Global Economics

Mexico's Power Shift Challenges Calder?n


Election results complicate the President's plan to bolster an economy devastated by plunging exports to the U.S.

Less than a decade after losing control of the Mexican presidency following 71 years in power, the Institutional Revolutionary Party (PRI) roared back to life in the July 5 midterm elections to become the strongest bloc in Congress, posing a serious challenge to President Felipe Calder?n's efforts to dig the country out of the worst recession since 1995.

The PRI won around 37% of the vote, while Calder?n's center-right National Action Party (PAN) took 28%. The leftist Party of the Democratic Revolution (PRD), which nearly won the Mexican presidency three years ago, took just 12% of the vote, the dismal showing due to party infighting spurred by former presidential candidate Andr?s Manuel L?pez Obrador, a controversial and divisive figure.

Preliminary vote tallies show that the PRI more than doubled the number of seats it holds in the lower house of Congress, to 233 from 106, while the PAN went to 146 from 206 seats and the PRD lost almost half its seats, falling to 72 seats from 127. In the senate, not affected by this election, the PAN holds a plurality, but not a majority, of seats.

Well-Oiled Machine

The PRI, which controlled Mexico for most of the 20th century, now can call many of the shots in Congress, where Calder?n's efforts to push through energy, fiscal, and labor reforms were already mired in legislative gridlock. The Mexican Green Party, which won 7% of the vote, is expected to vote with the PRI on most initiatives.

Much more than Congress was at stake. Also up for election were six governorships and more than 500 mayorships around the country. The PRI, known for its well-oiled political machinery, also did well in those races and looked set to take five of the governor's offices. The PRI's showing represented a remarkable comeback for the party that was booted from power in 2000 when maverick outsider Vicente Fox grabbed the presidency for the PAN, marking the first time in modern history that Mexico had a true multiparty democracy.

Calder?n, 47, enjoys a high popularity rating of 69% in leading polls, thanks to his aggressive efforts to wipe out international drug trafficking cartels that control most of the flow of cocaine, heroin, marijuana, and methamphetamines from South America to the U.S. Since taking office in January 2007, he has dispatched more than 50,000 Army troops to numerous cities to flush out the traffickers and more than 10,000 people, most of them believed to be associated with the cartels, have died, along with hundreds of law enforcement officers. Many Mexicans, although frightened by the escalating violence and by growing evidence that the cartels have officials at the local, state, and federal level on their payrolls, believe that previous governments erred in allowing the cartels to operate unimpeded.

Drop in Remittances

But the PAN's poor showing in the midterm elections reflects voter concern over the serious recession besetting the country. Mexico's economy, which is heavily dependent on exports of manufactured goods to the U.S., is expected to shrink by at least 5.5% this year, which would make it the most serious recession since the 1994-95 peso devaluation and financial crisis. If, as some expect, Mexico's economy shrinks more than that, it would represent the deepest downturn since the Great Depression of the 1930s.

Mexico also has been hard hit by a steep drop in remittances, which are cash payments sent to the country by Mexican workers laboring in the U.S. Last year, migrants sent home $25 billion in remittances, but in April, the cash transfers declined by nearly 20% compared with a year earlier, reflecting high unemployment rates in U.S. jobs traditionally held by Mexican workers. In addition, Mexico's tourism sector was hurt by the H1N1 ("swine flu") virus that swept the country in March and April.

Plummeting oil production also has hit government tax revenues, already eroded by weak corporate results. The PRI's victory may make it more difficult for Calder?n to make progress on fiscal reforms needed to increase the government's tax collection, which at 11% of gross domestic product is one of the lowest in Latin America. It may also complicate his efforts to reform Mexico's energy sector so that private and foreign investors might invest alongside Petr?leos Mexicanos, or Pemex, the state-run oil monopoly, to find new oil reserves to replace the country's fast-shrinking main reservoirs. Mexico's constitution bars private participation in oil exploration and production.

Smith is BusinessWeek's Mexico bureau chief.

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