Fox’s Biggest Sell

Vicente Fox Quesada is the nearest thing Latin America has to a leader these days. He towers above his peers in the region. He is probably unique in being able to deal with President George W. Bush as an equal. Bush chose to visit Fox at his ranch in Guanajuato on his first foreign trip as president, rather than go to Canada, as tradition dictated. Fox exudes great personal authority. He stands tall in his cowboy boots and has the natural, easy style of a born leader.

Fox also is the leader of a bloodless revolution. His election last July ended 71 years of uninterrupted rule by the Institutional Revolutionary Party (PRI). This was the first time ever in Mexico?s violent history that a new regime has taken power without resorting to force. Fox looks set to put Mexico firmly on the road to modernization and growth. This is why LatinFinance has chosen Fox as Man of the Year in 2001.

Fox says in his booming voice, ?My commitment will be to move [Mexico] from a path of corruption and impunity, from a path where no one pays attention to education and human capital, and move on to a path of high-speed growth, with a state of law and with an educational revolution.? He promises macroeconomic stability ?with absolute and total discipline on [controlling the] fundamentals of the economy [so Mexico] can grow at 7%.?

Fox is building on over a decade of reforms, sometimes misguided and fitful, which have nonetheless transformed Mexico profoundly since former president Carlos Salinas began liberalizing the economy in 1988. Nafta and the obsessive quest for economic stability under Fox?s predecessor, Ernesto Zedillo, accelerated the pace of growth. Last year the economy grew 7%.

In many ways it was Zedillo – LatinFinance?s Man of the Year in 2000 – who made Fox?s rise to power possible. He restored economic stability and began, but failed to complete, a process of political liberalization and reconstruction of the country?s institutions. The erosion under Zedillo of Mexico?s absolutist presidency, the emergence of an independent media and the rise of alternative power centers – non-PRI governors now rule half the country?s population – together helped ensure a peaceful transition to the new administration.

The Mexican people have huge, unrealistic expectations of Fox and he has not disabused them of this illusion. For the moment, Fox can bask in the glory of his election – his popularity rating of 70% is higher than the 43% of votes he got in the July 2000 elections – but eventually this honeymoon must end and the challenges of governing a complex and rapidly changing society will become apparent (see Mexico survey).

Fox?s office at Los Pinos, the presidential compound in Mexico City?s Chapultepec Park, is almost bare but for a full-length portrait of Francisco Madero, elected president in 1911 after playing a leading role in the Mexican Revolution that ended 35 years of rule by Porfírio Díaz. Until Fox?s triumph, Madero?s election was probably the cleanest Mexico had ever seen.

Great Challenge
Fox?s background as a Coca-Cola executive, tireless salesman, rancher, fervent Catholic and leading light in the pro-business National Action Party (PAN) is well known by now. Yet he also stands up for Mexico?s many millions of downtrodden. On the chilly December morning of his inauguration as president, he had breakfast with street children in Mexico City?s crime-ridden district of Tepito. While events like these have great propaganda value, they are heartfelt. ?We should not believe that with growth we are solving all the problems of humanity,? says Fox. ?We cannot rest while we are unable to include everyone in [economic] development. This is the great challenge for market economics and for business and political leaders.?

Equally sincere is Fox?s conviction that he and his cabinet of assorted businessmen, technocrats and intellectuals can overcome the country?s problems through the firm application of rationally designed policies. Fox is as much a manager as he is a salesman, and uses principles of business such as delegating authority, setting targets and demanding results. He is also stubborn, which can be a virtue in bulldozing his way through difficulties. Mexico got its first view of this trait during a televised debate about debates held during the election campaign. Fox demanded a debate ?Hoy, hoy, hoy? – today, today, today. Hoy has since become one of his trademark phrases – combined with a finger-stabbing gesture.

However, Fox can become overly managerial, seeking business responses to political problems. He vows to force Mexico?s vast government machine to submit to international quality standards. While his stubbornness looks like a virtue today, it may yet become a liability when the going gets really tough and the government could benefit from a more nuanced presidential approach.

Intractable Problems Remain
In spite of its progress under Zedillo, Mexico still has a great many problems. Despite posting its strongest growth rates in 20 years, Mexico is sunk in poverty. It is divided between rich and poor, and between north and south. The January 1994 uprising of the Zapatista Liberation Army in southern Mexico led by Subcomandante Marcos was a warning that these problems, allowed to fester under Zedillo, require urgent attention. Fox certainly thinks so. In a statement he must now regret, he claimed during the election campaign that given the chance, he could solve the Zapatista uprising ?in fifteen minutes.?
Now, he states that his government will try to help the poor without holding up growth. Fox says he will support ?the vanguard [of society], but also show greater commitment to the rearguard. We will create a social bank, [encourage] micro-lending, savings banks, we will support small and medium-sized enterprises. We will stimulate regional development. The idea is to unite the rearguard with the vanguard.? Furthermore, he states, he has ordered government departments to make sure they give first priority to isolated and impoverished Indian and rural communities.

If Fox wants to create a more just Mexico, he has to start with the basics. He must create more jobs and raise wages. The quickest, easiest and most effective way of achieving this is to increase foreign trade, investment and economic growth. Mexico is already the most export-oriented country in Latin America and is the eighth-largest exporting country in the world (if the European Union is counted as a single bloc). Mexico is the second-largest trading partner of the US and $700 million-worth of goods cross the border each day.

The trouble is that trade is so heavily skewed to the US, which takes over 80% of exports. Mexico?s 2001 budget assumes 3% growth in the US, but International Monetary Fund forecasters are now expecting 1.7% growth. Zedillo signed a free trade agreement with the EU last year and Fox hopes that European trade and investment will offset the impact of a slowing US economy.

And when the heads of state of western hemisphere countries gather in Quebec City in April to debate the creation of a Free Trade Area of the Americas, Fox can be expected to assume a key role in convincing Latin American presidents to back the idea. Fox makes no claims to be a Latin leader, but his reputation as both a firm, independent statesman and a close ally of the US place him in a unique position to act as a go-between for Latin America?s main capitals,  particularly Brasília, and Washington.

There is one big difference between Fox and most Latin leaders. They are mainly from patrician families or have backgrounds as intellectuals. Fox is a blunt businessman and an unabashed salesman.

Nafta continues to be Mexico?s single most important attraction to foreign investors. Free trade has done wonders for Mexico by allowing it to grow so fast and shake off its dependence on oil exports, which now make up little more than a tenth of the country?s total foreign sales. Growth has unleashed an employment boom. The Bank of Mexico, the central bank, says 529,000 new jobs were created last year and this forced real wages up by 6% on average. 

A Distorted Economy
However, this remarkable performance – much better than any other of the region?s big economies – masks some serious problems. Although oil is no longer Mexico?s staple export, it continues to distort the economy. The country?s imports last year grew at over 20%, driven by a red-hot economy. Exports grew too, but more slowly, and last year Mexico registered an $8.02 billion trade deficit, over 40% more than in 1999. Stripping out oil exports would give a deficit of $22.58 billion in 2000, the central bank says, nearly 60% more than the previous year.

Inflation Down
Inflation has fallen to under 10% thanks largely to the Bank of Mexico?s tight monetary policy, which indirectly pegged short-term rates at 18%. This, plus the convalescing financial system?s reluctance to lend, has made it hard for small and medium-sized companies to raise financing they need to grow.
Rogelio Ramírez de la O, a leading economic consultant, says government spending is now about one-third more than in 1999 because of surging oil revenues: the price of benchmark West Texas Intermediate crude has risen to $30 per barrel from $11 per barrel in 1998. Fox, charges de la O, has decided to keep spending at this level and has not made much of an effort to cut waste or improve the quality of public spending.

Fox?s first important policy clash is likely to come in March as he sends his tax reform proposals to Congress. He wants to raise more money by abolishing the value-added tax exemption for food and medicines. Fox argues that these measures do not hit the poor, but will affect the wealthy. He will use the extra tax revenues to finance his social programs, such as basic infrastructure projects and an increase in education spending.

He says a uniform VAT rate of 15% for all products ?in the first year this will give us 3% of GDP. More than this will go directly to education and the most basic thing there is – drinking water and electricity. The four million families, the poorest of the poor, will not feel the impact of the taxes [and will gain] in return education, water, health, electricity.?

The opposition, which consists of the PRI and the center-left Democratic Revolutionary Party (PRD), promises to put up a fight. No party has control of Congress and Fox must use his negotiating skills to win over the factions. Long gone are the days when a Mexican president could expect Congress to meekly approve his proposals. Fox says he is ready to negotiate. ?What is the formula for success?? he asks. ?It is to be disposed to negotiate, to be disposed to sacrifice. [Approval] of the budget in December was achieved unanimously because we all sacrificed a bit and here we have to do the same thing. We can?t have a fiscal reform that the executive imposes. It has to be negotiated.?

First Confrontation
Fox says he will send legislation to Congress in March to reform CFE, the federal power company. Zedillo wanted to privatize or at least allow greater private-sector participation in the industry, but gave up when talks with Congress broke down. Demand for power is expected to rise by half through 2005 and meeting this demand is likely to cost $25 billion in additional capacity and transportation networks. The government plainly lacks this money. Fox says he ?will modify the law more so that there will be more investment in electricity. We need to grow  electrical power by 9%.?

Fox?s first confrontation with the PRI?s ?dinosaurs? came in February when Víctor Cervera, governor of Yucatán and an old-line political boss, challenged the legitimacy of a new federal commission to oversee state elections in May. He vowed that, ?The people of Yucatán will never kneel down before federal interventions.? Fox said Cervera was ?endangering our institutions, our constitution and the rule of law.? When the PRI was in power, the president would have settled a dispute like this with a direct order. Now, these disagreements have to be settled by negotiation within the framework of the law. However, the laws are unclear, the division of responsibilities between state and federal governments is murky, and politicians unused to negotiating.

The outcome of the battles over tax, the power industry, the Zapatistas and Yucatán are likely to set the tone for the first years of Fox?s presidency. There are clear limits to the amount of structural reforms Fox can achieve ? privatization of Pemex, the gargantuan state oil company, is just not going to happen. Yet Fox can still accomplish a lot within the existing framework. He dreams of turning Pemex into a modern, profit-oriented corporation. Says Fox, ?The changes we will make at Pemex will put it in the same conditions as any company of its type in the world so that Pemex will have a strong capacity to grow.?

Raúl Muñoz, Pemex?s general director, was president of Du Pont Mexico for 12 years. The company?s new board includes business leaders such as Carlos Slim, who runs Telmex, Lorenzo Zambrano, the owner of Cemex, the international cement company, and Alfonso Romo Garza who heads the Savia seed group. These men are all billionaires and among the most influential industrialists in the country. Cleaning up Pemex and giving it a market-oriented focus will bring the government into direct confrontation with powerful special interests, starting with the oil workers union (which holds five seats on the board) and remnants of the PRI.

Corruption has become deeply embedded in Mexican society. Fox promises to uproot corruption. He understands that weak institutions are unable to enforce the law, allowing impunity to flourish. This is a serious problem in its own right, is a stain on Mexico?s image and above all, a deterrent to foreign investment. Wiping away decades if not centuries of corruption in all its forms is not going to be easy. Carlos Salinas, the disgraced former president, is reviled to this day for the corruption that flourished during his 1988-94 period in office.

Battle Against Corruption
Zedillo began reversing this legacy by giving an example of personal integrity and choosing ministers who were both generally competent and honest, although his former tourism minister fled the country to avoid arrest in a corruption scandal.

Fox promises to go further, recasting important bureaucracies and attacking special interests. The most dangerous of these are the drug traffickers who through their determined application of corruption and murder have entrenched themselves in parts of the country. At the beginning of the year, three narco chiefs escaped from jail in a matter of days after bribing prison authorities. Rafael Macedo de la Concha, Enrique González Mondragón and José Eladio Hernández González are still on the run.

The battle against corruption and special interests is just beginning and is likely to be bloody, especially if the economy slows sharply and Fox?s popularity falls. However, if Fox is able to keep the budget deficit under control and press ahead with liberalization he should indeed be able to raise Mexico?s underlying growth rate to 7% by the time he leaves office in 2006. And if that happens, erasing poverty in Mexico need no longer appear as quixotic as it does today. LF