Mexico’s Enrique Peña Nieto Confronts the Challenges of Federalism, Fiscal Reform and Education

The PRI leader, Enrique Peña Nieto, assumes the Mexican presidency on Dec. 1. Manufacturing output is up, official unemployment is low and drug related homicides are down. This is an auspicious time to inherit the presidency. What are the principal challenges facing a historic party in a modern era?

Corruption is endemic with the Mexican federal government lacking the tools with which to hold the state governments accountable for significant federal transfers. Under a national reform reached in 1998, federal funds are dispersed to the 31 states and Mexico City in proportion to their population, local revenue and poverty rate. Federal transfers replaced local tax revenues. However, use of the federal funds was supervised by state legislatures, not federal legislatures. This has resulted in inflated state budgets to justify continued federal transfers.  Ample opportunity for corruption by state and municipal officials exists. The incoming president will seek to devise and implement a new form of federalism which establishes reporting requirements and accountability for use of federal funds. A president from the PRI should have an easier task introducing this reform because 21 governors from the 31 states and Mexico City are members of the PRI. With less need to use federal transfers, for local political purposes, they are more likely to accept presidential instruction and conform to party discipline.

The use of educational funds presents a clear need for overhauling the federal transfer system. Non-conditional federal transfers are distributed based on the number of teachers in the state. The number of students is not considered. With the powerful teachers’ union, SNTE holding the capacity to influence the outcome of political elections, state politicians accept whatever number of teachers the union has established. Whether or not the teachers show up in class, federal funds are determined on those comisionados, i.e. licensed teachers. Presently, there are 160,000 comisionados in Mexico who do not show up to teach. If more comisionados = more Federal funds = more political support, the opportunity for corruption is obvious.

Reform of the federal structure is also related to fiscal reform. Currently, approximately one-third of federal revenues derive from the national petroleum company, PEMEX, but oil production has fallen from 3.4 million bpd to 2.55 million bpd. Falling production results in decreased royalties and taxes for the state. Therefore, the government must consider alternative forms of revenue raising measures. The easiest way is to raise the IVA (sales tax). However, the IVA is a regressive tax, impacting lower incomes more than those with medium to high income. A rise in the IVA conflicts with the president’s commitment to reduce the number of Mexicans living below the poverty line, currently estimated at 46% of the population. Therefore, other forms of raising revenue are being discussed. Raising or broadening the income tax is a possible solution, but Mexican citizens are skilled at avoiding this tax. (A pervasive cultural attitude suggests that only fools pay income tax.) Returning to the old system of higher state taxation may have to be considered. The downside of this proposal is that greater opportunity for corruption exists, but the advantage of decentralizing taxation is the potential for increased local responsibility and accountability for state and municipal programs, including education.

Education reform is essential. The OECD places Mexico at 51st in math, 48th in reading and 50th in science out of the 65 countries participating in the PISA 2009 scores. The World Economic Forum business leaders ranked Mexico’s education quality among the lowest in the world: 120th out of 139 countries surveyed. In large part, the problem lies with the SNTE (teachers union) to which all teachers are obliged to pay fees and which Elba Esther Gordillo rules with populist authority. Early in his administration and before the mid-term elections for governors, Enrique Peña Nieto needs to establish education goals and be ready to use political capital to implement them. Education reforms may require confrontation with the SNTE, a conflict that most politicians are unwilling to consider, given the power of the union. Needed is a comprehensive focus to mobilize parents, co-opt teachers and prosecute corrupt union officials. The task is herculean. If President Peña succeeds, he will enable the school students of today to participate in the modern economy and reduce the poverty rate. Otherwise, another generation of Mexican students will be condemned to half-time schooling, subpar skill sets and the inability to participate productively in the modern economy.

These challenges address underlying societal problems. They are more complex and maybe harder than reforming the energy sector. Nevertheless, now is the time to channel the soaring public expectation for positive change into these three directions: a new federalism, a fiscal reform that is fair, and a radically improved education system.