Mexico has become an important strategic ally and trading partner for the United States. The signing of NAFTA sparked a new era of cooperation between the two countries. For example, during the 1997 peso devaluation the United States single-handedly put together a loan package that helped stabilize a potential crisis. Today, Mexico ranks as the United States' third largest trading partner and may surpass Japan for the second position this year. In 1998, trade between the U.S. and Mexico increased 11% to $175 billion.

However, Mexico is undergoing profound political changes that could negatively impact U.S.-Mexican relations and affect companies with business operations in Mexico. The old guard, typified by the ruling Institutional Revolutionary Party (PRI), controls much of Mexico's wealth, but it is slowly losing its grip on power. Concurrently, the rise of narco-trafficking threatens Mexico's stability and could lead to an increase in violence if drug cartels lose key political allies due to political changes.

Issues

Two issues confront Mexico and its future, with possible ramifications for U.S. businesses. The first issue is the eroding power base of Mexico's ruling PRI party and the gradual shift to a democratic society. PRI has ruled Mexico since 1929; until 1997 it controlled the Congress and all state posts. Despite free elections, Mexicans were governed under an authoritarian system that insured the single-party rule of PRI. However, stern challenges from opposition parties and rising discontent among Mexicans may signal the end to PRI's single-party rule.

The second issue is the growing narco-trafficking industry in Mexico. U.S. officials estimate the drug trade in Mexico generates $30 billion a year, and they also believe that 2/3 of the Colombian drug trade now passes through Mexico en route to the U.S. These two problems are closely related. PRI has a long history of corruption, and everyone from the highest public officials to police officers have taken bribes, peddled influence and even committed murder without fear of retribution. The drug cartels use government corruption to their advantage, buying protection and information that allows them to operate with relative impunity.

The future remains cloudy for PRI, the world's longest ruling political party. The political transformation to democracy, when coupled with the growing strength of the drug cartels, could cause civil unrest and violence in Mexico, as certain factions demand changes to a corrupt system, while others fight to protect the status quo.

Background

PRI was formed in 1929 to bring union and stability to a country fractured in the aftermath of the bloody 1910-1917 revolution. Since then, PRI has won every presidential election and used authoritarian methods to retain power. For example, at the presidential level, PRI tradition decreed that the outgoing President should name his successor. PRI members didn't have a vote in the process and no primary system existed for electing candidates. Elections were a perfunctory process and challenges to PRI's authority were rare. PRI's 70-year rule has been noted for government corruption at all levels, resulting in the enrichment of a select few politicos and their families. Today, this culture of corruption fosters an environment that allows drug cartels to operate with minimal interference. President Zedillo's efforts to fight government and police corruption have met with limited success because it is difficult to change a 70-year legacy of corruption. The most high profile case is the prosecution of Raul Salinas, the brother of former president Carlos Salinas, for his role in the murder of a politician. Recent arrests of Mexico's former head of the investigative police for collaborating with a major drug organization and of five police officers for their role in the murder of an American student suggest progress in fighting corruption.

Current Situation

Recent political setbacks and internal party struggles provide evidence that the party's hegemony may be crumbling. President Zedillo has instituted reforms to make the party more open and democratic. For example, he announced the end to the tradition of naming the next presidential candidate and said PRI would select its presidential candidate through a series of state primaries. These changes have created an internal struggle for control of PRI. The battle within PRI is between the hard line dinosaurs, the party veterans who favor a return to authoritarian leadership so they can continue profit from the patronage system, and the technocrats, often American-educated reformers who favor democratic reforms. Party defections continue to rise as the rift between the two sides grows. A recent party survey showed PRI members were split over a number of key issues: the party's presidential candidate for the 2000 elections, whether to impose capital controls, imposition of the death penalty, and changing the party's political platform.

Besides internal struggles, PRI faces a population fed up with rampant government corruption, a system of privileges that benefits a few select officials, and poor economic conditions. Opposition political parties, mainly the Party of National Action (PAN) and the Party of the Democratic Revolution (PRD), have increased support at the expense of PRI. In addition, PRI missteps in handling the Zapatista rebellion in Chiapas, where indigenous Indians are demanding greater rights and democracy, have contributed to the party's faltering image. These events threaten the already fragile political and civil stability in Mexico. Tensions could mount if Mexicans become angry and discontent with the slow pace of reform by PRI.

PRI reform measures haven't satisfied voters either. For the first time PRI no longer enjoys the support of a majority of voters and now relies on poor, less-educated voters in the countryside for support. Until the 1980's, PRI consistently received 70% or more of the national vote. Current government estimates are that PRI would win only 42% of the vote in a general election.

PRI's hope for retaining power lies in the continued fragmentation of the opposition into two parties, PAN and PRD. In the past year, PRI won 10 of 14 governor's races, but with sharply reduced margins. In most cases PAN and PRD split a majority of the votes, allowing PRI to win elections with a minority of the vote. Still, opposition parties have managed to chip away at the PRI monopoly over the last two decades and now control 10 of 32 state capitals, and more importantly, the lower house in Congress.

In 1997 PRI lost its majority in the Chamber of Deputies (lower house of Congress) for the first time, and managed to win only a narrow majority in the Senate. The system of rubber-stamping PRI initiatives without meaningful debate appears over.

Finally, PRI's inability to address the corruption that enables narco-trafficking has become a point of contention between the U.S. and Mexico. Each year, the U.S. must certify Mexico as an ally in the war on drugs. Countries not certified face sanctions, including loss of foreign aid. Mexico received certification on 2/26/99 despite failing to make one major drug arrest in 1998. U.S. officials contend Mexican police know the location of drug leaders, but refuse to act. Also, there was a drastic fall in the seizures of cocaine, heroin, and marijuana last year. U.S. drug officials complain that Mexico=s inability to end corruption enables drug cartels to operate with little fear of punishment; Mexicans see the certification process as unilateral and subjective, claiming that America's drug consumption keeps the cartels in business.

Outlook

The waning power of PRI presents Mexico with an opportunity and a problem. The opportunity is to transform Mexico into a true democratic society. The problem is that such a change represents a drastic change for Mexicans, and the transition could lead to periods of civil unrest as Mexicans gain a greater voice in government. Another problem is that PRI officials could form alliances with drug cartels in an attempt to use fear as a means to retain power. As power shifts to the Mexican Congress, the Mexican President will no longer be the sole voice of Mexico's national interests. President Zedillo and former President Salinas worked hard to improve relations with the United States. Now, the United States may have to deal with a Mexican Congress that resents U.S. intrusion into Mexico=s internal affairs, and will undoubtedly exercise a larger voice in areas of trade, drug policies, finance and immigration.

Drug cartels threaten to turn Mexico into a narco-terrorist state akin to Colombia. The cartels will act quickly if their interests are threatened by a new government seeking to crack down on the drug trade. For example, in March 1999 suspected drug traffickers killed seven police officers in an ambush. Mexico is entering unchartered and perhaps volatile territory. Seven decades of PRI rule is being severely challenged as Mexicans become more comfortable expressing their discontent with the current PRI government. There is a mix of competing political parties, an unhappy populace, and ruthless drug cartels that could lead to more unrest and violence.

Businesses operating in Mexico should monitor the changing political situation closely for several reasons:

1. the impact on U.S.-Mexican relations
2. the potential for political instability
3. an increase in narco-terrorism and violence.

Due diligence should be performed on potential partners to make sure they are not involved in illicit activities. Besides monitoring the situation, companies should develop risk mitigation strategies and contingency plans to deal with a crisis.

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