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Mexico’s election adds Democratic element to economy

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Mexico City, July 4 — For a decade, Mexico did almost everything right to modernize its economy. The government sold hundreds of state-owned companies, removed barriers to trade and investment and allowed greater competition at home.

The opening, though, didn't free the economy of a one-party system in which politics was paramount. The poor use of state funds and heavy spending in election years would come back to haunt Mexico through recurrent devaluations and rampant inflation.

The country's dynamics began to change Sunday when Mexicans, in an unprecedented show of democratic fervor, voted the world's longest ruling party out of power by electing opposition leader Vicente Fox president.

"We had already begun with the opening up of the economy," said Marcelo Canales, chief financial officer of steel and auto part maker Grupo Imsa SA. "Now the political side took a huge step."

Sunday's vote was the missing piece Mexico needed to show its efforts to become a modern, free and democratic nation are real and can't be turned back. Competition in politics should lead to greater efficiency in government spending, make state contracts more transparent and probably streamline bureaucracy.

The vote, which ended the Institutional Revolutionary Party's 71 years in power, will put Mexico alongside other regional countries with democratic governments and free-market economies, such as Argentina, Brazil and Chile, among others.

And Mexico has an advantage over its southern neighbors in that it has the greatest access to the world's largest economy through the North American Free Trade Agreement, a pact that's made the country the U.S.'s second-largest trade partner. Mexico also recently signed a free-trade accord with the European Union.

"I firmly believe President-elect Fox will be well received in international business and financial circles," said Thomas F. McLarty, former White House chief of staff. "We expect he will be a welcome partner and neighbor to the United States."

Immediate Benefits

Investors hailed Fox's victory, as interest rates fell, the peso strengthened and the stock market surged. The bolsa index soared 8.2 percent to almost a three-month high. The currency strengthened 3.3 percent to 9.52 pesos a dollar, a one-month high, and the yield on Mexico's 28-day Treasury bill fell 271 basis points to 14.3 percent, the first decline in four weeks and the lowest level in almost two months.

A large measure of the change Mexico has experienced in politics in recent years can be attributed to President Ernesto Zedillo, a technocrat who ascended to power in December 1994 with few debts to pay to ruling party hierarchy. That allowed him to tear down the unfair advantages the ruling party enjoyed.

The importance of the election led Imsa' Canales to compare the Mexican president to Mikhail Gorbachev, the former Soviet leader whose policies of openness sparked the fall of communism.

"Zedillo, I think, is the Gorbachev of Mexico," said Canales. "He'll be remembered for modernizing the economy and modernizing politics in Mexico."

Zedillo, a Yale-trained economist, has surprised friends and foes for his ability to overhaul Mexico's political system peacefully. While many knew he would expand further the free-market policies of his predecessors, few expected him to have the guts to try to revamp an entrenched political system.

For starters, Zedillo handed over the running of elections to an independent institute, stripping it from government control. He also boosted financing for opposition political parties and opened the nation's airwaves to all opponents.

Investment Grade

Zedillo's efforts are expected to pay off as Mexico's fledgling democracy should attract a larger number of investors, who may have more confidence in buying Mexican securities or pouring funds into the country than they did before.

"Mexico, by showing itself to be much closer to the U.S. and Canadian paradigm than the South American paradigm, is just enhancing investor confidence," said Larry Krohn, chief Latin American economist at Donaldson, Lufkin & Jenrette in New York.

Many analysts say that after Sunday's fraud-free presidential race Mexico could soon receive an investment grade rating from Standard & Poor's to reflect the progress the country has made in revamping its economy and political system. S&P said today that it reaffirmed Mexico's credit rating, and an upgrade will depend on whether Fox's administration can pass a new tax code to reduce the government's dependence on oil and expand the tax base.

In early March, Moody's Investors Service surprised analysts by upgrading Mexico to investment grade for the first time, a move many thought premature as it took place before Sunday's election. Many thought a tight race could spark protests and reduce the chances of a smooth transition.

Judiciary Next Step

Now, many say it's time for S&P, which rates Mexico one notch below investment grade, to boost that rating.

"'It is imminent that Mexico gets investment grade from Standard & Poor's," said Hugo Rubio, a trader with Lazard Freres & Co. in New York. "We are buying Mexican stocks and definitely people are a lot more confident."

The next step Mexico may need to take to become an even safer investor place is an overhaul of its judicial system. While Zedillo made great strides to give greater autonomy to Mexico's judges, the efforts stopped short of revamping the entire system.

Supreme Court judges and other top judges have shown in recent years their independence of the executive or legislative branches. The problem, though, is that law enforcement at lower levels is still slow, complicated or down right ineffective.

For many this will be a key area Mexico's next president will need to address in order to modernize the country even further.

"We need to have a judicial system that is believed in and lived up to," said Alfonso Gonzalez Migoya, chief financial officer at Mexico's largest industrial group Alfa SA. "The establishment of the rule of law is very fundamental. I think everyone should recognize the need for a new legal framework."