Key Aspects of Mexican Presidential Candidates Economy Program

Transcription

1 Key Aspects of Mexican Presidential Candidates Economy Program Raúl A. Feliz The economy program of the three principal Mexican presidential candidates, Felipe Calderón from Partido Accion Nacional (PAN), Andres Manuel Lopez Obrador from Partido de la Revolucion Democratica (PRD), and Roberto Madrazo from Partido Revolucionario Institucional (PRI); acknowledged Mexico s need for change in its Economic Structure, in order to improve its recent dismal economy performance. Despite, a favorable external environment, and record levels of oil prices, the Mexican economy has grown by only an average of 1.8%, since the year 2000, and has created only 725K new jobs. President Fox economy program for 2000 presidential elections, called the economy to grow at a sustained 7% YOY, and to create 1000K employments every year. This time, the candidates economy programs do not specify any numerical targets. All programs accept the need for preserved macroeconomic stability. They support Banxico s autonomy, and its inflation target regime. AMLO suggest extending Banxico s objective to full employment, as in the US FED s chapter. All candidates support the ongoing fiscal policy that pursues low public sector deficit. In the case of AMLO and Madrazo, they propose to cut Government consumption and increase public sector infrastructure investment, the latter is supported also by Calderon. The three candidates propose increasing tax collection through different measures. AMLO proposed to cut government consumption by US$ 9.4 bn (1.4% of GDP), since the first year of his administration, and canalize this money to public investment. The mechanics to achieve this goal are not detailed on its program. AMLO tax program is the least ambiguous of the three. He will keep food and medicine free of VAT. In contrast, Mr. Calderon and Mr. Madrazo, implicitly accept VAT to food and medicine, as they argue in favor of uniformed taxes. In the case of income taxes, all candidates propose a simplify regime, with tax rates not higher than the current ones. Calderon proposes a more radical move, adopting a flat tax regime. All candidates accept the need to improve tax administration, to reduce tax evasion and elusion. AMLO will revise the actual special income tax regimes, with the intention of reducing them considerably. Energy policy is another aspect where AMLO s program differs from Madrazo and Calderon. AMLO explicitly rejects the opening of the oil-gas sector to private investment; and will keep the monopoly of government firms electricity distribution and commercialization. On the other hand, Calderon proposes the creation of a competitive electricity market between large producers and consumers. It also calls for a modification of the law that regulates oil and gas sectors, to allow major participation of the private sector, as a way of acquiring capital and technology. Mr. Madrazo is less explicit than Calderon, adopting a flexible approach that proposes any change needed to improve the energy sector performance, conditional to the preservation of Mexican sovereignty.

2 The restructuring of PEMEX is a key element of AMLO s economy program. Through government investment, financed by the reduction of government consumption, and better administration of the firm; AMLO wants to increase oil production, exploration investment, and new refineries construction. AMLO program also proposes the adoption of a Mexican standard price of energy; decoupling the actual link of Mexican oil-gas prices from US Houston hub. This will be a key industrial policy instrument that will support the creation and development of a domestic public and private petrochemical industry. We consider this proposal the most controversial of AMLO s program. Mexico has tried this approach many times in the past, unsuccessfully. Mr. Madrazo and Calderon labor policy reforms are similar; they both propose the modification of the current labor law to introduce more flexibility. AMLO does not propose a modification of the current law. He proposes minimum wages to increase every year by at least annual inflation. On pension reform, Mr. Madrazo and Calderon propositions converge. Both of them propose to generalize the actual defined contributions system of private sector workers to the public sector in all its levels, which currently work with a defined benefits system. In contrast, AMLO proposes a negotiation between businessmen and workers to develop a blue print of the pension system: financing, and age of retirement. He supports the defined contribution system of the private sector, but comes short of proposing its generalization. Infrastructure development is a key element of all three economic programs. The candidates call for a significant improvement of highway, airport and train networks. They proposed to finance it through tax reforms, which increase government revenues, join ventures with the private sector, and reduction of unnecessary government consumption. Finally, Calderon, Madrazo, and implicitly AMLO, propose deregulation measures that eliminate obstacles to economy activity and promote competition. Reforms Outlook As Fox administration failure to implement its structural reforms agenda show, viable political coalitions in the Congress is the key element for its execution. Mr. Calderon and Mr. Madrazo proposals are very alike, and more consistent with the financial market view than AMLO s program. If Mr. Madrazo is elected president, we anticipate PRI and PAN Congressmen will form a coalition, which will support Madrazo s reform agenda. In this case, the possibility to modify constitutional laws to allow private investment in electricity, gas and oil, and to deregulate the labor market increase considerably. A Calderon victory, will bring an executive willing to reform the economy, but the possibility of a successful coalition with a defeated PRI are low, and inexistent with PRD. A Calderon administration could look as Fox II.

3 In contrast, if AMLO is elected president, it is highly probable he could form a strong majority in the Congress; with the alliance of PRD and PRI Congressmen. If Madrazo losses, most analysts preview a defeated PRI will move to its historical nationalist roots. So, an AMLO administration could easily get enough support to restructure the budget, and increase public investment. We think this will work at the beginning, but soon will be clear that further and deeper reform measures will be needed.

4 Key Aspects of Felipe Calderon Economy Program (Partido Accion Nacional) Macroeconomic Policy. - Monetary Policy: Support Banxico s autonomy, and its inflation target regime. - Fiscal Policy: Keep a low Government deficit. Tax Policy. Change the current complex income tax law, to a uniform Flat Tax on Income of individuals and businesses, with the only exception of low income families. Flat Tax will be lower than the actual Income Taxes, and could reduce further as efficiency improves. Energy Policy. - Electricity: Opening to private sector, the generation and commercialization of electricity between large consumers and producers. Creating an electricity market with competitive prices. - Oil & Gas: Allow government companies (PEMEX), to form alliances with private companies to acquire technology. Opening energy downstream (refineries, petrochemical) sector to private investors, in order to complement government investment. Establish a new fiscal regime for PEMEX, which frees cash flows, and improves corporative government of these firms. Labor Policy. Introduce flexibility within the labor law, changing the current 8 hrs a day schedule, for a week based schedule. Allow young men and women to work at flexible schedules. Pensions. Change the ongoing defined benefits public sector pensions to a defined contribution system; similar to the one used for private sector workers. Promote voluntary savings. Infrastructure. Extend highway, airport and train networks. Allocate more public funds to the sector. Increase private sector participation on infrastructure project financing.

5 Competition Policy. Keep reducing government regulations, which limit economic activity, and restrict competition. Strengthen the Federal Deregulation Commissions. Key Aspects of Andres Manuel Lopez Obrador Economy Program ( Partido de la Revolucion Democratica) Macroeconomic Policy. - Monetary Policy: Preserve Banxico s autonomy. Support continues modernization of monetary policy operations. Central Bank objective must be similar to the one of the US FED: Inflation control and sustainable growth. - Fiscal Policy: Consolidate off-balance Government programs in government budget, and maintain low deficit. Reduce current government expenditure by an equivalent of US$ 9.4 bn (1.4% of GDP) on the first year. Increase Government investment. Public consumption instead of public investment must be the adjustable variable, for government revenues fluctuation. Tax Policy. Keep medicine and food exempt of Value Added Tax. No increase to individuals and corporations Income Tax. Improve tax administration, in order to reduce evasion and elusion. Revise case by case the special businesses regimes. Energy Policy. - Electricity: No modification to the actual law. No privatization of government assets in the sector. Modernization of government firms trough public investment. - Oil & Gas: No modification to the current law, which grant monopoly benefits to PEMEX in upstream activities and oil refineries. Modernization of the sector through government investment and better administration of PEMEX. The objective is to increase expenditure on oil exploration and refineries, in order to increase probable and possible reserves, and to eliminate gasoline and natural gas imports in three years. Adopt a Mexican standard price of energy, independently of the Houston hub, based in domestic costs of production. The objective is to help in the development of government and private firms within the petrochemical industry. Labor Policy. Pensions. No modifications to the current law. Increase minimum wages by at least the annual inflation.

6 Negotiate the financing of pension systems and age of retirement, with private sector and labor unions. Anyway, pensions must be enough. Improve the quality and coverage of health benefits. Infrastructure. Extension and modernization of highway and train networks. Incorporate private sector investment to nation development project. Link with train networks Pacific and Atlantic port facilities, through Tehuantepec Itsmo. Construct a Mexico City International airport, in a suburb (Tizayuca, Hidalgo). Competition Policy. Keep reducing government regulations, which limit economic activity, and restrict competition. Strengthen the Federal Deregulation Commissions Key Aspects of Roberto Madrazo Economy Program (Partido Revolucionario Institucional) Macroeconomic Policy. - Monetary Policy: Respect Banxico s autonomy and support the inflation target regime. - Fiscal Policy: Adoption of a fiscal program, which gradually reduces public sector balance deficit, in a six-year horizon. Presumably this program will target consolidated public sector government requirements. Make more efficient use of government consumption, increase government investment, and tax collection. Tax Policy. Establish a new tax regime with a lower and uniform tax rate. Better tax administration, to reduce tax evasion and elusion. Gradually reduce government finance dependence from oil revenues. Energy Policy. - Electricity: Restructure government electricity firms, improve their productivity, and reduce their operating cost, to equal the price with our trade partners. - Oil & Gas: Introduce the necessary reforms to improve the development of oil industry; specially the development of new oil reserves; with the only restriction

7 of preserving the country s sovereignty over the sector. Introduce competition in the gas industry. Labor Policy. Look for a consensus between workers, government and businessmen, in order to execute the necessary labor reforms, with the objective of increasing labor demand and improving worker welfare. Pensions. Change the ongoing defined benefits public sector pensions to a defined contribution system; similar to the one used for private sector workers. The new pension system will cover public sector workers at federal, state and local levels. Infrastructure. Target government expenditure; in order to improve physical infrastructure, and human capital in the Center and South tates. In the Northern states, with higher per capita incomes, develop physical infrastructure trough the associations with the private sector. Reserve to the government the execution of larger infrastructure projects. Competition Policy. Coordinate with all government levels, the elimination of unnecessary regulations within the economic activity, and promote more competition. Coordinate the Federal Sector Regulators with the Federal competition commissions to improve the competition policy.