlands: a big Ford or Chevrolet pick-upparked outside the door and, increasingly,a two-storey concrete house in place of awooden shack.

The second reason why people are bet-ter o� is a means-tested anti-poverty pro-gramme, pioneered by Mr Zedillo’s gov-

ernment and expanded and renamedOportunidades by Mr Fox. It pays mothersa monthly allowance provided they keeptheir children in school and take them forregular health checks. In Tlazoyaltepec,around 70% of families receive help fromOportunidades, says Mr Santiago.

Across Mexico Oportunidades helpssome 5m families (or around a quarter ofthe total) at a cost of $2 billion a year. Whilealleviating poverty, the programme’smain aim is to prevent it in the next genera-tion. The idea is to expedite Mexico’s tran-sition to a labour force that has �nishedsecondary school, says Santiago Levy,who as a �nance o�cial in Mr Zedillo’sgovernment invented the programme.

Thanks to remittances and Oportuni-dades, extreme poverty has declined un-der Mr Fox, despite mediocre economicgrowth (see chart 2). But as in many otherLatin American countries, income distri-

bution in Mexico has long been extremelyunequal. �Perhaps nowhere is inequalitymore shocking,� noted Alexander vonHumboldt, an aristocratic German scien-tist and traveller, in his essay on colonialMexico published back in 1811. Despite theprotestations of many critics of the econ-omic reforms, income inequality now isno greater than it was 20 years ago, but re-gional di�erences are becoming increas-ingly marked. �There is one Mexico morelike North America and another Mexicomore like Central America,� is how Mr Cal-derón puts it. �It is a very clear challengefor me to make them more alike.�

O�cial �gures show that one Mexicanin two still lives in some degree of poverty;in much of the south that �gure rises tothree in four. For most of the past centurysouthern Mexico has been worse o� thanthe north, but NAFTA is helping to widenthe gap. Average growth since 1995 inmany northern states has been running at4-5%; in most of the south and centre it hasbeen more like 1-2%.

Southern crossThe nine states of the south and south-eastaccount for almost a quarter of Mexico’stotal area and population. They are morerural, more Indian and poorer than the restof the country. Almost 45% of their popu-lation live in settlements of under 2,500people, compared with 20% elsewhere.Twice as many people lack electricity andpiped water, and half as many can readand write. Much of the south is a�icted bypoor schooling, poor communications,lack of investment and, often, reactionarypolitical leadership.

Successive governments have made a

Mexico’s mezzogiorno

What is needed to bridge the gaping north-south divide

2Calderón’s challenge

Sources: Secretaría de Desarrollo Social; World Bank

*Unable to meet basic food needs †Income insufficient to coverbasic living needs such as clothing,transport and education

‡Measure of income inequality where 1=maximum inequality

Poverty and inequality

1950 60 70 80 90 2005

10

30

50

70

90

0.40

0.45

0.50

0.55

0.35

Extreme poverty*

% of population:

Broadest measure of poverty† Gini coefficient‡

1


2 big e�ort to get children into education.Since 1960 the number of years the aver-age Mexican child spends at school hasgone up from 2.6 to nearly eight. But thatstill means some 35m adults have failed tocomplete the nine years of basic primaryand lower secondary schooling. They �ndit hard to get decent jobs. Enrolment at up-per-secondary level is lower than in many

other Latin American countries (see chart3, next page). Moreover, the quality ofschooling is poor and the education sys-tem fails to o�er equality of opportunity.

Mr Zedillo’s government bravely de-cided that Mexican children should sit in-ternational tests. Mexico came bottom ofall the countries of the Organisation ofEconomic Co-operation and Development

(OECD), the rich-country club it ambi-tiously joined when Mr Salinas was ridinghigh, and did no better than Brazil andother Latin American countries, eventhough it spends proportionately a lotmore on education.

Reclaiming the classroomIn the past much education spending waslavished on public universities becausethe PRI saw students and academics as animportant constituency. Recent govern-ments have spent more on schools, butnearly all of the money has gone on teach-ers’ salaries. That is a tribute to the stran-glehold the Educational Workers’ Union,Latin America’s largest trade union, has onMexican education. In e�ect, it is the pro-vider; the federal government merelyhands out the money. Its 1.4m membersinclude not just classroom teachers buthead teachers and school inspectors too.

In practice it is the union, not headteachers, parents or state governments,that decides on the hiring and (very rarely)

Not much of a future in Santiago Tlazoyaltepec

APART from better schools and alterna-tives to subsistence farming, the

south needs better transport links.NAFTA has made this more urgent. Mex-ico’s crucial competitive advantage in theUnited States over distant countries suchas China is lower transport costs. But thatadvantage diminishes the further southyou go. Distance thus inhibits the southfrom taking advantage of its lower pro-duction costs. Public policy has aggra-vated the problem.

Most railways and roads were built ina radial pattern, with Mexico City as thespider in the centre of the web. That pat-tern met the needs of centralised politicalcontrol and the policy of import substitu-tion pursued until 1982. At the peak in1970, half of the country’s industrial pro-duction took place in Mexico City alone.

Goods from the south bound for theUnited States must pass through thebottleneck of Mexico City, climbing to2,500 metres (8,200 feet) above sea level.What is needed is to build or to completemotorways from the south-east along theGulf Coast to the border, and along the

Paci�c Coast from Chiapas to the port ofLázaro Cárdenas. Expansion of the port atSalina Cruz and the railway to it acrossthe Isthmus of Tehuantepec would helptoo. Mr Levy reckons these projectswould require federal investment of $2billion-3 billion a year over the next �veyears. Once completed, they would cuttransport costs by up to 25%, as well asboosting tourism. The plan was �rst pro-posed in the late 1990s. Mr Fox unveiledan even more ambitious scheme to im-prove infrastructure in southern Mexicoand Central America. Not much hap-pened, despite Mexico’s oil windfall.

In 1994 a motorway from Mexico Cityreached the city of Oaxaca, cutting thejourney time from nine hours to �ve. As aresult Oaxaca’s metropolitan area nowaccounts for around a third of the state’seconomy, up from 10%in 1994, accordingto José Ramón Ramírez, the rector of thelocal Vasconcelos University. Tourism aswell as commerce has grown. But feederroads to smaller towns�which are theresponsibility of the states, not the federalgovernment�are still lacking.

The south-east produces most of Mex-ico’s oil and hydro-electricity, and getsmost of its rainfall. But until recently thegovernment ensured that electricity andfeedstock for petrochemicals cost thesame across the country. Another sub-sidy to the north is more explicit: that forelectricity for irrigation, which costsaround $450m a year (more than thecountry’s entire main rural developmentprogramme). Fruit- and vegetable-grow-ing is therefore concentrated in the north,even though the south is naturally bettersuited to it. With improved transportlinks, its Paci�c coastal strip could exportsuch products to California and Japan.

Mr Calderón says he is working on ahuge programme of public works for thesouth, including a scheme to mobilisefederal and international money fordrinking-water and sanitation schemes.Mr Téllez suggests measures such as taxbreaks for �rms that set up in the south.But such remedies have been tried else-where, without much success. Whateverform it takes, Mexico certainly needs a re-gional policy for the south.

All roads lead to Mexico CitySpider in the web

1


2 �ring or redeployment of teachers. It re-sists outside evaluation of teachers, manyof whom are untrained. Enrique Rueda,the leader of the Oaxaca teachers, con-cedes that the union has been better at pur-suing salary demands than at improvingschooling. �Control of bad teachers is verylimited,� he says.

As education minister in Mr Salinas’sgovernment, Mr Zedillo devolved formalresponsibility for schooling to the statesand modernised teacher-training and text-books. But in practice the system remainscentralised: the union negotiates salarieswith the federal government each year,

and then its regional branches try to extracta bit extra from the states. Few decisionsare taken at school level.

John Scott of CIDE, a Mexico City uni-versity, points out that only 1% of studentsin higher education are from the poorest20% of the population. As things stand,echoes Miguel Limón, who was Mr Ze-dillo’s education minister, education re-produces regional inequalities. Althoughcoverage in the south is catching up, qual-ity lags, partly because richer northernstates top up federal funds.

Across the south other factors conspireagainst good schooling. Poverty is itselfone reason why children drop out ofschool early, as the Oportunidades pro-gramme recognises. The region is home tomany Mexicans of indigenous descent. Atprimary level 1.2m pupils receive bilingualteaching in 54 di�erent tongues, but thereare few competent bilingual teachers. Andwhere the population is thinly scattered, asin the Mixteca, primary-school classes takein children of widely di�ering ages.

In Tlazoyaltepec the Velascos, a peasantfamily, provide an illustration of educa-tional progress�and of the obstacles thatstill remain. María Elena Velasco’s fatherhad only two years of schooling and hermother none. She and her brotherdropped out of secondary school after ayear. She is determined that her childrenwill do better. �I’ll have to take them to thevalley. Who knows how I’ll do it, but I haveto.� Mr Santiago, the education councillor,says the town council has asked the stategovernment for an upper secondaryschool �so that the young people don’thave to migrate to the United States.�

Technology may be the only way to im-

prove rural schooling. Mr Fox speaksproudly of having put a computer into ev-ery school, opening it up to Enciclomedia,a pioneering programme of digital text-books. The Tecnológico, a not-for-pro�tuniversity based in Monterrey, is workingwith the government on a scheme to de-liver upper-secondary schooling via theinternet in 1,000 communities in thesouth. But in Tlazoyaltepec, as in many ru-ral towns in the south, there is no internetconnection. Rafael Rangel, the Tecnológ-ico’s rector, says the scheme’s success de-pends on government investment in awireless internet network.

Lessons for teachersThat leaves the question of what to doabout the teachers. At present 95% of edu-cation spending goes to the producers andonly 5% to the consumers in the form ofscholarships. A really bold presidentmight try to break the union’s grip on theclassroom by giving the money to parentsin the form of vouchers. But Elba EstherGordillo, the union’s general secretary,has transferred her political support fromthe PRI to Mr Calderón, for whom she wasan important electoral ally.

Mr Calderón insists that the only wayto change education is with the unionrather than against it. �The key is to intro-duce the right incentives,� he says. He hasproposed to the union that instead of�paying more to those who press hardest,as in Oaxacalet us pay more to thosewho teach better, who raise the level oftheir class, who prepare more and whomeet required standards.� If he can get thisidea past Ms Gordillo, it would be a bigstep forward. 7

3Money misspent

Source: OECD

*Public and private institutions †Combined average

performance in reading, maths and science, 2003

(higher number = better performance)

Student performance†

Enro

lmen

t rat

e at

age

15*

50

60

70

80

90

100

110

300 350 400 450 500 550 600

S. Korea

Britain

Spain

Greece

Argentina

Chile

Mexico

BrazilPeru

Total public education spending as % of GDP, 2003

0 1 2 3 4 5 6

Mexico

OECD average

Brazil

Chile

Student performance and enrolment rate, 2003

United States

France

MR FOX had barely installed himself inLos Pinos, Mexico City’s modernist

presidential complex, in December 2000when his country was dealt two blowsthat stopped economic growth in its tracks.The dotcom bubble burst, triggering aslowdown in industrial production onboth sides of the border. And China joinedthe World Trade Organisation, marking thearrival of a powerful competitor to Mexicofor footloose manufacturers hoping to ex-port to the United States. Those twin blows

caused three years of economic stagnationin Mexico and the loss of some 700,000formal jobs, most of them in the maquilad-ora plants producing goods for export.Some of those jobs moved to China.

In the second half of Mr Fox’s termgrowth has picked up. This year it is head-ing for 4.5%, the highest �gure since 2000.In the �rst nine months of this year some900,000 formal jobs were created, almostkeeping pace with the growth in the la-bour force. That is thanks in part to higher

oil prices. But it is also because the privatesector has made a big e�ort to cut costs andregain its competitive edge, as AlfredoThorne of JPMorgan, an investment bank,points out.

The car industry is doing especiallywell, with output in the �rst half of thisyear up 36% on the same period in 2005.Detroit’s troubled carmakers may be clos-ing factories in the United States, but theyare quietly expanding in Mexico. So areNissan, Toyota and Volkswagen. Mexican

Plodding on

Economic stability is all very well, but where’s the growth?

1


2 suppliers of car parts account for a muchhigher portion of the �nished cars than inthe past. Mexico cannot match China’scheap labour, but it can compete in higher-value goods and where transport costs areimportant. Many of the jobs it lost were intextiles; some of the new ones are in elec-tronics, which now accounts for aroundone-�fth of the country’s total exports.

There is a familiar cloud on the horizon:the economy north of the border is onceagain threatening to slow down. But Mex-ico is much better placed to weather anAmerican recession than it was in 2000.That is because in�ation is low, the public-sector de�cit is close to zero and the cur-rent-account de�cit is much smaller than itwas six years ago. Nor is growth comingonly from exports. Mexican banks arelending again.

The end of original sin�A few years of single-digit in�ation havetransformed the �nancial markets,� saysGuillermo Ortiz, governor of the Bank ofMexico, the central bank. �What’s surpris-ing is that this has happened so quickly.�Mexico’s government debt began toachieve investment-grade status in 2000with dramatic e�ects. In 1999 the maxi-mum term of government bonds was oneyear; most were denominated in dollars orlinked to in�ation. In 2003 the governmentissued a 20-year bond in pesos; last monthit launched a 30-year peso bond not in-dexed to the in�ation rate.

So Mexico has overcome what RicardoHausmann, a Venezuelan economist atHarvard, dubbed �original sin��emerg-ing-market countries’ traditional inabilityto borrow long-term in their own cur-rency. Because of its relatively conserva-tive �scal policy, the government now ab-sorbs only 16% of national savings, down

from 80% in 2000. That has helped every-one else to borrow more cheaply. Big com-panies are now issuing ten-year pesobonds at a �xed rate of around 8%, accord-ing to Damian Fraser of UBS, a Swiss in-vestment bank.

The banking system seems poised forgrowth, after a turbulent quarter-centurythat began with its nationalisation in 1982.Mr Salinas privatised it but unwiselybarred foreign banks from bidding. Havinglent recklessly, sometimes to insidersand/or in dollars, the banks got into di�-culties when the peso plunged and interestrates leapt in 1994-95.

But just as the bankers had bene�tedfrom lax regulation under Mr Salinas, sothey received generous treatment from MrZedillo when they got into trouble. In e�ectthey were allowed to pass their non-per-forming loans to the government, whichalso o�ered unlimited deposit insurance.In all, the bank bail-out cost the taxpayeraround 20% of GDP. The Zedillo govern-ment did belatedly tighten supervisionand accounting standards and lifted theban on foreign commercial banks. Nowforeign banks make up more than four-�fths of the system.

Until recently the banks did very littlelending, but credit is now expanding. Mex-icans are able to take out mortgages againand loan interest rates are coming downfast. Such is the boom in house construc-tion that Cemex, Mexico’s biggest cementcompany, in September announced itslargest capacity expansion in a decade.

Consumer credit too is growing rap-idly. But small and medium-sized busi-nesses have been slower to take advantageof lower interest rates. Jaime Guardiola ofBancomer, the Mexican a�liate of Spain’sBBVA, notes that although his bank has asmaller market share in its home countrythan it does in Mexico, in Spain it lends tentimes as much to such businesses. To boost

such lending in Mexico, new rules areneeded to make it easier for banks to call inloan guarantees.

Mr Ortiz reckons that excessive interest-rate spreads and fees dampen demand forcredit. Bankers reject the criticisms. Com-petition is �erce and is driving down mar-gins, says Sandy Flockhart, HSBC’s manag-ing director for Latin America.

Mr Fox’s government has been mark-edly more e�ective at reforming the �nan-cial system than at dealing with its own �-nances. Since 1999 the public-sector bor-rowing requirement has fallen from 6.3%of GDP to around 2%, despite a modest in-crease in public spending. But the govern-ment has been helped by falling debt pay-ments and bumper oil revenues. Oilaccounts for more than a third of total gov-ernment revenue. There are two problemswith that. The �rst is that it bleeds Pemex,the national oil company, of investmentfunds. The second is that oil revenues arelikely to fall in the coming years.

The taxman comethMr Calderón will need to spend more�oninfrastructure, education, health and prob-ably on job-creation measures�if Mexicois to make the most of NAFTA, and indeedif it is to remain governable. Yet Mexico isnotoriously bad at collecting taxes. Totaltax revenues in 2004 (excluding oil in-come) amounted to only 11.4% of GDP.That is not only much less than the averagefor the OECD countries (36%), but also be-low the average for Latin America (13.7%).One reason is that large chunks of theeconomy�food, medicines, agriculture,�sheries and land transport�are either ex-empt from value-added tax or zero-rated.The OECD estimated that the exemptionscost up to 2% of GDP in lost revenue�andalso make evasion easier.

But Congress twice rejected the e�ortsof Mr Fox’s government to broaden VAT.

4Steady state

Sources: National statistics; IMF; JPMorgan Chase *Forecast

% increase on a year earlier in Mexico’s:

1990 95 2000 06*0

10

20

30

40

8

4

0

4

8

+

–

GDP consumer prices

nil

Racing against China for a share of the American market

1


2 Mr Calderón says he wants to simplify taxrates and increase the number of taxpay-ers, on which Mr Fox’s government has al-ready made some progress. He names �s-cal reform as one of his top two legislativepriorities because it will allow him agreater margin for manoeuvre. The otherpriority is energy policy, one of a raft ofstructural reforms that Mexico’s economyneeds if it is to become more competitiveand grow faster.

Even without reforms, the economy is

not about to collapse. Growth averagingaround 3.5-4% a year for the next few yearsmay still be possible. Indeed, Francisco Gil,the �nance minister, argues that Mexicocould follow Spain’s example. Like Mex-ico, Spain opened up its economy and casto� authoritarian rule. Like Mexico, Spainsu�ers from weak productivity but hasachieved sustained economic growth bycombining manufacturing exports to alarge and rich neighbour with dynamicconstruction and tourist industries and a

strong banking system. The trouble is that Mexico needs to do

better than Spain if it is to reduce povertyand raise its living standards by enough tostop its young people from leaving for theUnited States. Mr Ortiz says bluntly thatgrowth is �completely insu�cient. Withbetter public policies, we could grow at5.5-6% a year. That is the challenge. The an-swer is basically to make the economymore �exible.� But that will mean tacklingsome powerful vested interests. 7

THE most powerful man in Mexico isnot Mr Calderón, nor Mr López Obra-

dor. It is Carlos Slim, the world’s third-rich-est individual, with a net worth put byForbes magazine at $30 billion (the equiva-lent of 3.7% of Mexico’s GDP). His tentaclesextend across large swathes of the econ-omy. At their head is Telmex, the telecomscompany privatised by Mr Salinas in 1990,of which Mr Slim’s family holds 48% of thecapital and 71% of the voting shares. Thecash from Telmex has �nanced relentlessdiversi�cation. Mr Slim’s América Móvil isthe largest mobile-phone operator in LatinAmerica. His family also holds a string ofindustrial and retailing businesses, includ-ing the Mexican operations of Sears. He isthe biggest tenant in the country’s shop-ping centres. His latest venture is Ideal, aninfrastructure company working mainlyin the oil industry. He is also the second-largest shareholder in Televisa, Mexico’sdominant media business. What distin-guishes him from Bill Gates and WarrenBu�et, the only two men richer than him,is the parsimony of his philanthropy.

There is no doubting the business acu-men of Mr Slim. His defenders portray himas a national champion and a bulwarkagainst foreign (probably American) con-trol of the economy. But he has had a lot ofhelp from the government.

As with the banks, Mr Salinas priva-tised Telmex badly: the new owners weregranted an outright monopoly for sixyears. Since then the market has beenopen. Several competitors have pouredbillions of dollars into rival networks. Sowhy does Telmex still have 94% of land-lines, 78% of mobile services and 70% ofthe broadband internet market? That ques-

tion is all the more pertinent because tele-coms costs in Mexico, though falling, re-main above the international average (seechart 5, next page). Mexico also has fewerphones per person than any other OECD

country or Brazil, which privatised eightyears later but encouraged competition.

The answer is that Telmex still exercisessigni�cant monopoly power. Its competi-tors tell a Kafkaesque tale of regulatorycapture. Pedro Cerisola, the minister oftransport and communications, was a Tel-mex manager of long standing, and one ofhis deputies is a former manager of Tele-visa. In breach of its legal duties, the minis-try has dragged its feet in approving li-cences for would-be competitors andshown Telmex their business plans. Tel-

mex has repeatedly used the courts toblock or delay regulatory rulings telling itto cut its prices. If Mexico were the UnitedStates, Telmex would have been broken upyears ago.

But Mexico is Mexico. Telmex is merelyone of the more egregious examples of thewidespread rule of oligopoly. An ordinarycitizen who wants to import and distributebeer, cement, textiles or bread will soon�nd that he cannot do so. In the midst ofthe election campaign, Congress approveda law giving free wireless spectrum to Tele-visa and its only rival, TV Azteca. Only inthe airline industry has there been timidprogress: Mexicana and Aéromexico havebeen demerged, and two tiny low-costventures have started up.

�Mexico lacks a competition culture,�says the OECD. The Federal CompetitionCommission is fairly toothless, though anew law is supposed to give it more bite.Some analysts are hoping that technologi-cal innovation will undermine Telmex’smonopoly. But it is seeking to expand intonew businesses, such as cable television.

By common consent, any increase incompetition depends on the president’swillingness to use the legal instrumentsavailable. Mr Ortiz has denounced thecosts Telmex imposes on Mexico. Mr Gilsays he pressed Mr Fox in vain to open thetelecoms market. Mr Calderón can a�ordto be bolder. �The political monopoly ofthe PRI has ended but all other monopo-lies remain. There’s a public demand tochange that, because it carries a high costfor consumers,� notes Mr Aguilar Camín.

But private monopolies pale in com-parison with the state monopoly of en-ergy. Pemex’s stranglehold on the oil in-

Monopoly money

Competition is not Mexico’s strongest point

There’s no stopping Slim

1


2 dustry, from exploratory drilling tore�ning to deliveries to petrol stations,goes back to 1938, when President LázaroCárdenas expropriated British and Ameri-can oil companies, asserting that �El petró-leo es nuestro (the oil is ours).� But ratherthan working for the Mexican people, Pe-mex works for the government treasuryand for its own union. With almost140,000 workers, it is wildly overmanned.Its pre-tax earnings last year were around$50 billion, but it invested only $13 billion.As a result, oil production is already fallingand will decline rapidly unless new dis-coveries are made. Pemex is replacing onlya �fth of the reserves it is depleting, andMexico already imports 30% of the petroland 23% of the natural gas it consumes.

Mr Zedillo’s government made a �rstattempt at loosening Pemex’s monopolyby allowing others to import natural gas,which required a change in the constitu-

tion. But in practice Pemex is still the soleimporter. Mr Téllez, who as energy minis-ter introduced that reform, says that theneed for change is much more widely ac-cepted now. He recommends gradual re-form, starting with private investment inre�ning. Next, he would require Pemex tooperate along more commercial lines, andthen allow private investment in explora-tion. But the �rst thing that is needed is togive Pemex greater �nancial autonomy.

The electricity industry is dominatedby two state-owned monopoly distribu-tors, the Comisión Federal de Electricidadand, in Mexico City, Luz y Fuerza. Mr Ze-dillo changed the constitution to allowprivate investment in generation; Mr Foxhas secured further investment throughpublic-private partnerships. But electricityis expensive, despite subsidies equivalentto around 1% of GDP (which bene�t therich more than the poor). Luz y Fuerza is inthrall to its powerful trade union.

The PAN used to be suspicious of thePRI-dominated trade unions. But Mr Fox’sgovernment has appeased the most pow-erful unions, such as the teachers, the em-ployees of the Social Security Institute, thePemex workers and the electricians. Someeconomists argue for constitutionalamendments to reform the unions and thelabour market. In practice labour in manyindustries is quite �exible already. A betterway of taking on the over-mighty unionswould be to tackle the monopoly powerthat sustains a number of them.

In view of all these economic rigidities,and of the poor quality of the judicial sys-tem, it is little wonder that Mexico does notdo well in league tables of internationalcompetitiveness. Mexican workers are

only a third as productive as those in theUnited States. Foreign direct investment,apart from a couple of big bank takeovers,has fallen from 3.5% of GDP in 1994 to lessthan 2% a decade later.

Mexico does have a handful of bigworld-class �rms. Cemex has grown to be-come the world’s third-biggest cementcompany, with factories in 50 countries,thanks to professional management, ahighly e�cient production system and astring of acquisitions. Mexican beer hasbecome a big export industry: Corona andSol are two of the country’s few interna-tional brands. Grupo Maseca, a tortillamaker, has opened a factory in China andis planning others. But most Mexican �rmsseem to lack ambition. Between January2004 and June 2006 there were just 19share o�erings in Mexico, with a totalvalue of $5.7 billion. Mr Fraser of UBS

points out that the equivalent �gures forBrazil are more than three times higher.

North of Mexico City there are outpostsof innovation. On a patch of shrublandnext to Monterrey’s airport, the Tecnológ-ico, with government partners, is buildinga technology park. Since 2003 it has set up30 campuses across Mexico that are o�er-ing degrees in engineering and computing,linked to small business incubators. MrRangel, the Tecnológico’s rector, points outthat Mexico trains more engineers eachyear than the United States, China or India.He sees great potential for Mexico in indus-tries such as aerospace, white goods, food,biotechnology and pharmaceuticals.

That may be tomorrow. But today thevast majority of Mexican companies aresmall businesses, many of them operatingin the informal economy. 7

5Talk is expensiveTelephone charges, August 2006$ at purchasing-power parity

Source: OECD

*Composite basket of annual usage including international calls

and calls to mobile networks †Average charge for

single call, weighted by traffic, excluding VAT

Residential calls*

Mexico

United States

OECD average

Mexico

United States

OECD average

International business calls†

0 0.5 1.0 1.5 2.0

400 450 500 550 600 650

IN THE afternoon, try walking past thestately headquarters of the Bank of Mex-

ico, across the Alameda from the massivenew foreign ministry tower in the heart ofMexico City. Your progress along the pave-ment is slowed by a thick mesh of streetvendors. Throughout the centre of MexicoCity they hawk Chinese clothes and elec-tronics, or pirated DVDs produced closer tohome. They are just the most visible seg-ment of a huge informal economy of un-registered businesses.

According to a recent estimate by theWorld Bank, this sector accounts forslightly more than half of total employ-ment in Mexico. That is about par for thecourse in Latin America. Contrary to someclaims, informal work has not expandedin the dozen years since NAFTA came intoe�ect, but nor has it shrunk, says Bill Ma-loney at the World Bank, who is preparinga book on the subject. And perhaps there isno reason why it should have done:NAFTA is just a trade agreement, albeit a

sophisticated one. Unlike the EuropeanUnion, it does not require the wholesaleimport of regulatory regimes and legal in-stitutions.

The size of the informal sector goes along way to explaining why Mexican pro-ductivity is so low: small businesses in thissector �nd it hard to expand or to innovate.It is also one of the reasons why the taxtake is so meagre. But there is no simple rec-ipe for change. Mr Maloney �nds thatmany people consciously choose to work

The joy of informality

Working in the o�cial economy has its drawbacks


2 in the informal sector, not least because itis hard for those who never completedtheir basic education to get a well-payingjob in the formal sector.

Tangles of red tape have made it unnec-essarily hard for informal businesses to golegal. That is starting to change. A reformlast year cut the average time it takes to setup a new business in Mexico City from 58to 27 days. Together with cuts in federalcorporate income tax and a new capital-markets law that improved corporate-gov-ernance standards, this lifted Mexico 19places to 43rd (out of 175 countries) in theWorld Bank’s latest annual survey on theease of doing business around the world.

Even so, recent innovations in socialpolicy may be making it more attractive toremain in the informal economy. Formalprivate-sector workers are obliged to con-tribute to the Mexican Institute of SocialSecurity (IMSS), which provides pensionsand health care, as well as to a housingfund. Between them, workers’ and em-ployers’ contributions add up to a hefty35% of wages.

The institute is yet another of Mexico’sunion-driven Stalinist monopolies. It ad-ministers the state pension scheme and isperhaps the largest single provider ofhealth care in North America. Its trade un-ion is the second-biggest after the teach-ers’, with 380,000 members. Mr Zedillo re-formed pensions, switching from apay-as-you-go system to Chilean-styleindividual capitalised accounts for newworkers, but with one embellishment. Thegovernment makes a contribution to eachaccount (at a total cost of $1.5 billion a year)because otherwise many pensions wouldbe too low to live on. The Afores, as thenew pension funds are called, now man-age $61 billion in assets and have provideda natural market for the government’s

long-term peso bonds.But the reform did not apply to the So-

cial Security Institute’s own employees(nor to other public-sector workers whohave a separate social-security institute).So of each peso of contributions, 17 centa-vos go to the institute’s own pensioners. Inten years’ time this �gure will rise to 30centavos, says Mr Levy, who was Mr Fox’s�rst IMSS director. He piloted a billthrough Congress that would haveswitched new employees at the institute toa pension scheme similar to the one usedin the private sector. But the union went onstrike in protest, and Mr Fox caved in. Sothe health system for formal-sector work-ers continues to be short-changed. More-over, thanks to the union, there are toomany cleaners and clerks and not enoughdoctors and nurses.

Meanwhile, Mr Fox’s government,with the best of intentions, has launchedor expanded a range of non-contributorysocial-protection schemes for workers out-side the IMSS. The IMSS covers only 13mworkers, or 30% of the workforce. Theschemes include Oportunidades, the anti-poverty programme that replaced a seriesof less e�ective transfers and subsidies.This year the government added a pensionscheme to Oportunidades under which itcontributes slightly more generously thanit does to formal-sector pensions. MrSzékely, a former o�cial at the social-de-velopment ministry, says that more than95% of those who get Oportunidades havenever worked in the formal sector. MrLevy fears that if more bene�ts are addedto the scheme, they never will.

Mr Fox’s government also launched ahealth-care programme called Seguro Pop-ular for those outside the social-securitysystem. In practice, this is non-contribu-tory. All told this year public spending on

health for workers in the informal sectorwill total 131 billion pesos ($12.1 billion),against 107 billion pesos for those in theIMSS. Since 1998 public spending on socialprotection for informal workers has ex-panded by 110%; the �gure for the social-security system is only 21%. Meanwhile,general public investment in infrastuctureand the like has risen by just 0.8%.

Better at the bottomThanks to Oportunidades and the expan-sion of social protection, the poor are get-ting much more out of social spendingthan they did in the past. But rather than aminimum safety net, social protection isbecoming a powerful competitor to the of-�cial social-security system�and one thatwill increasingly provide better health carefor informal than for formal workers. Itthus amounts to a tax on formality. As MrLevy puts it, �we tax unskilled labourthrough the social-security system. Work-ers prefer to wash cars if they get free bene-�ts.� Mr Calderón has promised that thegovernment will pay the �rst year of con-tributions for every new job registeredwith the IMSS. But that will not solve theproblem: many low-income workers regis-tered with the IMSS drift into the informalsector later on.

The solution is not to dismantle socialprotection but to merge it with a reformedsocial-security system. A �rst step wouldbe to separate the pension and health-carefunctions of the IMSS. A second stepwould create a universal non-contributorybasic pension, supplemented by a freelynegotiated contributory scheme. Thiswould recognise that in Mexico, unlike inBrazil, the elderly tend to be poorer thanthe population as a whole, notes Mr Scottof CIDE. A third step would be to create auniversal health-care system �nanced outof taxes (and/or by means-tested social in-surance). This would replace the present ri-val systems, one contributory and theother in e�ect paid for from oil revenues. Afourth step would reform the labour mar-ket, reducing payroll taxes and severancepay. That would still o�er to those whowork in the informal sector more rights ifthey were to go legal.

Given that state governments areincreasingly involved in the delivery of so-cial policy, all this would involve complexnegotiations. But the prize would be worthhaving: to provide incentives for formalis-ing work, thus boosting tax revenues; andperhaps even to increase productivity andeconomic growth. �Social policy is econ-omic policy,� concludes Mr Levy. 7

No Stalinist monopolies here

1


THE informal economy is one of themore benign manifestations of law-

lessness in Mexico. In recent years therehave been many more frightening signsthat the state, its police and its courts areunable to keep the peace and protect or-dinary citizens. The biggest challenge hascome from drug gangs. Brutal murders, of-ten of policemen, are reported almost ev-ery day. Drug-related killings last yearwere running at twice the rate in 2004, andnumbers have been rising further thisyear, to 1,500 in the �rst eight months. Inrecent weeks severed heads have beendumped on the dance �oor of a night clubin Michoacán and outside a police head-quarters in the Paci�c resort of Acapulco.

Drug violence is particularly seriousalong the northern border. The city ofNuevo Laredo, the busiest border-crossingpoint for goods to and from the UnitedStates, is still without a police chief aftertwo were murdered last year. In Septem-ber armed men brie�y kidnapped 25 peo-ple in a hotel where they were waiting foran American visa to work for a companyin Texas. That prompted a broadside fromTony Garza, the American ambassador toMexico: �Violence in the US-Mexico bor-der region continues to threaten our veryway of life.� In the past two years, headded, there had been dozens of unre-solved kidnappings involving Americancitizens along the border.

What Mr Garza did not say is that theviolence in Mexico is in large part a resultof the continuing failure of drug policy inthe United States. Over the past decade thelocus of power in the drug trade, as in somany other businesses, has moved closerto the �nal consumer. That means it hasshifted from Colombia to Mexico, which isnow the gateway for up to 90% of cocaineentering the United States, as well as ever-increasing amounts of marijuana andmethamphetamine.

Mr Fox says that the upsurge in vio-lence re�ects his success in cracking downon the trade. Certainly his government hasproved more e�ective than any of itspredecessors. It has caught several of thetop gang leaders, extradited about 50 sus-pected tra�ckers to the United States andseized record quantities of drugs. Much of

this work is done by the army, but somealso by the Federal Investigation Agency(AFI), a new police force modelled on theFBI. Where once there was total mistrustbetween law-enforcement authorities inthe two countries, now there is active co-operation, at the top at least.

The problem, as Mr Fox implies, is thatthe government’s actions have unleasheda turf war between two of the main gangs,one based on the Gulf coast and the otherin Sinaloa. �It’s like breaking a wasp’snest,� says Jorge Chabat, a political scien-tist at CIDE who has long followed thedrug issue.

Drug violence is only one aspect of awider problem of public insecurity. Risingcrime over recent decades owes much tourbanisation and low economic growth,but in part it is also the legacy of authori-tarian rule. After the revolution, policingwas seen as a municipal matter. The job ofthe federal security services was to repress

political dissent. Laws were to be appliedwith discretion, as a mechanism for dolingout political reward and punishment. Cor-ruption was the oil that lubricated the sys-tem. �In Mexico the law is an aspiration,not the norm,� says Bernardo León, a law-yer who advised Mr Fox on judicial re-form. �We made many laws to look good,not to obey them. There is no public con-demnation of lawbreakers.�

Which side are they on?As crime has risen, so have public de-mands for security. Government re-sponded by creating ad hoc police units.Today, Mexico has some 400,000 police inhundreds of di�erent forces. On averagepolicemen have spent just six years atschool, have received only two weeks’training and are paid just $370 a month forthe job, according to Mr León. Some 35% ofthem use drugs, and two-�fths leave eachyear. Many municipal and even stateforces work for the drug trade rather thanagainst it. Only the AFI is better-trained,better-paid and better-motivated, thoughthere are signs that some of its o�cers maybe falling from grace.

None of these police forces can investi-gate crime. That is the job of the AttorneyGeneral’s o�ce, known as the PGR from itsSpanish initials, and its equivalents in thestates. So dismal is its reputation that three-quarters of crimes are not even reported.Of those that are, under 10% lead to pros-ecutions. The courts are similarly dysfunc-tional. In 97% of cases suspects are foundguilty, says Mr León. A confession is heldto be unanswerable proof and so is oftenextracted by torture.

Mr Fox’s government set up a new pub-lic-security ministry and channelled moremoney to local police forces. It also in-tended to turn the PGR into an indepen-dent prosecution service and to reform thejudicial system, moving to adversarial oraltrials in place of the current inquisitorialapproach using written evidence. Some ofthis is starting to happen piecemeal at statelevel. But the government’s plan to unifythe police forces and create a single na-tional code of criminal procedure wasblocked in Congress.

Mr Calderón is likely to take up much of

Policing the police

The rule of law is an aspiration, not a reality

Underpaid, undertrained and often brutal

1


2 this un�nished agenda. He wants a judi-cial reform to �avoid the brutal impunitywe have in Mexico�. The instinctive oppo-sition of the states may make it hard to in-troduce a national police force. But in re-sponse to drug violence, a group of stategovernors has recently called for a com-plete rethink of policing, the judiciary andthe prison system. �We don’t reject any-thing but will have to look carefully,� saysNatividad González Parás, the PRI gover-nor of Nuevo León. �It’s the start of a long

discussion and transformation.� What is missing from the discussion,

says Marcelo Bergman, a sociologist also atCIDE, are proposals to make the policemore accountable through performancemeasures and external evaluations. Mak-ing the PGR autonomous without �rst re-forming it seems counterproductive. Bet-ter, says Mr Bergman, to end its monopolyof prosecution.

Two other changes are urgentlyneeded. The �rst is to curb the amparo, a

kind of injunction under which judgesroutinely set aside the law. This was used,for example, by Mr López Obrador whenhe was mayor of Mexico City to allowthousands of pirate taxis to operate freelythere, in return for which their drivers turnout for him in his frequent demonstra-tions. The second is to set up a national po-lice unit with skills in public order andcrowd control, capable of ensuring thatprotests remain within the law withoutshedding blood. 7

THE two cowboy-booted ranchers, onefrom Guanajuato and the other from

Texas, were quick to call each other amigowhen Mr Fox visited George Bush at theWhite House in 2001. The American presi-dent declared that �the United States hasno more important relationship in theworld� than the one with Mexico. Mr Foxand Jorge Castañeda, his foreign minister,wanted a bilateral treaty on migration, andMr Bush seemed receptive to the idea.

Yet as Mr Fox reaches the end of histerm, Mexico’s relations with the UnitedStates are clouded in disappointment. Theterrorist attacks of September 11th 2001and their aftermath changed Mr Bush’spriorities. Mexico used a rotating seat atthe United Nations Security Council to ex-press its opposition to war in Iraq. And MrFox’s hopes for a migration agreementwere swamped by a rising tide of anti-im-migrant feeling in the United States.

Mr Bush proposed to combine tighterborder security with easier legal migrationand steps to legitimise the 11m migrants(6.3m of them Mexican) thought to be inthe United States illegally. But only the �rstpart is being implemented. In the run-upto this year’s mid-term elections, Congressvoted to add another 700 miles (1,100km)to the fences that currently stretch for 75miles along the border. Earlier this year MrBush sent 6,000 National Guard to policethe area. None of this will stop the �ow ofmigrants, but it might reduce it by raisingthe risks and the price of crossing. SinceMay this has doubled to $5,000, accordingto Rafael Fernández de Castro of ITAM, auniversity in Mexico City. The UnitedStates Government Accountability O�cereported recently that the number of

deaths at the border rose from 254 in 1998to 472 in 2005.

That angers many Mexicans. But theyalso know that there are limits to the bor-der crackdown. If wages start to rise in theUnited States, American businessmen arelikely to press for more legal migration.�The reality is that we have an integratedlabour market and we ought to �nd waysto manage it,� says Je�rey Davidow, theAmerican ambassador in Mexico Cityfrom 1998 to 2002.

Because migration has become such adivisive issue, it is easy to overlook that re-lations between Mexico and the United

States are �very constructive on dozens ofissues in hundreds of ways every week�,as Mr Davidow puts it. Economic integra-tion is binding the two countries moreclosely together every day. In Ciudad Juá-rez, across the border from El Paso, indus-trial parks, shopping malls and brand-newhousing estates in faux-colonial stylestretch out endlessly into the Chihuahuadesert. Monterrey, the industrial hub ofnorth-east Mexico, has become a hand-some North American city of swirling free-ways and glass o�ce blocks, just the placeto hold international conferences.

Mexicans were encouraged to believethat NAFTA would deliver instant prosper-ity. It has not done that, but it has certainlyboosted Mexico’s exports and made itmore attractive to foreign investors. �It’sbeen a huge success on both counts. Youcan’t ask much more,� says Jaime SerraPuche, who negotiated the treaty as Mr Sa-linas’s trade minister.

But the treaty has also thrown up sometricky issues. In January the tari� on im-ported American maize will be cut from27% to 16%, and a year later to zero. The Un-ited States subsidises its maize farmers lav-ishly. South of the border, growing maizeine�ciently in tiny milpas is not just a wayof life for several million poor Mexicans, asit has been since long before the Spanishconquest; it is part of Mexico’s nationalidentity. So the issue is politically explo-sive. It prompted Mr López Obrador to saythat he would renegotiate the relevantchapter of NAFTA.

Opinion is split on whether the pro-blem is more than symbolic. Mexico’s im-ports of maize have risen since 1993, but sohas production. The United States pro-

So close and yet so far

Making the most of NAFTA requires change at home

The ones who did not make it

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duces mainly yellow corn; the Mexicansort is white. Mr Serra points out that Mex-ico has had 15 years to help its farmersadapt, and has done nothing. Mexicoshould be the market garden of NorthAmerica, producing fruit and vegetables,which are labour-intensive and can begrown on small plots. In the end demandfor ethanol may push up maize prices.

Some Mexicans argue that their coun-try needs European-style regional aid toadapt to NAFTA and halt the �ow of emi-grants. But it is hard to see why the Ameri-can taxpayer should pay up when his Mex-ican counterpart contributes so little. Thepoliticians are trying to deepen NAFTA inmore humdrum ways, such as setting com-mon standards and rules.

Despite increasing security concerns,tra�c has continued to �ow more or lesssmoothly across Mexico’s northern bor-der. Mr Fox’s government has co-operatedclosely with the United States on security,sharing counter-terrorist intelligence, saysArmand Peschard-Sverdrup at the Centerfor Strategic and International Studies, athink-tank in Washington, DC. But there isscope for more.

Some Mexicans are also starting tothink that tighter border security is in theirown interests. Of the 1m people who crossthe northern border each year without avisa, only half are Mexicans; the rest aremainly from Central and South America.If the northern border is porous, the south-ern frontier with Guatemala is �a hugesieve�, says Arturo Sarukhan, who advisesMr Calderón on foreign policy.

Under Mr Fox Mexico’s foreign policybecame less defensive than it had been un-der the PRI. That led to quarrels with Cubaand Venezuela. �The international agendaof Mexico is to support human rights. Ifyou apply that to Cuba, it gets called inter-ference,� says Luiz Ernesto Derbez, the for-eign minister. Mr Calderón’s foreign pol-icy will pay more attention to Mexico’srelations with Latin America, particularlyCentral America, says Mr Sarukhan.

Further a�eld, Mexico has signed free-trade agreements with the European Un-ion and Japan, and has become an asso-ciate member of Mercosur. But trade withthe EU has been disappointing. Mexicanproducts increasingly tend to be NorthAmerican products, which makes them in-eligible under the rules of origin in the EU

agreement. Geography dictates that Mex-ico’s most important relationship will al-ways be with the United States.

Look back a dozen years, and Mexicohas indeed achieved much. Amid all the

post-election turbulence, it is easy to forgetthat away from the centre of Mexico Cityand (for di�erent reasons) Oaxaca, thecountry quietly got on with its business.The peso and the stockmarket sailedthrough the election with barely a blink.This economic stability provides a robustbasis for faster growth.

Moreover, Mexico is a much moredemocratic, pluralist and open societythan it was under Mr Salinas and hispredecessors. This transition has beenachieved without serious violence. MostMexicans shunned Mr López Obrador’scall to revolution. The electoral machineryhas passed a severe test.

To go north, �rst head southBut it would be unwise to conclude that allis well. The clearest sign that it is not arethose 500,000 young Mexicans who eachyear turn their backs on their country insearch of better opportunities. Demogra-phy will eventually reduce that �ow, buttime is not on Mexico’s side.

NAFTA no longer gives Mexico a un-ique competitive advantage. CentralAmerica now has a free-trade agreementwith the United States, and Peru and Co-lombia may soon follow suit. China andIndia are sucking in a lot of the foreign in-vestment that Mexico had hoped for.Manufacturing wages in Mexico are onlyone-tenth those in the United States, butmore than three times those in China. If itwants to keep ahead of China, and stop itsown people from leaving for better jobsnorth of the border, Mexico must move tohigher-value manufacturing.

Yet the country often seems less ambi-tious than its own migrants. A long history

of authoritarian rule has discouraged risk-taking. People are used to being told whatto do, and in return they expect the state toprovide for them. This is especially true inMexico City and the south. Mr Téllez saysthat in his job as head of the Mexico o�ceof Carlyle, an American private-equitygroup, he visits Monterrey once a month tosee �rms who need capital, but has neverhad cause to travel south of Mexico City.The di�erence, he says, is that the northhas specialised in business rather thangovernment. In the south suspicion ofprivate, and especially foreign, investmentremains widespread. Throw in a history ofmistrust of the United States, and Mexicanambivalence towards globalisation is un-derstandable. If the PRI had a lasting ideol-ogy, it was nationalism. Yet ordinary Mexi-cans are noticeably less anti-Americanthan the political elite.

But the main thing holding Mexicoback is that partial reform has producedpartial results. �As long as our income dis-tribution is as bad as it is, many peopledon’t see the bene�ts of globalisation,�says Mr Derbez. The country is split moreor less evenly between those who havebene�ted from the changes of the past twodecades and those who have not.

Economic stability, NAFTA and democ-racy are three great achievements. But theyshould be the starting point for more e�ec-tive public policies, not an excuse to goback to sleep. It is time for the governmentto sweep away the remnants of crony cap-italism, set the economy free and liberatethe south from its backwardness. Mr Cal-derón does seem determined to turn Mex-ico into a prosperous and global capitalistdemocracy. Wish him luck. 7

Future surveys

Countries and regionsBritain February 3rd 2007America’s South March 3rd 2007

Business, �nance, economics and ideasThe brain December 23rd 2006Executive pay January 20th 2007European business February 10th 2007O�shore �nance February 24th 2007

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