BUSINESSWEEK ONLINE : JULY 17, 2000 ISSUE
INTERNATIONAL -- LATIN AMERICAN COVER STORY Mexican Revolution (int'l edition) What Vicente Fox's upset victory means for Mexico's economy, society, and politics As soon as he heard that maverick opposition leader Vicente Fox had won Mexico's presidential election, Gustavo Gutierrez jumped in his car and headed for Fox's Mexico City campaign headquarters. Standing in the middle of a four-lane road, the 48-year-old businessman watched with glee as cars cruised by, honking their horns and waving Fox banners in celebration. ''For the first time in my life, we're going to have a government that represents the hard-working people of this country,'' said Gutierrez, who imports machinery for the garment industry. ''We voted out the gang of corrupt thieves who hijacked Mexico for so many years.'' Mexicans pulled off a minor miracle on July 2, when they voted overwhelmingly to toss out the Institutional Revolutionary Party (PRI), which has ruled the country since 1929. From impoverished Chiapas state to the industrial powerhouse of Monterrey, Mexicans hungry for political change after seven decades of one-party rule gave the National Action Party candidate 43% of the vote and just 36% to his PRI rival, Francisco Labastida. ''It's comparable to the fall of the Berlin Wall, the end of apartheid, and the vote to oust [Chilean military dictator Augusto] Pinochet, all rolled into one,'' exulted independent Senator Adolfo Aguilar Zinser, a Fox adviser. The 6-foot, 5-inch rancher and former Coca-Cola Co. (KO) executive rode to victory on a pledge to bring accountable government to Mexico. But his ambitious vision goes far beyond that. The 58-year-old president-elect wants to see Mexico transformed by a second wave of reforms that build dramatically on the free-market initiatives of his presidential predecessors. The Fox philosophy extends from the grandiose--he wants to turn North America into a true common market--to the minute--he wants farmers and small-business owners to receive ''micro-credits'' as low as a few hundred dollars. In between is a range of measures that tackles everything from taxes to electricity privatization to an overhaul of law enforcement agencies. If Fox follows through on even half this agenda, Mexico could move to the next stage as a destination for foreign capital. That would throw open the whole country to the effects of the global economy--not just the northern border, where the majority of the maquiladora factories of Western and Asian manufacturers are concentrated. A planned doubling of the education budget would raise the skills of Mexico's young and enable them to move up the ladder of jobs. The policymakers of China and Southeast Asia will undoubtedly be watching to see how much more investment Fox can attract, and whether Mexico will become their strongest rival in the race for global capital. The North American Free Trade Agreement figures high on Fox's agenda. Mexico's exports have tripled since the accord took effect in 1994, and the country recently displaced Japan as the second-largest supplier of goods and services to the U.S. But Fox says ''NAFTA can do much better than it has up to now.'' He wants to sit down with leaders of the U.S. and Canada to discuss the possibility of turning the free-trade area into a full-fledged common market, complete with free movement of labor and a single currency. Fox acknowledges it may take several decades to achieve that goal, but he says it's not too early to begin laying the groundwork. These are some of the main ingredients in Fox's formula for growth. Indeed, Mexico's president-elect has promised that before he leaves office in 2006, the economy will be growing at an annual 7% clip, up from the 5% that has been the average since 1996. That might sound like a tall order. But Carlos Slim, the billionaire businessman who is chairman of Telefonos de Mexico, believes Fox has what it takes to steer the country to a more prosperous future. ''Fox is energetic and determined, and has the best intentions of moving Mexico forward,'' Slim says. Local and foreign investors are upbeat about the prospects for a Fox presidency. The Mexican stock market rose 6.1% the day after the vote. And the peso, which had been losing ground against the dollar in the weeks leading up to the election, rebounded to 9.57 per $1. One big reason for the rally: President Ernesto Zedillo immediately recognized Fox's victory and promised to work closely with his successor during the five months before the Dec. 1 inauguration. ''Investors had been worried about the long transition period, but Zedillo's personal pledge to work with the incoming government to guarantee a smooth handover improves the outlook considerably,'' says Rafael Elias, a political analyst for ING Barings and a close adviser to the Fox campaign. TAX OVERHAUL. Fox is riding the wave of support. He has enlisted talent scouts and head-hunting firms, including several from abroad, to fill all 17 cabinet posts. Candidates will be drawn from all walks of life, he says, including academia and the private sector. In a remarkable show of cooperation, Zedillo has said that his officials will work hand-in-hand with Fox's appointees to draft the 2001 budget, which must be presented to Congress when the new President is sworn in. Meanwhile, Fox's economic advisers are putting the finishing touches on a six-year national development plan. ''By Dec. 1, we'll have a variety of initiatives ready on everything from decentralizing the government to revitalizing the country's educational system,'' says Eduardo Sojo, a Wharton School-trained economist who is one of Fox's closest counselors. Where will Fox find the money to pay for such programs? Mexico is expected to end the year with a fiscal deficit equal to 1% of gross domestic product, so there's not much cash to spare. Fox's answer is an overhaul of the tax system. Mexico's tax receipts total just 18% of GDP, compared with 33% in Brazil and 31% in the U.S. What's more, taxes on oil sales account for one-third of all tax revenue, which leaves Mexico vulnerable to the vagaries of international oil prices. To tackle these problems, Fox has proposed widening the tax base and cracking down on rampant evasion. His economic advisers are also studying removal of some tax exemptions that favor big business. But, for now, there are no plans to hike taxes, which in Mexico are already quite high. Pushing through a fiscal overhaul will be Fox's first political test, since broadening the tax base will inevitably cut into incomes of the millions of Mexicans who labor in the underground economy. To stimulate development, Fox also plans to offer tax incentives to companies that create jobs in Mexico's poorest states, such as Chiapas and Oaxaca. He wants to encourage foreign investors to reinvest profits rather than remitting some $3 billion a year to their home countries. LITMUS TESTS. Fiscal reform is some of the unfinished business of the current administration. So, too, is the opening of the long-protected electricity and petrochemical sectors to badly needed private-sector investment and competition. Investors will be watching to see whether Fox can succeed where Zedillo failed. Unlike the PRI, Fox is not beholden to the powerful interest groups--organized labor, in particular--that oppose such reforms. Yet he must still tread carefully to avoid provoking them. ''The real trial by fire will be if Fox can carry out those changes,'' says economic consultant Salvador Kalifa, who runs an independent Monterrey think tank. Another litmus test for the incoming government will be competition. Some say that's what's lacking in the telecommunications industry, where the privatized telephone company Telefonos de Mexico (Telmex) retains a dominant position despite attempts by foreign carriers to break into the market. MCI WorldCom Inc. (WCOM) and AT&T (T), among others, have complained that Mexican regulators have been loath to rein in Telmex. ''There's no doubt that an open, politically transparent system could hurt the economic interests that have thrived under 71 years of PRI rule,'' says Damian Fraser, Latin America strategist for UBS Warburg. Mexican voters will also be expecting their new president to crack down on rampant crime and corruption. Fox has proposed a wholesale overhaul of Mexico's federal police force and attorney general's office to improve their effectiveness. Reforms of Mexico's antiquated justice system, so it can better combat corruption, crime, and international drug trafficking, are also on the table. Fox intends to establish a national transparency commission that will look into major corruption cases and monitor the new government for abuses. Yet he has assured the vanquished PRI that he has no appetite for witch hunts. ''It's not our intention to immerse ourselves in the past,'' he says. ''The country has enough problems to deal with, and we must look to the future.'' Fox has a good foundation to build on, thanks to the reformist efforts of Zedillo and the more progressive elements of the PRI. Indeed, for the first time in a quarter century, it looks as if Mexico will make it through a presidential transition without a devastating financial crisis. Foreign direct investment is now running at more than $11 billion a year, and inflation will fall into the single digits for the first time since 1993. ''It's pretty remarkable that Mexico voted to 'kick the bums out' when economic times are so good,'' says Mexican political analyst Federico Estevez, referring to the PRI. But despite the drubbing it just took, the party could still make life difficult for Fox. The PRI still controls two-thirds of all statehouses and the second-largest bloc of seats in Mexico's Congress. The party also wields considerable influence over labor unions and other grassroots organizations. Powerful vested interests, ranging from big business to drug cartels, could also challenge Fox. To help defuse the inevitable political tensions, Fox plans to assemble a multiparty cabinet. The team is likely to include several prominent Priistas, possibly from the current administration. One name frequently mentioned for the post of Finance Secretary is that of Energy Secretary Luis Tellez. Finance Under Secretary Santiago Levy and Commerce & Industry Secretary Herminio Blanco also may be asked to stay on. Such appointments would guarantee a measure of continuity in economic policy in Mexico, something investors would surely welcome. DEALMAKER. Fox has a bigger reason to reach out to rival parties. The coalition backing his presidential bid captured just 38% of seats in the Chamber of Deputies and 41% in the Senate, which means it is short of a working majority in either house of Congress. A lasting alliance with either the PRI or the left-leaning Party of the Democratic Revolution (PRD), which has been reduced to a minor player in Congress, is not in the cards. Instead, the new government will have to cut deals with one party or another depending on the issue. Luckily, Fox is already accustomed to bargaining. While governor of his home state of Guanajuato (from 1995 to 1999), he managed to push most of his program through an opposition-dominated legislature. ''Fox is a very capable negotiator, and he should be able to strike a good balance fairly easily,'' says Estevez. Carlos Salinas, Zedillo's predecessor, inadvertently set off the forces that may eventually lead to his party's demise when in the late 1980s, he threw Mexico's economy open to foreign trade and investment and privatized scores of industries. Former Soviet Union leader Mikhail Gorbachev cautioned Salinas that ''perestroika'' could produce a dangerous outcome if it were not accompanied by a political ''glasnost.'' But the Mexican leader shrugged off the warning, and his final year in office was marked by a guerrilla revolt, political assassinations, and other unrest that helped precipitate the December, 1994, peso devaluation. Soured on the long-ruling PRI, Mexicans began to cast about for political alternatives. Meanwhile, Mexico's fledgling opposition parties were beginning to reap the rewards of electoral reforms introduced during the first half of Zedillo's six-year term. Designed to level the political playing field, the reforms helped deprive the PRI of its majority in the lower house of Congress in 1997 midterm elections. Today, 12 of Mexico's 32 governorships and more than half of its municipal governments are under opposition control. Call it trickle-up democracy, but it was only time before the all-powerful presidency would pass to another party. Fox's victory in a clean and highly competitive election should provide Mexicans with a much-needed boost in self-esteem. Many have long been embarrassed by their country's image as a democratically backward nation, rife with cronyism and corruption. ''All of the progress they've made in economics, in politics and the benefits of NAFTA got lost under all of these negative issues,'' says Susan Kaufman Purcell, vice-president of the Council of the Americas, a New York-based organization. Mexico's president-elect boasts a clear mandate for change. Because voters have a grasp of the political challenges he faces, Fox may also benefit from an extended honeymoon. But Fox has elevated Mexicans' expectations, some of which may prove difficult to fulfill. ''He's promising the Holy Land, and if he doesn't deliver then people will feel betrayed,'' says UBS Warburg's Fraser. Millions of poor Mexicans are counting on Fox to craft a decent future for them. And the country's long-suffering middle class, which helped propel him to power, is hoping for creative leadership. ''The PRI was obsolete, and the longer it stayed in power, the more it corrupted our country's values,'' says 42-year-old housewife Lucero Dias. ''Fox represents a complete change, and we're more than ready for it.'' If she's right, the revolution may have just begun. By Geri Smith, with Elisabeth Malkin, in Mexico City _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Mexican Revolution (int'l edition) LATIN AMERICAN COVER IMAGE: Mexican Revolution TABLE: Challenges ahead for President-Elect Fox TABLE: Making of a President The PRI May Tear Itself Apart (int'l edition) ONLINE ORIGINAL: Vicente Fox on the Transition, NAFTA, Corruption, Drugs, the Economy... INTERACT E-Mail to Business Week Online

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