Clamour for policy change
The Partido Acción Nacional's defeat in the mid-term elections for the Cámara de Diputados is unlikely to mean that the government will find it any easier to get its structural reform programme through congress. What is likely to happen is that the government will try to generate more revenues through a fiscal reform programme. The other two main parties may support this provided that the new revenues flow through to states and municipalities.
One of the consequences of the result of the congressional elections will be increased pressure on the government to change its economic policy. In the first three years, the government pursued an orthodox mix of economic policies. They were billed as focusing on keeping the government's finances sound. In fact there is mounting evidence to suggest that the Fox government has only kept the fiscal deficit under control by cutting capital projects and cashing in on the strength of the oil price. Oil taxes and royalties still supply over a third of government revenues.
The problem is that the real economy is wallowing. On 11 July, the official statistical agency, Inegi, published the figure for people employed in the formal economy and making social security payments to the IMSS. At the end of June there were only 12.2m people doing this. Damningly, this is 575,000 fewer than at the end of the previous administration.
Under Fox, the number of people in proper jobs has fallen by 4.5%. The worry is that the manufacturing industry, which had been driving the rest of the economy, has been shedding jobs. It has lost 730,000 jobs since Fox took office at the end of 2000. These lost jobs have been, partly, offset by a pick up in jobs in services, especially retailing.
Whether these jobs are secure must be moot. The comparative boom in retailing (given the dismal state of the rest of the economy) has been caused by two factors. The first is the strength of the peso against the dollar over the past three years. This has encouraged Mexicans to spend, rather than hold dollars.
The second reason is that incomes have been rising strongly; real incomes, according to the IMSS, were 12.5% up in May 2003 on December 2000. It must be doubtful whether wages will continue to rise at anything approaching this rate. The slackness of the labour market must eventually translate into lower wage increases. Perversely, once wages start to fall, the rate of lay-offs will slow down.
Lurch. To be fair, to a large extent the loss of a lot of the manufacturing jobs is due to factors beyond the government's control. The main external factor, the government would like to say, is the slowdown in the US economy, which has clipped demand for Mexican-made products.
The loss of manufacturing jobs has been particularly acute in states with big maquiladora industries, such as Baja California and Chihuahua. Manufacturing jobs have also been lost in Mexico City.
Big worry. This big worry for policymakers is that the domestic economy, which has been keeping growth positive, just, will start to run out of steam before the US recovery kicks in. Recent econ-omic figures show that the Mexican economy has already changed down a gear.
The official statistics agency, Inegi, reported that there was a 0.9% drop in economic activity in April. Another sign of the faltering economy was negative inflation. The central bank reported that there was negative inflation in the first half of June, following May's fall of 0.3% in prices.
The Inegi figures were horrible: industrial production was down by 4.8%, compared with April 2002. Manufacturing, the key sector of the economy, was down by 6.7%. The only reasonable bits of the economy were farming (up 2.7%, despite the worries about cheap imports at the beginning of the year) and services (up 0.6%).
Inegi tried to put a gloss on the figures by saying that they were distorted by Holy Week, which fell in April this year. Ignoring this, output was 0.5% up on April 2002.
What is worrying is that key sectors, such as construction, which seemed to be on the mend earlier in the year, are now floundering. April 2002 was the poorest month for the industry since President Vicente Fox took office in 2000. Yet output in April 2003 was just 0.4% up on the figure for December 2000.
Inegi's new data on construction companies show that those that are working are doing so at only just over 62% of capacity.
Government response. The government's response to the economic problems it is facing is technocratic. The finance ministry said that it will again try to push through a tax reform. This seems odd. The government squandered Fox's mandate by dithering over a tax reform proposal which was heavily watered down by congress and failed to produce the revenues the government had hoped.
The government argues that without tax reform it will be impossible to come up with a new regulatory system for the oil industry and the electricity industry. Yet, as we have argued, the increase in the priísta representation in congress, plus the rise of the PRD, makes a fundamental, constitution-changing reform of the electricity and oil industries unlikely.
Some analysts argue that the government's talk about fiscal reform, and a harmonisation and extension of VAT rates (which failed in 2001) is really a smokescreen for a change in income tax rates. The argument is that the government will propose something on VAT which it knows it cannot get, and accept some compromises from congress in return for changes to the income tax rate, which will deliver more revenues.
Tinkering with income tax rates could prove dangerous. It is worth noting that income tax receipts in the first five months of this year are 14% higher in real terms than in the same period of 2001. This is an impressive performance, given the economy's poor performance over the past three years.
What the government may offer to congress is more hypothecation (earmarking particular taxes for particular areas of spending). The PAN has always been keen on this, because it limits the scope the federal government has to interfere in state and municipal affairs. The political success the mayor of Mexico City, Andrés Manuel López Orador, has made of the extra federal funds he has nabbed, thanks to the PRD's clever budget interventions, shows the benefits extra money can bring.
Business: Carlos Slim, Latin America's richest man, is another Mexican businessman who questions the sustainability of the government's apparently robust fiscal position.
He wants the government to prepare its accounts in a similar way to businesses, so that extraordinary gains (ie, oil windfalls) are distinguished from recurring income.
On the liability side, Slim also suggests that the government should detail items such as future pension payments. Slim suggests that people should work longer, so that pensions do not become a major problem.