Andrés Manuel López Obrador, better known by his moniker AMLO, did not arrive for his swearing-in ceremony in the traditional flurry of pomp and circumstance. Rather, the man who on December 1 was as Mexico’s first leftist president under multi-party democratic rule arrived to take up his post in the same small white Volkswagen Jetta that he has driven for several years.
While AMLO’s morality-driven movement is popular with voters, critics have raised concerns about his radical approach
This rebuke of pageantry is characteristic of AMLO, who campaigned on the platform of personal frugality in favour of tackling the poverty, corruption, impunity and inequality that currently plagues Latin America’s second-largest economy. But while his morality-driven movement is certainly popular with voters, market critics have raised concerns about his radical approach, with some fearing that he will not protect business interests.
AMLO also has a powerful and unstable leader to contend with on the country’s northern border, with US President Donald Trump having laid the blame for the economic impact of the American drugs trade and illegal immigration solely at Mexico’s door. Balancing all of these respective interests while staying true to his political goals is a tall order for AMLO – is he up to the job?
Look to the past
Democracy and prosperity have always been intrinsically linked in Mexico – and both had something of a rough ride over the course of the 20th century. Following several decades of revolutionary insurgency, the authoritarian Partido Revolucionario Institucional (PRI) party occupied the seat of power from 1929 until 2000, effectively transforming the country into a one-party state. Until the 1980s, the PRI pursued collectivist economic policies, such as the nationalisation of the oil industry in the 1930s and post-war import substitution industrialisation, which created a number of vast, state-owned enterprises.
of Mexicans were satisfied with how Mexican democracy was functioning in 2017
of Mexicans trusted the national government to do what was right for the country in 2017
AMLO’s share of the popular vote in the 2018 presidential election
Drop in Mexican currency when AMLO’s victory was announced
In the 1980s, then-president implemented a number of sweeping neoliberal reforms, which sought to control rampant inflation and boost productivity by curbing state power and creating a more attractive environment for foreign direct investment (FDI). “[The environment] became a lot more [conducive to FDI] – that was in fact a major goal of the Mexican politicians and technocrats [who] were carrying out the reforms,” Tom Long, Assistant Professor in New Rising World Powers at Warwick University, told Mrassociates. “They hoped to increase Mexican economic growth and improve its balance of payments situation, [a strategy that] was overwhelmingly successful,” he added. These reforms were further built upon in 1986, when Mexico joined the General Agreement on Tariffs and Trade, and in 1994, when it became a full participant in the North American Free Trade Agreement (NAFTA) alongside Canada and the US.
However, also in 1994, calamity struck when civil unrest pushed the incumbent administration to take action in order to calm nervous foreign investors and protect the country’s newly liberalised financial system. In a bid to demonstrate economic stability and control inflation, the Mexican central bank intervened in foreign exchange markets by issuing dollar-denominated public debt to buy pesos, which overvalued the peso and drove funds into the US. Facing a default on its dollar-denominated debt, the bank allowed the peso to float freely, which devalued it to such an extent that the country’s inflation rate hit 52 percent, forcing the IMF to administer a $50bn bailout package.
Following the crisis, Mexico fell deep into a recession that widened the inequality gap and drove extreme poverty up from 21 percent of the population in 1994 to 37 percent in 1996. “[The crisis] eroded purchasing power really quickly,” explained Long. “When the value of the peso dropped, imported goods became really expensive, which decreased people’s standard of living pretty quickly unless they had access to dollars, which only middle-class and upper-class people were likely to have.”
As such, throughout the 20th century, the country’s erratic economic milieu was closely tied to its interventionist political environment. This supposedly came to an end in 2000 when the PRI lost its grip on federal power, which in turn transformed the country’s democratic institutions from symbolic to functional. The eyes of the public were trained on subsequent presidents Quesada, Calderón and Nieto to implement policies that were democratic not just in name, but also in impact, and went some way in truly improving the lives of Mexico’s citizens. However, due to gridlock in the country’s bicameral political system, misdirected focus and a high level of bureaucratic corruption, desperately needed social reforms were not well implemented by any of these presidents. Consequently, the quality of life for many – particularly rural citizens – has remained low. Private-sector monopolies by a select handful of businesspeople and elevated crime rates in certain areas as a result of the Mexican drug war have also further sustained high levels of inequality.
Inaction in tackling key socioeconomic issues has led to an overarching absence of faith in Mexico’s political sphere
This presidential inaction in tackling key socioeconomic issues, even after the fall of the PRI, has led to an overarching absence of faith in Mexico’s political sphere from its citizens. According to a 2017 poll by the Pew Research Centre, just six percent of Mexicans were satisfied with how democracy was functioning in their country. After all, if politicians aren’t able to transform the lives of their citizens, there’s little reason for faith in the system. “Some of this [absence of faith] is derived from general economic dissatisfaction that democracy hasn’t brought more growth, particularly wage growth, but the other aspect of this [is] corruption,” Long said. “Democracy has not brought an end to the impunity that characterised the PRI system and continues to characterise Mexican politics today.”
Finally, though, it would seem that change is afoot. Mexico’s new left-leaning president campaigned on the platform of an absolute overhaul across all political, social and economic strata: he has pledged to put an end to corruption, roll back military intervention in the drug war and level out inequality by prioritising the poorest members of society.
Born in 1953 in Tepetitán, AMLO’s political career began with an administrative campaign position within the governing PRI party. He left the PRI in 1988 to join the dissenting left wing that would later become the opposition Party of the Democratic Revolution (PRD) party. His early political career, during which he notably appeared on national television drenched in blood following confrontations with the police over indigenous people’s rights, earned him a significant grassroots following among the liberal working classes.
AMLO was always going to have to tread a fine line between keeping markets happy and pursuing liberal policies
Between 2000 and 2005, AMLO was the mayor of Mexico City; with this authority, he introduced policies such as subsided transport fares and financial aid programmes for single mothers and senior citizens. This set the scene for his social-welfare-focused approach, which he would draw upon in presidential campaigns. AMLO ran for president as the PRD candidate in 2006 and 2012, but was defeated on both occasions amid allegations of electoral irregularities. Following his second loss, he founded the National Regeneration Movement (MORENA); as its candidate, he won 53 percent of the popular vote in the 2018 presidential election, with the party taking a majority in both chambers of Congress.
Off the starting line
AMLO set about implementing his radical reformist plans immediately upon taking office in December 2018. This has included establishing training programmes for unemployed young people, launching a universal pension scheme for over-65s, and championing a new law that will prevent any government officials from earning more than he does. Given that he has set his salary at just over $5,000 per month, this law would entail wage cuts for more than 30,000 public officials – a move that has not been popular with long-standing civil workers. If passed, it will also precipitate pension cuts for the country’s last five presidents.
While his policies and political persona have proved popular with the public, market reaction has been more mixed: exit polls that predicted AMLO’s win in July 2018 sent the peso soaring, but the currency then fell by 1.3 percent when his victory was officially announced (see Fig 1). The peso has since recovered, but the realisation that economic reform was on the agenda undoubtedly spooked investors.
As the summer drew to a close, the outlook grew rosier: Morgan Stanley analysts upgraded Mexico’s economic status from ‘equal weight’ to ‘overweight’ amid positive forward stock valuations and a strong corporate economic outlook. In October 2018, however, AMLO sparked concern when he announced the cancellation of the construction of a $13bn airport in Mexico City, which he said was wasteful and plagued by corruption. This sent stocks into free fall, while the peso lost almost four percent of its value against the US dollar. Construction of the airport was already more than 30 percent complete, and its cancellation will cost the government an estimated $6bn, according to a study by the Mexican Institute for Competitiveness.
The decision to terminate the project was reached following a referendum called by MORENA in which less than two percent of the Mexican electorate voted. This in turn raised the alarm for investors, who are concerned that AMLO may use this kind of arbitrary decision-making process to shape economic policy. “It’s unfortunate, because it could have been an opportunity for AMLO to enhance anti-corruption measures without necessarily having to frighten the Mexican business community,” Long told Mrassociates. “If he focused on carrying out a more efficient, transparent, corruption-free project, instead of throwing the baby out with the bathwater, he might have been able to [achieve more].”
Since that point, though, AMLO’s economic decisions have been popular with markets: his December budget, which redistributed public spending across environmental and educational sectors and boosted state oil firm Pemex’s funding to $23bn, sent bond yields sky-high and caused the peso to rise by 0.7 percent.
Ultimately, AMLO was always going to have to tread a fine line between keeping markets happy and pursuing liberal policies. In his campaign manifesto, he set out an ambitious target of four percent annual GDP growth – a figure the country has failed to accomplish since 2010 (see Fig 2). He will have to keep markets, corporations and investors on side in order to achieve that. However, he must also work to tackle corporate corruption, which necessitates making some unpopular market decisions.
“[AMLO] has an uphill struggle [with regards to] his campaign against corruption,” said Colin Lewis, an emeritus professor of Latin American economic history at the London School of Economics. Mexico is currently in 138th place out of 180 countries on Transparency International’s Corruption Perceptions Index, due principally to the level of corruption that underpins extremely high inequality between wealthy bureaucrats and poor rural workers. There’s also the issue of drug cartels, the leaders of which have historically wielded significant influence in both government and private business. “Tackling corruption means taking on some very powerful (and violent) interests,” Lewis added.
On a corporate level, the country is ruled by a handful of businesspeople who have maintained long-standing monopolies on key market sectors, aided by corrupt government officials who have rushed through paperwork on nefarious deals in return for a cut of the profits. For instance, state-owned oil firm Pemex has been accused of offering wildly inflated contracts to private contractors to build new refineries, many of which were extremely poor quality or never completed. According to a report by the Baker Institute for Public Policy, Pemex handed out $11.7bn worth of these contracts between 2003 and 2012, for which it has faced little retribution.
AMLO is teetering on a tightrope between staying true to his political goals and delivering on the economic growth he has promised. It’s clear the public appetite to tackle the issue is there: according to Lewis, “many Mexicans are fed up with corruption and violence – and the impact on daily lives and the economy”. As a publicly elected official, AMLO must answer first and foremost to his citizens; although actions to fight corruption may cause initial market mayhem, they are likely to lead to greater stability and a fairer business environment in the long term.
Alongside thorny business relationships, AMLO also has a combative neighbour north of the border to contend with. US President Donald Trump has been a frequent critic of Mexico and its citizens, calling the country “totally corrupt”, referring to its citizens as drug dealers, criminals and rapists, and insinuating that they are murdering US citizens. He has also pledged to build a wall between Mexico and the US, which he originally claimed that the Latin American country would pay for.
The president does have an ambitious mandate, yet it’s one he has been building upon during 20 years of public office
“It makes it difficult for AMLO to publicly cooperate with the US when Mexicans look at the Trump administration and see racism,” said Long. It also seems to be only a matter of time before the duo clashes. Their economic attitudes are very different – AMLO has just $23,000 in savings, while Trump owns a hotel covered in gold-infused glass – to say nothing of their political ones. Some, however, believe AMLO is playing the long game: in tolerating Trump, the Mexican president may be hoping to curb pressure on his country and secure economic support in the future.
That being said, the two countries’ administrations have so far worked together fairly cohesively on economic policy, including on negotiations for USMCA, the US-Mexico-Canada trade deal that is set to replace NAFTA. Both Trump and AMLO were critical of the original 1994 agreement, albeit for very different reasons: Trump argued that the pact undermined US jobs and salaries, given that at the time it was agreed, Mexico’s per-capita income was just under 30 percent of the US’. AMLO, meanwhile, has lampooned NAFTA for disadvantaging farmers in the agrarian south by introducing unsustainable competition from their US counterparts.
However, Central American migration is proving a more complex issue to resolve. Mexico bears much of the burden for migrants travelling up from conflict-stricken southern nations such as Honduras, El Salvador and Venezuela: it becomes a place of refuge for those who are not accepted into the US, but are unable to return to their homeland. Asylum requests in Mexico have increased tenfold over the past five years, hitting a high of 14,544 in 2018. That number is set to rise further this year, as AMLO’s administration has committed to taking in asylum seekers who have cases currently pending in the US. “This puts a lot of pressure on certain Mexican communities at the northern border, which are maintaining camps of central Americans waiting for asylum appointments that are taking longer and longer to process,” Long told Mrassociates.
Supporting such a high number of transitory residents comes at a steep price for the nation. With this in mind, in December 2018 AMLO introduced his own Marshall Plan – a $30bn initiative to tackle the root causes of migration in Central America and provide migrants to Mexico with visas, healthcare and employment. Meanwhile, the US Government has pledged its support, as well as $5.8bn in public and private investments. Long, however, warned that “there’s more rhetoric than substance” to US engagement, and suggested that “it is not really clear how much private investment has actually materialised”.
From a public-perception point of view, AMLO’s Marshall Plan is a brilliant PR strategy. By committing to values of openness, support and generosity in the context of migration, Mexico marks itself out as the stark opposite of the US under the Trump administration – an approach that will help curry favour with other democratic world powers. It’s also a productive solution to a crisis that has taken its toll on the region, and one that will strengthen Mexico both at present and in the future. The crucial question now, though, is whether the plan can fly economically if the US doesn’t foot its portion of the bill.
With this complex foreign policy to attend to, along with the pressing need to address endemic corruption at home, it’s clear that AMLO has his work cut out for him. The president does have an ambitious mandate, yet it’s one that he has been building upon during 20 years of public office. Whether any of his policies were simply pre-election showmanship remains to be seen, but voters are certainly convinced that AMLO has good intentions. His rhetoric has also provided real hope for the country’s poorest citizens. Six years is a long time, filled with plenty of opportunities to bring about positive change for Mexico’s people and its economy. As Lewis concluded: “Let’s see what the new president can achieve in this sexenio.”