Sunday, May 15, 2005

Political Institutions and the PMP in Mexico

Abstract: This paper uses a transaction-costs framework to link the policymaking process (PMP) and the outer features of public policies in Mexico. It shows how a PMP centralized around the presidency fashioned nationalist policies that were stable, adaptable, coordinated, and private-regarding for the urban-based corporatist pillars of the regime. When growth faltered in the early 80s, however, this PMP was no longer able to adapt to economic volatility, even if it remained dominant in an increasingly turbulent polity.

We explain how unified government and the corporatist control of the economy made a constitutionally weak president in fact a very strong policymaker, even at the cost of being unable to enact reforms with short-term costs for corporatist groups. We also explain why democratization and economic liberalization in the 1990s is constructing a less centralized and more open PMP that benefits larger shares of the population. However, as the separation of powers of the 1917 constitution comes alive, policymaking is increasingly wedded to the status quo. On the one hand, divided government preserves a macroeconomic framework consistent with an open economy (e.g., fiscally sound policies and a floating exchange rate). On the other hand, checks and balances are permitting old and new parties and interest groups to veto second generation reforms in tax policy, labor regulation, and energy markets.

(from the paper conclusion)
The new PMP increases the transaction costs of negotiating structural reforms. The activation of the separation of powers (that unified government and corporatist representation concealed) with numerous checks and balances among the branches of government fragments political power. By fragmenting state power, old as well as new parties (and interest-groups) can veto efforts to denationalize energy sectors, to eliminate tax loopholes, and to deregulate labor markets.

Poorly defined property rights over the effects of reforms may also help to explain why parties cannot agree, for example, to amend the constitution to permit private sector investment in the energy sectors. Political bargains are more difficult to effect because it is hard to translate future economic payoffs into present value political compensation. A hypothetical contract, where reforms are agreed upon in exchange for some political and economical compensation, requires credible commitments, and equally important, they need to be enforceable. In private bargains, it is easy to rely on explicit contracts and third party enforcement. But in matters of public policy, such explicit contracts are rare, and the likely enforcer, the electorate, faces collective action problems and remains ambivalent about further structural reforms.

Non-consecutive reelection also undermines the policy expertise of legislators, even though divided government makes Congress into the principal lawmaking branch of government. Term limits also shortens time horizons of deputies and Senators, thus limiting the political bargains that can credibly be made. It is also not clear how an increasingly independent Supreme Court will interpret the constitution, an unknown of strategic importance because public control over energy resources is constitutionally protected in Mexico. In the PRI era, centralized policymaking allowed for some political bargains, but they also faced limits and trade-offs, which often turned into unsustainable policies. It is possible that as partisan identities and policy choices become clearer, key players will be able to credibly commit to reforming the economy.

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