Mexico's Presidential Election

Taking the Chávez Out of López Obrador

By Allyson Lucinda Benton 

IS MEXICO VENEZUELAN OR BRAZILIAN IN ITS POLICY TRAJECTORY?

Over the past few years there has been a surprising shift to the left in Latin American politics, raising concern among domestic businessmen, international investors, and the U.S. government about the sanctity of their investments. Rather than support the Washington Consensus, a growing number of politicians have improved their political prospects by blaming fiscal austerity and free-market economics for their countries’ lackluster economic records and widespread poverty. Indeed, as a counterpoint to neoliberal economic approaches, many newly elected leaders have won elections by advocating an increased role of the state in the economy.

Mexico is no exception to this trend. The front runner for the July 2, 2006 presidential elections is the left-leaning Andrés Manuel López Obrador of the Partido de la Revolución Democrática (PRD) who, like his Latin American counterparts, is campaigning on a left-of-center platform that questions, even if it does not fully reject, structural reforms like labor reform, social security reform, tax reform, and energy sector privatization that would help the Mexican economy retain its competitiveness and thus its market share in the U.S. economy. Domestic and international investors are concerned that López Obrador’s rejection of such measures, combined with his views on the importance of aiding Mexico’s poor, implies a potential weakening of the country’s macroeconomic position, investor confidence, and stable economic growth.

However, not all left-leaning presidents end up pushing through the policies they campaigned on. For every president like Néstor Kirchner (Argentina) or Hugo Chávez (Venezuela), two presidents who have dramatically increased state presence in their economies in recent years, there is a Luiz Inacio “Lula” da Silva, a Ricardo Lagos or Michelle Bachelet, or a Tabaré Vazquez. In these countries—Brazil, Chile, and Uruguay—left-leaning presidents have honored the neoliberal economic policies of their predecessors and even pushed for more, often to the chagrin of co-partisans. Regardless of the rhetorical shift to the left at election time, the region’s left-leaning governments tend to follow one of two trajectories: the statist or the neoliberal path.

Which path will Mexico’s López Obrador take if elected? Will he push his government to follow a more statist economic policy agenda or will he support the continuation of Mexico’s free-market economic policy approach? I argue that Mexico is most likely to find itself along the second path because two things limit its president’s ability to choose a left-leaning policy agenda: the nature of the government’s fiscal resources and congressional politics.

Presidents who can easily build coalitions in Congress and whose financial policies depend on revenues generated from single economic sectors like commodity production, rather than directly on governmental economic policy for revenues, have a much better chance of rolling back free-market economic policies. Governments whose fiscal finances depend on maintaining free-market economic policies, a broad domestic tax base, and access to cheap credit in international capital markets are much more limited in their capacities to pursue left-leaning policy objectives, even with a pliant Congress. Statist policy measures often lead to negative reactions by investors, triggering capital flight, rises in the cost of financing debt, and economic downturns. Indeed, it is those leaders lacking either fiscal resources or a compliant Congress who often find themselves either pushing for neoliberal economic policy reforms or accepting the status quo.

Though there are several parties competing for the presidency, Mexico’s presidential race is between three main contenders: the left-leaning López Obrador, the centrist Roberto Madrazo of the Partido Revolucionario Institucional (PRI), and the right-of-center Felipe Calderón of the Partido Acción Nacional (PAN). Recent public opinion polls conducted in February 2006 put López Obrador somewhere between five to ten percentage points ahead of Calderón, with Madrazo about three points behind the PANista candidate. A poll published by Reforma, a leading national newspaper, showed López Obrador with 38 percent total national votes compared to Calderón’s 31 percent and Madrazo’s 29 percent. Consulta Mitofsky shows a larger lead: López Obrador with 39 percent, Calderón at 29 percent, and Madrazo at 27 percent total national support. Though there are still several months left in the race, López Obrador’s continued popularity among the nation’s vast number of independent voters (estimated to be around 40 percent of total eligible voters) points to his edge at election time.

Unlike the PRI and PAN candidates, López Obrador is campaigning on a left-leaning policy platform that highlights Mexico’s wide income disparities. He advocates an increased role of the state in the economy to beef up job creation and increase economic opportunities, even if he does not support a rise in governmental expenditures along the way. López Obrador would also like to reorient governmental spending toward social programs and infrastructure development. A major crackdown on tax evasion by businesses and elites and a significant reduction in redundant governmental spending and thus waste would give him extra resources to pay for such spending priorities.

Some of these proposals are not very radical: most economists and politicians believe that Mexico needs infrastructure development, education spending, and poverty programs to help political stability and medium-term economic development. However, it is the prospect of state involvement in areas formerly left to markets alongside the outright rejection of many types of structural reforms that has raised concerns among domestic and international investors. López Obrador rejects fiscal reforms meant to broaden Mexico’s extremely narrow tax base as they would then increase the tax burden on the humbler classes. He rejects the notion of energy reform that would allow private investment in this highly regulated, tightly closed, and thus extremely expensive sector, claiming that energy (read: oil production) is of strategic importance for Mexico and its economy. Labor reform to ease the ability of companies to fire and hire workers is criticized for reducing worker benefits, while a full scale social security reform to allow individual accounts and an end to the defunct pay-as-you-go system is also unlikely. Most governments that have made economic decisions disregarding markets have also found themselves under pressure to support target industries for political rather than economic reasons, leading to inefficient governmental expenditures, macroeconomic instability, and low economic growth down the line.

At the other end of the left-right continuum stands Felipe Calderón. In the tradition of current President Vicente Fox (PAN), Calderón highlights the need to undertake structural reforms to attract foreign investment and ensure economic growth. Indeed, he believes that foreign direct investment and macroeconomic stability, through their effects on job creation, are the key ingredients to alleviating poverty and Mexico’s wide income disparities. Calderón also highlights the need for a continuation of governmental transparency and support for the rule of law as a means of reducing corruption, enhancing public security, and thus attracting foreign investors. Reforms to the legal system would make both of these things possible. Calderón’s policy platform is music to investors’ ears, even if it has not been as attractive to Mexican voters as López Obrador’s.

Madrazo has had a harder time appealing to supporters. Though he places himself at the political center, his party spans a wide array of ideological positions ranging from radical left to conservative. As a result, Madrazo has had perhaps the least clearly defined policy platform, one that changes depending on which constituency he is addressing. Otherwise, he risks alienating supporters. Madrazo appears keenly aware of the importance of foreign direct investment in the economy, and thus has argued in favor of structural reforms to attract investors. It is thanks to his close ties with a range of business groups that he pushed the PRI to again change its party statutes to allow its members to support fiscal and energy reforms in the future. Investors are confident that Madrazo would push for the types of reforms they prefer, even if they understand that he cannot espouse them during his campaign.

MEXICO DOESN’T HAVE WHAT IT TAKES (TO TRULY MOVE LEFT)

Mexico’s upcoming presidential elections reflect a competition between more statist economic approaches and neoliberal free-market economics. Given that López Obrador looks increasingly likely to win, this means that Mexico’s next president will have gained office through exactly the same means as many other presidents in the region. But will he be able to push policy truly left, that is, support a dramatic rise of state presence in the economy, shift governmental expenditures to new areas, and prevent additional liberalizing reforms? López Obrador’s capacity to shift governmental policy to the left depends on two things: the government’s fiscal coffers and his ability to build support in Congress. Yet neither seems to favor López Obrador.

State involvement in the economy implies increased fiscal expenditures, regardless of a politician’s intention to limit governmental spending. Policy measures deemed too radical by markets risk raising interest rates and thus debt payment obligations, something that can hurt fiscal coffers severely. This tendency worsens with economic performance, fiscal performance, monetary conditions, or any other economic or political risk perceived by markets. Arguments that López Obrador can increase governmental coffers by streamlining government are suspect in that most of the streamlining would have to come at the expense of worker salaries, which accounts for the lion’s share of governmental expenditures. Most jobs are protected under civil service or labor law. López Obrador will save money, but not enough to make up any fiscal gaps left by increased interest rates on sovereign debt.

It is possible that López Obrador could buffer fiscal coffers with oil revenues. It is true that windfall gains from oil revenues are widely expected to continue into the very near future. However, though oil prices are likely to remain high in the near to medium term, there are questions over Mexico’s ability to maintain its oil production targets over the next few years. Any dip in production would necessarily adversely affect López Obrador’s policy plans.

The government and state oil monopoly Pemex both agree that the engine of Mexican oil production, the Cantarell complex, is set to decline in the coming two to three years. Cantarell accounts for 60 percent of total oil production in Mexico and, though it produces about 1.9 million barrels per day (mbpd), it is set to decline to about 1.4 mbpd by 2008. However, other energy experts argue that this decline will be much steeper, with Cantarell producing only half its projected amount by 2008. If Pemex is unable quickly to replace lost barrels with increased production from other fields, governmental coffers could suffer dramatically. Pemex contributes between 35 and 40 percent of total governmental revenues. In a worst case scenario where Cantarell production dropped to about half of what it is producing now, something that is possible since López Obrador is reluctant to open the sector to private investment that would likely ratchet up production, and where only half of that lost production was replaced by increases from other fields, the government could lose as much as 5 percent of its overall budgetary resources. In the absence of fiscal reform to broaden the tax base, this would be a hard hit.

Even in the best case scenario where oil revenues remained high, tax collections improved, and governmental expenditures were streamlined, López Obrador would still have to face Congress. Mexico’s Congress is made up of two chambers, the Chamber of Deputies and the Senate. Most shifts in policies must be approved by both chambers in Congress, while changes to governmental spending targets must be approved by the lower chamber. Though López Obrador is favored to win the presidential elections, it is very unlikely that his PRD will gain a majority in Congress. In fact, most public opinion polls show that the parties are evenly matched in terms of congressional support, and this means that the Congress could be divided about evenly between the coalitions led by the PRD (with the Partido del Trabajo and Convergencia) and the PRI (with the Partido Verde Ecologista de México), and the PAN (running by itself).

The PAN would never support measures implying increased state control. So, to pass reforms, López Obrador would need to build a coalition with his party’s closest political counterpoint, the PRI, but a quick look at the chamber of deputies makes this seem remote. Let us assume for argument’s sake that each of the three parties wins about 150 seats each in the 500-seat lower chamber, with the remaining seats going to small parties. This means that to pass legislation, the PRD would have to build ties to small parties, as well as gain a significant share of PRI deputies, perhaps as many as two-thirds of them in the absence of small party support. This is unlikely. Though the PRI counts on politicians who might support López Obrador, to get two-thirds of these party members on board any measure is no easy task. Current policies in most areas reflect internal PRI preferences and any dramatic moves to the left (or right in the case of a Calderón presidency) are necessarily difficult to sell to politicians who prefer current stances. It also bears mentioning that the PRI has historically been quite disciplined in congressional votes, since party leaders still control campaign financing resources and access to opportunities to run for local and national office. As a result, splitting the party on important policy votes appears unlikely, especially to the extent that the PRI believes that it would be worse off under such policy regimes.

TAKING THE CHÁVEZ OUT OF LÓPEZ OBRADOR

Though López Obrador is quite popular and looks increasingly likely to win the national election this July, he will be faced with problems similar to those faced in countries like Brazil, Chile, and Uruguay, which do not count on major fiscal windfalls from commodities exports and which count on retaining access to international capital markets to finance sovereign debt and budget deficits. Mexico is no Venezuela, whose oil reserves are much larger and which counts on private investment in the sector to bring those reserves to market (and taxes and royalties to governmental coffers). Mexico is no Argentina, either, where the government also counts on windfall profits from export taxes on non-oil commodities exports and thus has the capacity to finance governmental economic and monetary policies with much more ease than Mexico. Rather, Mexico is more like Brazil in this regard, and for this reason, thanks to its integration into the international economy and international capital markets, and thanks to the willingness of voters to split their tickets between presidents and congressmen, will retain a more moderate policy course, with no major shifts to the left. This means that there is very little downside risk in Mexico, though, in a country that needs additional structural reform, the upside benefit is missing as well.

Allyson Lucinda Benton is a professor and research associate at CIDE in Mexico City. She has worked as a political risk analyst in New York and is currently a consultant for international investors through Medley Global Advisors. She has published academic articles on voting behavior, party factionalism, and economic trends in Latin America.