06/27/2012 01:41 pm ET Updated Aug 27, 2012

Mexico's Battle for Modernity

On July 1st, Mexicans will head to the urns in what is only the second presidential election following 70 years of single-party rule by the PRI. On the economic front, the stakes have never been higher. For three decades, Mexico has languished in a middle-income trap of tepid growth and low productivity, notwithstanding its post-NAFTA transformation into an export powerhouse. Furthermore, its institutional development has been stunted by a political class that, despite being freed from the shackles of single-party rule, remains woefully inefficient, prone to conflict rather than compromise, and corrupt. Although much has been said of the country's recent economic revival -- it is most likely going to outpace regional poster-boy Brazil in terms of GDP growth for the second year in a row. There are reasons why the medium- and long-term outlook will be gloomier in the absence of a fundamental redesign of the way Mexico does its politics. For it is bad politics, not bad economics, that are mostly to blame for why the country has failed to reach its full potential.

No consensus and no compromise

According to the mainstream discourse, Mexico's weak growth is mainly attributable to the lack of structural economic reforms. This is only partially true. A reform of the energy sector could help bring in foreign capital to boost Pemex's technological capacity and allow the investments needed to harness Mexico's potential in shale gas -- the country boasts the world's fourth-largest reserves. A fiscal reform could force states and municipalities to shoulder a higher burden of tax collection, rather than have them depend on federal handouts. The hugely complex tax code could also be simplified in order to reduce evasion and informality. Breaking the stranglehold of public sector unions would also help redesign the education system for the needs of a competitive, global economy, and facilitate the creation of a more efficient labor market.

Unfortunately, most of these reforms require a level of political consensus (and risk-taking) unseen in Mexico's short democratic history. What Mexicans know all too well is that neither electoral democracy nor economic liberalization have eroded Mexico's well-entrenched system of PRI-era clientelism and patronage, a legacy of what Nobel laureate Mario Vargas Llosa once called "the perfect dictatorship." In fact, it is safe to say that Mexico now resembles a dysfunctional feudal state, one in which a plethora of mini fiefdoms -- be it big domestic businesses, public-sector unions, TV networks, or state governments -- hunger for an ever-increasing slice of fiscal resources and privileges. The system's dysfunctionality is not necessarily the result of its feudal nature per se, but because the weakness of the presidency in recent years has ensured that the vassals are the true rulers of the realm.

Mexico's main battle on July 1st is therefore not just one for the presidency, but one for modernity -- this time on the political rather than the economic front. Already a few skirmishes have been fought, such as the #YoSoy132 student movement's campaign against media bias from the two main TV networks -- widely perceived to be political kingmakers in a country where television remains people's main, if not only, source for information. That the movement bases itself on social media points to the fact that Mexico's civil society -- especially its youth -- has comfortably adjusted to the new "globalized" way to do things (and politics) differently from its archaic and conservative politicos. This awakening would do wonders to complement Mexico's recent economic success stories, which prove that the country is not inherently doomed to underperform. For example, its recent caving-in to Brazil's demands for auto export quotas may have been a diplomatic defeat, but one which can easily be read as a sign of strength. A nascent aerospace industry shows promise too. Near-zero net migration to the U.S. also means that a few talented brains may choose to stay home (or even return) rather than opt for a better life elsewhere.

Reigning in the vassals

For the Mexican economy to maintain its rhythm, the next president should at the very least to push for a number of high-impact policies that could be undertaken even under further legislative deadlock (which is highly likely). For example, regulators could be given teeth to properly sanction uncompetitive practices by Mexico's big domestic monopolies (a record US$1 billion fine on Amérca Móvil, Mexico's largest telecoms firm, was recently withdrawn after intense legal lobbying). Grossly inefficient and socially regressive fuel subsidies could be cut, and the resources spent on extending credit to SMEs, investing in infrastructure, and broadening social services in order to reduce poverty and inequality -- which in contrast to most South American countries, have barely budged over the past decade. Progress on these fronts could have positive impacts on growth, and sustain a momentum for change that might actually lead to some of the politically trickier structural reforms to succeed in the longer run.

Of course, to do this, the next president has to reign in his vassals, or be sucked into an ever more vicious cycle of submission to the forces that are blocking Mexico's path to prosperity. Furthermore, he or she must bring institutional development and anti-corruption policies at the forefront of the agenda, and not assume that sustained economic growth in itself will inevitably lead to the creation of an efficient state -- despite the transformation of its economic institutions over the past two decades, Mexico has achieved neither. If all goes well, as one can only hope, Mexicans may at last have their first taste of political modernity after decades of mediocrity.

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