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Colin Chapman: In the dying days of the Calderon administration Mexico's armed forces this week captured one of the most wanted drug traffickers — a man who goes by the nickname El Taliban or Z-50. He'd been a commander in the brutal Zetas cartel. His arrest follows the capture by marines earlier this month of El Coss, the founder of the rival Gulf cartel. While no one pretends that this means that the end of the drug wars are in sight, it does come at a time when Mexico is in the process of change. Now Mexico is the world's 13th largest economy by GDP, and it recently elected a new president, Enrique Pena Nieto, who is busy preparing for his inauguration on December the first. So what is he planning to do?
Welcome to Agenda. I'm Colin Chapman. And I'm delighted to welcome this week Stratfor's Latin America analyst Karen Hooper. Karen, the economy and crime are the big issues — how will Nieto address them?
Karen Hooper: Well when Pena Nieto comes into office in December, we really expect him to focus most of his energy on economic issues, and really we expect him to distance himself from the criminal aspects of what's going on in Mexico. It's really an opportunity for him to establish the PRI as a government that is able to take steps forward on the policy issues than most Mexicans agree on. Now the areas where we're really looking at this kind of change include labor reform and energy reform, with the possibility of a little bit of tax reform.
Colin: Karen, I'll come right on to these issues in a moment, but first let's deal with the drug cartels. The outgoing Calderon administration achieved a scalp this week with the arrest of one of Mexico's most wanted drug traffickers. Will this help or hinder the incoming president?
Karen: Well one of the consistent problems that we see with government gains against cartels is that the fragmentation of leadership in cartels can often lead to infighting among those who are left. So really when we're looking at the high-value target or HVT strategy in action, we're looking at a situation where the removal of leadership could spawn different factions spinning off and their own organizations. And we're really keeping an eye on that throughout Mexico and at many different cartel organizations to see if we're going to diverge from this sort of polarized landscape where you have the Los Zetas on the eastern coast of Mexico and the Sinaloa cartel on the western coast of Mexico. We're looking for fragmentations within those two groups that might spawn more violence.
Colin: Let's turn to the economy. At one level it's going okay with aspirations to challenge China, where prices are rising, but it's also clear significant reforms are needed, especially in energy.
Karen: The main problem that Mexico faces in the energy sector is that constitutionally, foreign companies are not allowed to own mineral assets in Mexico. So this means that the normal joint venture agreements that are signed between companies operating in any country around the world, that give companies the rights to claim reserves as a part of their assets, those kinds of agreements are not possible in Mexico, and that's been a huge impediment to foreign investment partnerships in Mexico. This has had the effect of reducing Mexico's access to developing technologies, reducing Mexico's access to foreign capital, and really has stymied Mexico's efforts to increase production which has declined fairly rapidly in the last few years. In addition to addressing some of the questions about whether or not foreign investment might be able to come in and develop greenfield locations, Mexico's also going to have to address some of the major underlying challenges towards Pemex, the official — Mexico's national company. Pemex is largely considered a fairly corrupt organization. It's fairly inefficient. And it's been struggling to achieve the kinds of technological and output gains that it is looking for on its own. So it's really looking for those external partnerships, but without reforms in its corruption and the way that it manages itself, will have a hard time accomplishing that.
Colin: Does the president-elect Nieto have political support for his aims? Because he managed only a fairly narrow victory.
Karen: Perhaps one of the most remarkable things that's happened over the past couple months is that in the wake of the election there's really been an alignment of the further right candi— party, the PAN, and the centrist party the PRI, that's Enrique Pena Nieto's party. Their alignment on major issues — the need for labor reform, the need for energy reform — has been fairly remarkable and it seems that most of what's been holding up Mexico policy decision-making over the past thirty years or so has been the political infighting that led up to the presidential election in July. So what we're looking at here is an opportunity for these parties to really cooperate on the areas where they agree, and they do agree on these issues. We expect to see significant progress in labor reform, even before Pena Nieto gets into office in December. And we expect him to come out swinging with an energy platform once he's inaugurated.
Colin: Karen, can you be more specific about the labor reforms? What's actually planned?
Karen: The labor reforms are still under debate, so it's not entirely clear what the final product will look like, but under debate are reforms that would address transparency in unions, the right of companies to employ workers part time, and basically it would attempt to liberalize the labor sector a little bit, in order to make it less expensive for companies to operate in Mexico. Now oppositionists to this proposal are arguing that what this would do would be to reduce protections for laborers in Mexico and make an already sort of difficult labor environment even more so.
Colin: Karen, how powerful are the unions? Because they'll oppose this, won't they?
Karen: Well I expect that there will be buy-in from the unions between the PRI and the major labor unions in Mexico, some sort of agreement before this is passed. Certainly I think that there are gains to be made on both sides.
Colin: Right, now when Nieto's party was in power before, it had a long history of authoritarianism and some would say greed. How will the public accept what's inevitably going to be a challenging period of change?
Karen: Mexico's really entered a very different period of its history. When the PAN — when the PAN was elected in 2000, we really saw a shift in Mexico's political system that changed everything. What you're looking at now is a system that allows political competition, requires the formation of alliances and really requires parties to live up a little bit more to voter expectations. And so, I do expect that the PRI will get cooperation from the PAN and also occasionally the PRD. As it goes forward and tries to make different policy adjustments.
Colin: Finally what's been the reaction of international investors?
Karen: There's a lot of opportunity in Mexico. We're looking at a situation where labor rates are rising in China, particularly on China's coast. Now we don't expect that low-end manufacturing relocating from China will all go to Mexico, but certainly Mexico has a leg up, in terms of having relatively cheap labor, a free trade agreement with the United States and direct physical access to the United States. So Mexico's really looking to capitalize, at this moment, on that shift in China by making these reforms, making labor reforms and possibly considering corporate tax reforms that will make it easier for companies to consider relocating to Mexico in the long term.
Colin: Karen, thanks very much. That was Karen Hooper, Latin America analyst, and it was her first time on Agenda, I'm sure she'll be back. And you can follow her analysis on our website. And until the next time, goodbye.