How a Great Power Falls Apart
Decline Is Invisible From the Inside
“When the tide goes out, you can see who’s been skinny dipping,” Warren Buffet once famously said about financial investing. As many investors are now discovering, the receding economic tide has caught Brazil in a state of undress. Slowing global growth and low oil prices have exposed not only a faltering economy, but also deep-seated corruption, which has helped send the country into a recession and damaged its reputation as a rising global player. Mexico, Latin America’s second largest economy, is not in such dire financial straits (buoyed in part by the relatively strong economic performance of the United States to which it is closely linked), but there are still plenty of chinks in its political and economic foundation. It would not be surprising to see the country in a similar state of crisis in the coming years.
In Brazil, the investigation known as “Operation Car Wash” has revealed that, as early as the late 1990s, Petrobas, the majority state-owned oil giant, conspired with a cartel of companies to award rigged contracts in return for bribes. Petrobas has conceded that nearly $17 billion worth of profits are tainted. The scandal has implicated dozens of senior government officials, including the speakers of both houses of parliament and five cabinet ministers. It has tarnished President Dilma Rousseff’s credibility and threatened her ability to remain in power. Even though she has not been charged with any wrongdoing, she was on the board of Petrobas when the illegal exchange took place.
In Mexico, many of the same building blocks of a scandal are in place: compromised public institutions, leaders who face limited political accountability, and a significant enough overlap between business and politics to make official corruption a lucrative undertaking.
In fact, Mexico may be riper for scandal than Brazil ever was. Mexico emerged from single-party rule at the turn of the last century, but had been governed by the Institutional Revolutionary Party (PRI) for the vast majority of that time in what Peruvian novelist Mario Vargas Llosa once called “the perfect dictatorship.” He was specifically referencing the entrenched system of patronage that allowed party leaders to co-opt opponents rather than confront them. Although the PRI no longer exercises such blanket control, the longstanding patronage system still undergirds Mexican politics and society.
Given its political structure, Mexico has experienced a steady stream of low-grade corruption scandals. In fact, late last year President Enrique Peña Nieto came under fire after the Wall Street Journal reported that one of the president’s mansions was purchased from a firm owned by Juan Armando Hinojosa Cantú, also the owner of a construction firm that won the bid to build the country’s first high-speed railway. (The project has since been paused.) Earlier this year, recordings emerged of the executives from Obrascón Huarte Lain, a Spanish construction firm, discussing how to get Mexican government officials to agree to pay fees for work that would allegedly never be completed. And while there has been no direct evidence, there are rumors that it was corrupt officials that enabled drug lord Joaquin "El Chapo" Guzman’s dramatic jailbreak in July.
For the time being, these scandals will continue to simmer, but they are unlikely to boil over as they have in Brazil. Although business and political interests intersect in Mexico, there are some natural firewalls that could help prevent a corruption scheme from affecting the entire system. Consider the companies involved in Operation Car Wash: the construction conglomerates accused of forming the cartel are omnipresent across the Brazilian economy, responsible for the delivery of billions of dollars’ worth of infrastructure works. Wholly Brazilian-owned, they have effectively become part of the political woodwork. Rousseff’s predecessor, Luíz Inácio Lula da Silva—who became involved in a number of corrupt schemes during his time in power and whose former chief of staff is implicated in Operation Car Wash—was unafraid of using executives of the cartel to execute Brazil’s foreign policy objectives, such as delivering major infrastructure projects across Latin America. In Mexico, by contrast, a more open economy has led to a growth of foreign firms bidding for public works contracts. The diversity makes it less likely that Mexico would see multiple companies caught up in a single, large-scale corruption scandal as in Brazil. The effects of corruption in Mexico are also more diffused: graft is particularly rife at the state and municipal levels, but the fallout then also tends to be local in nature.
Mexico’s simpler political structure could also help contain the political fallout from a corruption scandal—at least at the national level. In Brazil, there are more than 20 political parties represented in congress, making it extremely challenging to build a parliamentary majority—not to mention maintain one—which provides a greater incentive to pay off coalition members. Indeed, the fallout from the Car Wash scandal has affected senior politicians from several Brazilian parties. Mexico has only three dominant political parties, which simplifies the process of building a ruling coalition and reduces the chance a corruption scandal could cut across party lines. (This may be changing, however. Mexican politics have become increasingly fragmented and fringe parties have gained some momentum in recent years.) Yet this same structure also means that a scandal affecting a single party in Mexico is likelier to reverberate through multiple levels of government, trickling down to the regional and local ranks through the entrenched patronage systems.
Another reason that Mexico is less likely to erupt in a Brazil-style scandal, at least for now, is that it does not have a strong federal prosecutor overseeing government behavior. Brazil has a much more active and independent government investigator. Even amid the fallout from Operation Car Wash, Rousseff approved the country’s top prosecutor for an additional term. It would be hard to imagine a similar scenario in Mexico, where prosecutors are less independent and more hamstrung by political forces. After all, Peña Nieto and his wife were absolved of wrongdoing in the case involving their mansion by an investigator appointed directly by the president. Moreover, unlike in Brazil, where a healthy culture of investigative journalism has matured in recent years, the local Mexican press is not free. In the last decade, 62 journalists have been killed in Mexico and the country ranks 148 out of 180 on the World Press Freedom Index. It is one of the most dangerous places for journalists to work. Most of Mexico’s recent corruption scandals were exposed by the international press. The absence of a truly independent national press corps may make a corruption scandal less likely to see the light of day in Mexico, but it also increases the risk of a long-running scheme that metastasizes out of control.
It is hard to imagine what a nationwide scandal in Mexico might look like, but it is worth trying. State-owned Pemex is one potential source of corruption. The state’s historic autarky over the oil sector, which is responsible for more than 30 percent of government revenue, has surely created fertile conditions for politicians and union officials to collude over illegal spoils. Peña Nieto’s flagship energy reform promises to break the Pemex monopoly and hold the company to higher standards of transparency and accountability; it would be ironic, then, if time reveals that widespread corruption has undermined the firm’s performance. If allegations of misconduct published last week in Mexico’s El Financiero newspaper are any indication of broader wrongdoing, such revelations may not be that far off.
There is another type of business enterprise in Mexico that thrives on its ability to corrupt public officials: organized crime. Mexico’s long struggle against drug cartels has produced few tangible results outside of a growing body count. The most damaging crisis of Peña Nieto’s presidency involved the kidnapping and apparent murder of 43 students who were planning a series of political protests in the western state of Guerrero. The city’s mayor, a member of the opposition Party of the Democratic Revolution, and law enforcement allegedly conspired with a local organized crime syndicate to have them detained and killed. The specifics of the case remain murky, and an international investigation has questioned the Mexican government’s own account of what had transpired.
The plot resulted in dozens of arrests, the resignation of the state governor, and large-scale protests elsewhere in the country. Public anger tied to the crisis seemed to catch Peña Nieto by surprise and damaged his efforts to pursue economic reforms without first ensuring greater public security. In fact, it is possible to make the case that Peña Nieto has never been able to fully recover from the crisis since the story broke. The implementation of his economic, political, and fiscal reforms is now largely stalled and Peña Nieto seems unable to generate the momentum to push them forward, despite his own party’s working majority in Congress. Meanwhile, the precipitous fall in oil prices threatens to undermine Peña Nieto’s energy reform on which his long-term legacy depends.
Another scandal—for example, smoking-gun evidence linking the government to El Chapo’s escape or corruption at Pemex—could be the straw that breaks the government’s back. (And as Mexico’s civil society matures, it has shown initiative in taking on the dirty investigative work that the government refuses to do.) The fallout might include damage to the administration’s ability to both govern and secure reelection in 2018. The public has already begun to demonstrate its lack of faith in mainstream politicians. The vote share of the three major political parties has fallen steadily in recent elections.
No scandal in Mexico will ever mirror what is currently transpiring in Brazil; the structural differences between the two nations make this a near certainty. But a scandal in Mexico could prove just as damaging. That is why companies seeking to take advantage of Mexico’s opening energy market would do well to proceed with caution. After all, there are now plenty of companies who wish they had better hedged their bets in Brazil.