Felipe Calderon’s narrow victory in the 2006 presidential election and the subsequent political deadlock that ensued throughout Mexico, prompted by political fraud accusations and election theft (Previous Report), are all but forgotten by a large majority of Mexican voters that are actively supporting the Mexican president’s pursuit of drug cartels and economic reforms.
Calderon and his National Action Party (PAN) secured another economic reform on September 14, 2007, gaining support for his administration’s tax reform bill following several weeks of political horse-trading between the PAN and the center-left Party of the Democratic Revolution (PRD).
President Calderon’s ability to effectively negotiate with the opposition was instrumental to the passage of the reform measure and will likely be important in any other developmental reforms in the future.
Calderon’s Tax Reform
Calderon’s long awaited tax reform bill is designed to increase the government’s non-oil tax collection from 10 percent of GDP to 12 percent by 2012, earning an extra US $10.3 billion in 2008 and lessening Mexico’s reliance on PEMEX oil revenues. In addition the tax reform measure will allow the government to cut taxes on PEMEX, allowing PEMEX to reinvest profits into developing technology, infrastructure maintenance and improvements and debt repayments. The reform measure will also raise petrol taxes and reduce the ability of large corporations to avoid paying income taxes, which have historically avoided paying taxes through a convoluted Mexican tax system. Following the final passage of the tax reform bill, the Mexican government revised its forecast for economic growth to at least 3.7 percent in 2008, anticipating additional local and foreign investment ventures.
Although Mexico maintains close economic ties to the United States and is one of Latin America’s most developed countries, it has one of the lowest tax collections in the region, hindering the government’s ability to invest in infrastructure, schooling and health care. Increasing tax revenues will assist the Calderon administration in its pursuit of both educational and health reform proposals while allowing his government to continue its current military campaign against Mexico’s drug cartels.
Despite the PRD’s final support of the tax reform measure, PRD members openly opposed the petrol tax increase that will likely hurt middle and lower class Mexicans, forcing them to allocate additional income towards transportation expenses. The PRD’s support was instrumental in securing the final passage of the tax reform bill and was acquired through Calderon’s willingness to both passively support a constitutional amendment on electoral reform proposed by the PRD, that remains embittered from its 2006 presidential defeat, and eliminating proposals to include a value added tax (VAT) in the reform bill.
Electoral Reforms Placate Opposition
The electoral reform measure is an outgrowth of the 2006 elections in which the PRD believes it was wrongfully denied the presidency by the independent Federal Electoral Institute (IFE). The law will impose an external comptroller on the IFE and will replace the Institute’s president, Luis Carlos Ugalde, and five of the nine directors. The PRD has openly voiced its disapproval of Ugalde and questioned his independence following the 2006 election (Previous Report). His successor remains unknown at this time. Calderon’s willingness to acquiesce to electoral reforms placated the center-left PRD, allowing PRD politicians to tell their political supporters that they are seeking to end the country’s long history of electoral fraud and have achieved successes.
Political Horse-Trading and Future PEMEX Reforms
These concessions to the PRD will assist President Calderon when his administration begins the process of altering the Mexican constitution. Calderon and the PAN have championed constitutional revisions to alter the rules guiding PEMEX operations, allowing both private investment in PEMEX and PEMEX to form limited strategic partnerships with foreign companies (Previous Report).
Overcoming nationalist opposition to private investment and strategic limited partnerships will be difficult for Calderon as both PRI and PRD politicians have previously blocked PEMEX reforms, fearing any constitutional changes, however limited, would eventually lead to full privatization of Mexico’s oil industry. PEMEX’s inability to allow foreign participation in its operations has crippled PEMEX’s financial ability to expand exploration and production capabilities.
Many US financial firms have voiced their overall approval of Calderon’s tax reform measures and have actively encouraged amending the Mexican Constitution to allow foreign investment in PEMEX.
President Calderon will likely experience limited PRI and PRD resistance in passing constitutional amendments to alter PEMEX operations. However, we believe Calderon has a far greater chance of acquiring PRI and PRD political support through his demonstrated ability to engage his political opponents in negotiation.
