It’s the hot new emerging market. But can President Peña Nieto and his team of reformers really turn their country around?
Correction appended, February 13, 2014
At 9 o’clock on a February night, Mexican President Enrique Peña Nieto was still working inside Los Pinos, his official Mexico City residence, where camouflaged soldiers with assault rifles stood guard outside. For the 47-year-old President, it was a reminder that the presidency is a deadly serious business — especially at this pivotal moment in Mexican history.
Five years ago, drug violence was exploding, the Mexican economy was reeling, and a Pentagon report likened the Aztec nation to the terrorist-infested basket case Pakistan, saying both were at risk of “rapid and sudden collapse.” As Barack Obama prepared to take office in 2008, one of his senior foreign policy advisers privately nominated Mexico the most underappreciated problem facing the new U.S. Administration.
Now the alarms are being replaced with applause. After one year in office, Peña Nieto has passed the most ambitious package of social, political and economic reforms in memory. Global economic forces, too, have shifted in his country’s direction. Throw in the opening of Mexico’s oil reserves to foreign investment for the first time in 75 years, and smart money has begun to bet on peso power. “In the Wall Street investment community, I’d say that Mexico is by far the favorite nation just now,” says Ruchir Sharma, head of emerging markets at Morgan Stanley. “It’s gone from a country people had sort of given up on to becoming the favorite.”
Want proof? On Feb. 5, Mexico’s government bonds earned an A — rating for the first time in history when Moody’s revised its assessment of the country’s prospects, ranking it higher than Brazil, the onetime darling of international investors, and making it only the second Latin American nation after Chile to get an A.
“I believe the conditions are very favorable for Mexico to grow,” Peña Nieto told TIME in an interview at the Los Pinos compound. “I’m very optimistic.”
He’ll share that optimism with Obama when the U.S. President arrives in Mexico for a North American leaders summit on Feb. 19. Obama will likely nod in approval: a booming Mexico — integrated with the U.S. economy in myriad ways — would put wind in the sails of U.S. economic growth and further reduce an already declining flow of immigrants illegally crossing the shared 1,933-mile (3,110 km) border.
But “Mexico’s moment,” as many are calling it, could still disappoint. Corruption and mismanagement are endemic to Mexican politics. Some of Peña Nieto’s reforms are engendering fierce resistance. And drug trafficking, with its related crime and violence, remains a defining fact. After his interview with TIME, Peña Nieto went straight into a meeting to plan his trip the next day to Michoacán, a nearby state where vigilante groups have formed to fight drug bosses who have seized control of their towns.
Officials and experts in both Mexico and the U.S. describe a country at a pivot point. “This is dramatically different from what we’ve seen before,” says Duncan Wood, director of the Mexico Institute at the Wilson Center. “I reserve judgment for the time being on whether this is all going to work out.”
A New Generation
Peña Nieto casts himself as a fresh, young reformer. But he is also a product of the ruling elite that helped lead Mexico to the brink of ruin. His uncle and godfather were both governors of the state of Mexico, a position he assumed in 2005 when he was 38. He is a member of the Institutional Revolutionary Party (PRI), which ruled Mexico for 71 years — often with the help of election results widely considered fraudulent — until it was knocked out of power in 2000. Peña Nieto revived the PRI’s fortunes by promising bold and tangible results to a country largely resigned to corruption and stasis. “Between 2000 and 2012, the opposition parties deliberately blocked major reforms that were necessary,” says Wood. Peña Nieto promised to overhaul the state-run energy sector and the tax system and contain the drug war’s savagery.
Adding a glow to the ambitious promises were the candidate’s famous aesthetics: Peña Nieto’s rallies were sometimes charged with subtle sexual energy. Or not so subtle: “Peña Nieto, bombón, te quiero en mi colchón” (“Peña Nieto, sweetie, I want you in my bed”), women would chant.
Peña Nieto’s opponents did their best to turn this against him by tagging him as a shallow pretty boy. They were particularly gleeful when, during an appearance at a Guadalajara book fair, he struggled to name three books that had shaped his life (“and that’s spotting him the Bible,” says a former U.S. official with a chuckle).
Eventually, in a three-way race in the summer of 2012, Peña Nieto won just 38% of the vote — hardly a mandate for generational change. The secret to his recent success lies in the way he then built a powerful legislative coalition. After meeting secretly with the two leading opposition parties, he struck the kind of legislative grand bargain that has eluded his counterpart across the northern border. The resulting Pacto por México gave liberals higher taxes on the wealthy and conservatives an end to Mexico’s ban on the re-election of politicians, while Peña Nieto won support for a raft of other reforms, including opening up the country’s oil monopoly.
Even after the deal was announced, jaded observers doubted that Mexico’s political system could deliver. But whatever he may lack in literary erudition, Peña Nieto compensates for in political prowess. He is assisted by a group of young technocrats, many with advanced degrees from outside Mexico, who together put a decidedly more modern face on a very old and very distrusted PRI machine. Among them are the President’s longtime top adviser and now Finance Minister, Luis Videgaray Caso, a 45-year-old economist with an MIT doctorate, and Emilio Lozoya Austin, the new 39-year-old chief of the state oil company, Pemex, who holds a Harvard master’s degree. Running the powerful Interior Ministry is 49-year-old Miguel Ángel Osorio Chong, Mexico’s new point man on the drug war. All of them met with TIME in Mexico City recently.
Sitting in a personal office near a bright red phone that connects him directly to the President, Videgaray says talk that he is the true mastermind behind Peña Nieto’s reforms is “not at all the reality.” Instead, he says, “the time was right. Mexico needed fundamental changes.”
New Politics of Oil
“Traitors! traitors!” came the shouts from inside Mexico’s Congress on Dec. 12. Opponents of a measure allowing foreign investment in Mexico’s oil sector had barricaded and padlocked the lower house of Congress, forcing the debate into a nearby auditorium. One legislator stripped down to a pair of black underpants as he railed at the lectern about the stripping of his nation.
The passion stems from the politically charged history of oil in Mexico, which holds the world’s 11th largest reserves, right behind Brazil in the western hemisphere. A large monument and fountain near the center of Mexico City commemorate the day in 1938 that President Lázaro Cárdenas, fed up with American and British oil companies’ siphoning profits away from Mexican soil, declared that Mexico’s oil belonged to its people and could not be owned by foreigners. Mexico celebrates the nationalization of its oil with a civic holiday every March 18.
But national pride meant that Mexico missed out on the global energy boom. While oil prices have roughly quadrupled over the past decade, enriching big producers, Mexican oil production dropped by 25%, thanks to the sclerotic federal oil enterprise, Pemex, which lacks the capital and expertise to tap the country’s reserves. “They’ve recognized that the government monopolies have stopped working and that they have fallen behind in taking advantage of what entrepreneurship and private capital can do,” says Ed Morse, head of global commodities research at Citibank. Meanwhile, a U.S. oil-production boom has reduced Mexican petroleum exports to the lower 48 states, forcing Mexico to look elsewhere for markets.
Under the new law, foreigners will again be able to explore for oil in Mexico and extract Mexican crude for profit, even if the oil technically still belongs to the people — a point Peña Nieto is careful to underscore. “The world has changed, and especially the energy sector has changed,” he says, rebutting the suggestion that he has allowed his country to be stripped to its skivvies. “The state does not compromise in its view that the property continues to be owned by Mexico. It belongs to all Mexicans.”
For all its drama, the oil reform might not even be Peña Nieto’s most important victory. In fact, the uproar against his education reform was even more intense than the battle over oil. A law overhauling Mexico’s absurdly deficient public-education system — in which teaching jobs are handed down through generations and are sometimes even sold — enraged the powerful teachers’ union, whose members paralyzed central Mexico City with mass street demonstrations last September.
There’s also evidence that Peña Nieto will challenge Mexico’s entrenched powers. Last year he ordered the arrest of the longtime and powerful leader of the teachers’ union on charges of embezzling millions in union funds. And some observers say his telecom-reform plan doesn’t please telecom mogul Carlos Slim, the country’s richest man.
Factor in a law that rejiggers the tax code and an end to single-term limits for all federal politicians, and you have what might be the most productive legislative session anywhere in recent history. “You have to give them extraordinary marks for both political instinct and management of the process,” says Tony Garza, a U.S. ambassador to Mexico under George W. Bush.
Credit Peña Nieto with good timing too. Rising labor costs in China have made Mexican wages cheaper by comparison, reversing a dynamic that held for most of the 2000s. Meanwhile, a slowdown has dampened foreign enthusiasm for Brazil’s economy, making Mexico look more appealing. Even Peña Nieto’s critics don’t deny that he has delivered changes that could transform Mexico’s economy. “The question,” says Manuel Camacho Solís, a member of the Mexican Senate, “is whether that will create the outcome they want.”
Camacho is suspicious that Peña Nieto’s agenda seems to be a bigger hit in Davos than in Xico. “Investors applaud. Newspapers outside the country applaud. So why does the image of the President keep falling?” asks Camacho, noting that Peña Nieto’s poll numbers have fallen several points below 50%. (Some trace the poll slump to a recent pause in economic growth that economists call temporary.)
In a country rife with corruption, rapid growth is more likely to produce oligarchy than broad prosperity, Camacho warns. He says Peña Nieto must act on his pledges to combat corruption, though he doubts that will happen: “If we don’t have the political will, then the outcome will not be Norway. It will be Yeltsin’s Russia.”
A Path to Modernity?
Even Yeltsin’s Russia didn’t have the sort of sociopathic gangsters who plague Mexico today — and who threaten to stunt its potential. Drug smuggling boomed in the country in the late 1990s after a U.S.-led crackdown largely choked off Caribbean smuggling routes and forced traffickers to find new ones through Central America. Extreme violence followed as cartels vied for business and turf. In 2009, Mexican police captured a drug-world figure who could have been devised by the creators of Breaking Bad: dubbed the Stewmaker, he allegedly disposed of some 300 dead bodies by dissolving them in acid. The symbolic nadir may have come the night in 2006 when patrons at a Michoacán nightclub looked down to see five severed heads rolling across the dance floor.
Later that year, Peña Nieto’s predecessor, Felipe Calderón, launched a massive crackdown on the cartels and a campaign to end drug trafficking. Bush and Obama backed up 50,000 Mexican army troops with over a billion dollars in funding, military equipment and surveillance drones. But apart from headlines touting the arrests of various kingpins, the effort produced little but more violence. Since the start of the Calderón offensive, the drug war has claimed more than 60,000 Mexican lives.
Peña Nieto promised to tackle the violence. But once in power he seemed to de-emphasize the drug war. U.S. officials worry that drug lords understand that the pressure will ease on their trafficking so long as the heads — so to speak — stop rolling. “The government’s messaging outside the country is about changing the conversation from the cartels to Mexico’s economic potential,” says Wood.
Chong insists otherwise. “We are not mixing security with politics,” says the Interior Minister, who, it may be worth noting, has a political background as a former governor of the Mexican state of Hidalgo. Speaking from his private office — the better to avoid a part of town paralyzed by street protests — he adds that the drug fight has been focused by centralization of authority under his control and that his government has captured some prominent drug lords, including the sadistic leader of the Zetas cartel, Miguel Ángel Treviño Morales, in July 2013.
Skeptics scoff at this sunny narrative. Murders have slowed in some areas, but other crimes have spiked. In late January, the President unveiled a new initiative to combat a recent epidemic of secuestro, as kidnapping for ransom is known.
And then there is the crisis in Michoacán, where the emergence of armed vigilante groups is a disturbing echo of Colombia’s descent into a kind of low-grade civil war in the 1980s. “Nobody knows who the hell these people are — whether they are honest, bona fide vigilante groups or whether it’s one cartel fighting another,” says Jorge Castañeda, former Mexican Foreign Minister.
“What’s happening in Michoacán is really worrisome,” says Shannon O’Neil of the Council on Foreign Relations. “If you can’t fix rule of law, I don’t see how the economic side can thrive.”
Peña Nieto doesn’t deny that Michoacán is a serious problem. “We need to re-establish the rule of law” in the state, he says. (The next day, he announced a $3.4 billion social and infrastructure investment package.) But, he adds, “we are regaining territorial control.” He grabs a chart from his chief of staff that shows violence dropping in several troubled cities.
This is a common complaint from Mexican officials: that broad security advances are overshadowed by shocking but localized acts of violence. “Sometimes people see the events but not the statistics,” says Chong.
A senior Obama Administration official expresses sympathy. “It’s a big country,” he says, recounting a nervous call from a U.S. auto-industry executive headed to a large Mexican city for a convention. The official’s advice? Relax. “It’s the equivalent of, you’re going to L.A. for a convention and you hear about a big shoot-out or hostage taking in Alabama. Would you feel unsafe?”
Not that security is the only obstacle to an economic boom. For one thing, last year’s reforms still require a wave of so-called secondary legislation to spell out their details. Passing it will take hard work, although the good news is that, unlike last year’s template-setting constitutional reforms, which required two-thirds majorities in Congress, these laws require only a simple majority.
Peña Nieto takes a long view. “We are not [working] only with a short-term goal,” he says. “We have a broader horizon, without thinking about what the polls are saying.”
Even if some reforms fall short, it has been a long time since Mexico experienced grand political bargains, a growing economy and optimism about the future. The idea might have been laughable until recently. But is it possible that America’s leaders could learn a thing or two from its resurgent southern neighbor?
—with reporting by Dolly Mascareñas / Mexico City
Correction: The original version of this story misidentified the Director of the Mexico Institute at the Woodrow Wilson International Center for Scholars as Gordon Wood.
This appears in the February 24, 2014 issue of TIME.