Will Corruption Undermine Growth in Mexico?

04.06.15

Will Corruption Undermine Growth in Mexico?

04.06.15
Chatham HouseChatham House

By Dr. Daniel Friedheim for Global Risk Insights

Businesses report that Mexico’s level of money laundering, bribery, and conflicts of interest is higher than Brazil’s. Mexico ranks only 103rd of 174 countries on fighting corruption, according to Transparency International, better than Russia but worse than Brazil, India, and China.

So it is easy to imagine how a corruption mega-scandal might undermine the 1 full percentage point increase in the annual growth rate by 2018 that Mexican President Enrique Peña Nieto promises from reforms like breaking the seven-decade long monopoly of state-owned oil company Pemex.

Two scandals last year offered glimpses of the corruption that the U.S. Department of State has warned afflicts all levels of government.

At the local level, a drug cartel reportedly executed 43 university students at the request of a small-town mayor who had arrested them for protesting against him. This suggests that “corruption allows criminal gangs to capture public institutions,” Transparency International pointed out.

At the national level, critics accused the president of multiple conflicts of interest for: 1) letting a government contractor build him a private mansion; 2) his soap opera starlet wife letting the country’s largest broadcaster subsidize her own separate mansion; and 3) awarding without competition a billion-dollar contract to construct a bullet train linking Mexico City to the industrial hub of Querétaro.

With the New York Times documenting suspicious property purchases by the son of a long-time ruling party power broker now heading the national housing agency, calls arose to start prosecuting high-ranking officials and family members.

It was in the face of public indignation that the ruling Institutional Revolution Party (PRI) finally convinced the two major opposition parties in Congress to pass a bill granting more corruption investigatory powers to the State Auditor.

Although many multinational corporations accept corruption as an unfortunate cost of doing business, U.S. courts recently convicted two corporations for doing so on a mammoth scale in Mexico, penalizing the British bank HSBC $1.9 billion for laundering drug money and American retailer Wal-Mart $439 million for bribing officials.

While the World Economic Forum places Mexico 61st of 144 countries on its latest Competitiveness Ranking, it drops the country down to 119th for Diversion of Public Funds, as well as for Irregular Payments and Bribes. One local, non-partisan think tank, México Evalúa, concludes that this helps explain Mexico’s “disappointing economic performance” over many years.

Predictably, President Peña’s popularity has fallen by half, but it has not collapsed to the unprecedented lows that the Brazilian president’s has. Street protests in Mexico are not yet demanding presidential impeachment like in Brazil. And nothing on the scale of the Petrobras scandal in Brazil – which has led to the arrest of 100 people, including 30 politicians – has hit Mexico, so far.

Even so, Treasury Minister Luis Videgaray, himself accused of a conflict of interest, recently warned that the government risked losing the public’s “trust.” One sign of that might be how, while accepting his Oscar for the movie Birdman, Mexican director Alejandro González Iñárritu caught the world’s attention by “praying” that Mexicans “would get…the government we deserve.”

A rising tide of public disgust with corruption could hurt the ruling PRI party in the mid-term Congressional elections in June. Although public opinion polls still show the PRI with a 5-point lead over the conservative National Action Party, about one third remain undecided. If those undecided voters turn against the PRI, then the election results might jeopardize the implementing legislation that President Peña’s ambitious reforms still require.

That package of 11 major reforms is meant to unleash higher economic growth by liberalizing energy (including oil, gas, and electricity), telecommunications, banking, business competition, labor mobility and tax collections, as well as modernizing education, justice, transparency, politics and elections.

However, continuing revelations of corruption could still jeopardize those reforms, as well as the 3.5% growth rate currently forecast for this year.

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