When Agustin Carstens was tapped to be finance minister by president-elect Felipe Calderon nearly a year ago, his credentials came off the same template as those of his predecessors. A lifelong technocrat whose career had been built in the finance ministry and central bank, Carstens capped his fiscal orthodoxy with a stint in 2003-06 as a deputy MD of the IMF.
But he needed far more than technical expertise for the challenge ahead: winning a fiscal reform that would raise taxes from a divided congress, amidst a mood of political bitterness fuelled by the extremely narrow margin of votes that carried Calderon to power.
What was not factored into this equation was Carstens’ charm, excellent timing and the backing of a president whose career was developed in party politics and the national legislature. Carstens started promisingly, with a pension reform in April 2007 that will allow the private sector to share more of the burden with the state. Then on September 14, Congress passed the most significant reform in Mexico in a decade: a fiscal package that raises taxes on corporations, lowers evasion, increases collections from informal businesses and promises to spend more efficiently. The vote by two of Mexico’s three leading parties broke the paralysis that had gripped the legislature since the 1997 passage of a controversial, $90-billion bank rescue package.
From the outset, Carstens courted Congress, holding countless meetings with deputies. He also bided his time, listening and gathering opinions from legislators, industry and civil society about what Mexico needed in a fiscal reform, before finally unveiling the government proposal on June 20.
When legislators proposed lowering the tax burden on the national oil monopoly, Pemex, so that it could invest more to combat slumping production, Carstens took it in his stride. “We share [the view] that Pemex needs to have resources for investment; to fulfil that, the change in the transfers from Pemex to the federal government should be proportional to the [gain] obtained from the fiscal reform,” he tells Emerging Markets. Such language is a far cry from the heavy-handed approach taken in the past with deputies and senators.
Finally, Carstens took a cue from leaders of the former ruling Institutional Revolutionary Party (PRI), who demanded more social spending. “This treasury reform seeks to meet the urgent needs for spending in social and physical infrastructure to be able to settle the social debt we have,” he told a meeting of PRI legislators in August. Carstens won their votes as a bloc. Markets were also persuaded: Fitch upgraded its sovereign rating on Mexico by one notch to BBB+ within days of the fiscal bill’s passage.
The time was right to win over Congress. With Pemex production in decline, raising more revenues took on a new urgency as it became plain the oil monopoly could no longer be milked so heavily for budget transfers. And the practice of blocking government had hurt the credibility of opposition parties. “The PRI’s change of strategy from obstructionism is facilitating advances,” says Jose Antonio Crespo, a political scientist at Mexico City’s Centro de Investigacion y Docencia Economica.