Wednesday, January 30, 2008

Mexico Country Update

The 2006 elections sparked attempts to reform the electoral system, and the Senate has now complied. On September 12, the Senate approved legislation (111 to 11) that places stricter controls on campaign spending and begins a process of replacing the nine elected members of the Federal Electoral Institute (IFE) General Council—the autonomous, public organization responsible for organizing Mexico’s federal elections. Political parties are also prohibited from paying for the transmission of political propaganda in electronic media during campaigns. The Chamber of Deputies must now approve the measure. Pushed at the behest of the opposition Institutional Revolutionary Party (PRI), passage is expected to pave the way for other compromises between Congress and the Executive.

Fiscal reform gets a boost

Mexico has long sought to pass much-needed fiscal reform. Previously, this year’s fiscal reform package—presented to Congress on June 20—was tied up for a number of reasons including the outcome of the electoral reform bill. The two bills were linked together. But with electoral changes now a done deal, the opposition is more favorably inclined to support the government’s fiscal reform.

If passed, fiscal reform is expected to address perennial deficiencies in Mexico’s tax and budget systems. Its centerpieces include reducing tax evasion, expanding the number of taxpayers, improving the efficiency of government expenditure, and diversifying revenue streams away from oil revenue. The proposal aims to raise non-oil fiscal revenue by 2.8 percent of GDP by 2012. Currently Mexico collects only 11 percent of its GDP in taxes, with estimates suggesting a 40 percent tax evasion rate. The bill also gives states the power to levy sales taxes. A National Council for the Evaluation of Public Policy would be created to evaluate federal and state government budgets, and government spending would be cut by $4.2 billion.

As the bill goes through Congress, changes and additions are expected. One has already been finalized: a 60 billion peso ($5.45 billion) tax cut for Petroleos Mexicanos (PEMEX), the state oil company. Currently, the Mexican budget draws 40 percent of its funds from PEMEX. This hobbles PEMEX’s ability to fund technological research. A tax cut is expected to free up discretionary funds for investment to increase crude production.
On September 11, after months of inter-party negotiation, the Chamber of Deputies Finance Committee gave initial approval to portions of the fiscal reform bill. It must now be approved on the floor of the lower house as well as by the Senate. All indications are that passage will occur in the near term.

In sending his 2008 budget plan to Congress on September 8, President Calderón noted that the budget was “insufficient” without passage of the fiscal reform bill. The bill would increase revenue by a projected 115 billion pesos next year. According to Secretary of Finance and Public Credit Agustín Carstens, the government would face a deficit of 2.9 percent of GDP by the end of Mr. Calderón’s term without reform.
Reaching abroad

President Calderón has continued his whirlwind efforts at expanding Mexico’s international role. In a move welcomed by the Left, Mexico restored diplomatic relations, severed since 2005, with Venezuela. Venezuela has now appointed Roy Chaderton, a former minister of foreign affairs, as its ambassador in Mexico City. Mario Chacón, Mexico’s recent ambassador to Colombia, heads to Caracas. Combined, the two diplomats have over 70 years of diplomatic experience.

In August, Argentine President Nestor Kirchner and Brazilian President Luiz Inácio Lula da Silva (Lula) visited Mexico, both inviting Mexico to join Mercosur. Argentina and Mexico signed a Strategic Association Agreement aimed at increasing bilateral trade and aligning the two countries’ political positions in the United Nations and other international forums. Following his meetings with Kirchner, Calderón was visited by Mauricio Macri, mayor-elect of Buenos Aires. Cultural, business and education cooperation were on the agenda.

Stopping in Mexico as part of his regional tour, President Lula signed a series of agreements on justice, energy and immigration policy with President Calderón. According to Gonzalo Mourao, the Brazilian foreign ministry director responsible for Mexico, the visit sought to boost two-way commerce with the goal of doubling trade by 2010 (it reached $1.70 million last year).

Beyond Latin America, President Calderón attended the annual North American Leaders’ Summit to discuss trade, security, the economy, and regional integration. However, with Hurricane Dean threatening the Yucatán, he cut short his trip to return home. In early September, he traveled to New Zealand, Australia and India with the goal of promoting trade. At the Asia-Pacific Economic Cooperation(APEC) summit, President Calderón pushed for fairer international trade conditions. He then moved on to India—the first Mexican president to travel there in over two decades—where he signed a Double Taxation Avoidance Agreement that is expected to foster increased trade flows. India-Mexico trade amounted to only $1.8 billion in 2006, less than 1 percent of both countries’ total trade.
Domestic concerns

Security and the economy appear to dominate the concerns of everyday Mexicans. According to a May-July 2007 Consulta Mitofsky poll, these two issues outweigh unemployment, poverty, drug trafficking, etc. Nevertheless, the poll also showed 65.8 percent of respondents agree with how President Calderón is governing Mexico—the highest level since the poll began measuring Calderón’s approval in October-December 2006.

In the past two months, two rounds of attacks have been launched on PEMEX pipelines. Both have resulted in no casualties but caused fires and gas leaks, affecting over 2,000 businesses. The People’s Revolutionary Army (EPR), a Marxist guerrilla movement that had been quiet for years, claimed responsibility.

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