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Setting Himself Up For A Fall? (Int'l Edition)


International -- Latin American Business: Mexico

Setting Himself Up for a Fall? (int'l edition)

Fox promised the world. It'll be tough to deliver

Moises Salas has been selling candy and cigarettes from the trunk of his car outside a Mexico City office complex for 17 years. He clears around $14 a day, barely enough to support his wife and four kids. Life is tough, but the 37-year-old Salas hopes it will get better once Vicente Fox is sworn in as President of Mexico on Dec. 1. "Let's hope that it's a transparent government that governs with justice, sincerity, and follows the law," he says. Gloria Franco, a 29-year-old mother of three who earns her living as a janitor, has her own wish list. She hopes "there won't be as much crime and that children will have better schools."

Mexico is filled with great expectations as it awaits the inauguration of the first opposition politician to hold the presidency after 71 years of single-party rule. Fed up with seven decades of authoritarian government, widespread corruption, and a string of crippling economic crises, Mexicans overwhelmingly voted on July 2 to make the straight-talking former Coca-Cola Co. executive their next leader. Fox, 58, must now make good on a long list of campaign promises, including a pledge to keep economic growth running at 7% a year and create 1.35 million new jobs annually.

Yet high hopes could also lead to deep disappointments. "My only concern is that people must understand that things don't change overnight," says Antonio Madero, CEO of Sanluis Corp., an auto-parts and mining conglomerate with $500 million a year in sales. "Fox doesn't have a magic wand." What Mexico's incoming President does have, though, is a mandate. Fox won the three-way election with nearly 43% of the vote, and he intends to make the most of his political honeymoon. He plans an offensive in Mexico's Congress to pass key laws fast, and so set the tone for an entire administration.

The scope of Fox's legislative ambition is huge, and every contemplated law carries a big political risk. In late November, his center-right National Action Party (PAN) intends to introduce controversial legislation to open up Mexico's electricity industry to private competition. Previous attempts at electricity reform have been shot down. And the PAN, which lacks a congressional majority, must win the backing of the long-ruling Institutional Revolutionary Party (PRI) and the left-of-center Party of the Democratic Revolution (PRD) to get the measure approved, since it will require an amendment to Mexico's constitution.

But these parties, both of which suffered humiliating defeats at the polls, are leery of the plan, which they believe will ultimately lead to privatization of the entire electricity industry. And privatizations are viewed with suspicion nowadays in Mexico, since some sales of state-owned assets over the past 15 years have flopped, forcing the government to spend over $100 billion on bailouts. "They are absolutely mistaken if they think we're going to go along with that," says Marti Batres, who heads the PRD's 60-person delegation in the lower house of Congress. Fox's aides stress that their plan calls for keeping existing power plants under state control while allowing investors to participate in generation and distribution.

Fox might have chosen to start off his term on a less contentious note. But his advisers maintain that the need to open Mexico's electricity industry to private capital is pressing. The country needs to double electricity-generation capacity over the next 10 years to keep pace with surging demand, at a cost of approximately $50 billion. "Sure, we're worried [about the legislative fight], but this is a matter that cannot wait," says Juan Bueno, a former PAN congressman and Fox's main adviser on electricity reform.

Fox faces other tough legislative battles. In his first month in office, he must secure congressional support for an austere 2001 budget, while Mexico's economy is riding high thanks to a $5 billion oil windfall, continued dynamism in nonoil exports, and resurgent domestic demand. Economic growth is expected to top 7% this year--the highest the country has seen since 1981.PAINFUL. Yet Fox's economic advisers believe that public spending must be reined in to compensate for a cooling U.S. economy, which absorbs almost 90% of Mexican exports. They fear that unless the government curtails growth, Mexican consumers will keep buying record levels of imports. That would cause the current-account deficit to widen to unsustainable levels, setting the stage for a painful peso correction.

Tax reform is also high on the Fox agenda, since the incoming government will need to boost public revenue to finance ambitious antipoverty and job-creation programs. Fox expects to submit a sweeping tax-reform proposal to Congress by March.

While there is broad consensus that the country needs a fiscal overhaul, the Fox package will draw fire from opposition politicians and vested interests. The Mexican Treasury collects only 17% of gross domestic product in taxes, compared with 30% of GDP in the U.S. Tax evasion is rampant, and numerous exemptions for businesses deprive the government of much-needed revenue. "Right now, a great deal is paid by very few companies and persons," says Eugenio Clariond, CEO of Grupo IMSA, a Monterrey-based steel conglomerate with $2.4 billion in sales. Clariond would like to see the elimination of some taxes on business--such as the levy on reinvested profits--and more taxes on consumption.

In fact, the Fox team has already floated a plan to extend Mexico's 15% value-added tax to previously exempt items, such as food and medicine. That has outraged many politicians, who argue the measure will hit the poor hardest. Not surprisingly, it is also opposed by major retail and pharmaceutical companies. Fox's advisers maintain that the impact on the 40% of the population that subsists on less than $2 a day will be softened by targeted subsidies and improvements in basic health and welfare benefits.

One thing is sure. To advance his agenda, Fox will have to deploy his considerable charisma and hands-on negotiating style. As governor of the state of Guanajuato from 1995 to 1999, Fox worked effectively with an opposition-dominated legislature. His business experience could also be a plus--something Mexico's recent Ivy-League-educated bureaucrats-turned-Presidents have lacked. Those who caught a glimpse of Fox in action in the 1980s, while he was president of Coca-Cola de Mexico, came away impressed. "He's an excellent negotiator," says Jose Antonio Fernandez, CEO of FEMSA, a leading Mexican brewer and Coke bottler. "He knows how to form teams and listen to others' opinions."

For now, despite all of Fox's talk about building bridges, key groups in the power structure may not be in the mood to deal with the new political realities. The PRD recently turned down Fox's offer of several Cabinet posts. And Mexico's civil servants are showing little appetite for reform. In early November, hundreds of thousands of public-sector workers took to the streets of Mexico City to protest President Ernesto Zedillo's decision to do away with the 20-year practice of rewarding civil servants with an end-of-term bonus. Zedillo, who hails from the PRI, ultimately caved in to their demands.

Mexicans have entrusted Fox with nothing less than the task of reshaping the country, making it a more equitable, more prosperous, and less corrupt place. Clearly, that mission will be difficult to achieve in a six-year presidential term--but at least Fox can start paving the way. "I don't think he has done a good job bringing people's expectations in line with reality," says political scientist Luis Rubio, director of the Center for Research & Development in Mexico City. That may prove to be the biggest challenge in Fox's first 100 days.By Geri Smith and Elisabeth Malkin in Mexico CityReturn to top


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