A Window of Opportunity

This month the Mexican Congress passed a bill containing the biggest reform in labour laws the country has seen in forty-two years. While most of the changes contained in the bill are not ground-breaking, they do regulate many labour practices that have been in place for a long time. The passing of this reform just a couple of months after the presidential election – and even before President-Elect Enrique Peña Nieto takes office – is a welcome sign about the possibility of other structural reforms being discussed and passed in the months ahead.

Modernizing labour law is difficult in any country. It is always a highly sensitive issue that touches the lives of millions. InMexico, labour regulations are largely seen as a moral asset inherited from the Mexican Revolution of 1910. Although the bill addresses many aspects of labour law that required reform, other issues related to union transparency and accountability were not approved. Many large labour unions inMexico, with budgets running into hundreds of millions of pesos every year, receive little or no independent oversight into the management of their finances. These institutions should start adopting world class standards of corporate governance immediately. The risk is that, if they do not do so, they will continue to be a target for corruption, dishonesty and even used as a platform for money laundering by organised crime. Of course, as is always the case, generalisations do not tell the whole story. Many labour unions are an example of transparency and good management, while there are many others that are way behind in this regard. The unions that are already democratic and transparent should join forces with other sectors of Mexican society in order to push for this change.

One of the key objectives of the reform is to promote labour flexibility and competitiveness in companies of all sizes. The transaction costs and potential liabilities related to formal employment have long been identified as detractors of job creation, particularly for small enterprises. They also contribute to the formation of businesses of all sizes outside the formal economy, which originates other problems such as tax evasion, unequal competition, and counterfeiting. If the bill is successful at detonating job growth in the small business sector, this could prove to be a very clever piece of legislation.

Critics of the reform argue that it will represent a retreat from stronger hiring standards. The truth is the older standards were often evaded through legal mechanisms and strategies that over time created a kind of parallel job market, one that was generating job growth but was surrounded by legal uncertainty for all stakeholders. In that sense, it is positive that the bill attempts to regulate the outsourcing industry, which gained a lot of popularity in recent years as a means of obtaining the flexibility that the legal environment could not offer.

Since twenty years ago, when Mexico entered the North American Free Trade Agreement, its economy has made great progress in terms of trade and investment. Nevertheless, that progress has been insufficient and has often lagged the true potential of the country. In the meantime, other emerging countries have made the necessary structural reforms to make their economies more attractive. We are convinced that the government of the President-Elect will find a unique window of opportunity to make changes of perhaps historic proportions inMexico. He is a young president that understands both the old ways of doing business as well as the new demands and realities of the global economy and of civil society. He will find support from other visionary political leaders who understand the importance of making these long-awaited reforms. His political party should be effective at establishing the necessary political arrangements in order to move the country forward, while at the same time obtaining leverage from the numerous positive aspects that exist today.

However, the window of opportunity will not last forever and this is the reason why the structural reforms should be finalized in the following months, before elections in different states of the country make it difficult again to find consensus among political actors. This is the time to do the right job. This is the time to get the job done. There is no more time to lose.

Mexicohas an enormous social debt towards its millions of citizens who still live in poverty and have few opportunities for social advancement. The structural reforms are possibly the best way to speed economic growth and development in years ahead. After labour reform, we need to see energy reform that allows Mexico to fully develop its large oil reserves at the same time that it transforms its state-run company into a more efficient and sustainable entity. We need to see tax reform that ensures that all individuals and companies contribute fairly and timely to public finances, with no exceptions. And we need to see reform of the social security system, which has been a source of social justice for millions but also suffers from a weakened balance sheet that threatens its long-term survival.

Mexicois very well positioned to take advantage of some specific trends that could benefit its economy in years to come. It has a population of more than 110 million, an emerging middle-class that will double or triple in size, a solid macroeconomic environment with low inflation, low debt, and record foreign reserves, and a stock market that has vast room for expansion relative to GDP. Its economic integration with theUnited Statesand the fact that manufacturing in Asia has become more expensive in recent years will makeMexicoan attractive destination for investment. Equally important, democratic institutions and values grow stronger every day, which should inspire other countries in the region. The opportunities abound, but this is not enough if we are incapable of acting on them. It is very encouraging to feel the sense of urgency that both the departing and entering presidents have shown so far. We urge the members of the legislative and judicial powers to share that same sense of urgency and do everything possible to materialize the reforms that the country requires. If key sectors of business, government and civil society are successful in aligning their efforts towards a common agenda for change – as we are beginning to see – the next decade could bring very good things for Mexico and its business partners.

Armando Nuricumbo is founder of Nuricumbo + Parners, a consultancy in Finance, Risk, and Strategy. He is member of the Mexico-UK Committee at the Mexican Council for Foreign Trade, Investment and Technology (COMCE). Contact him at armando@nuricumbo.com

Countries: Mexico
Topics: Employees and Legislation & Regulation
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