Washington's potential Mexico problem: the consequences of a left-wing win in July's elections could be greater than financial markets think.

• Author: Whalen, Christopher

"Mexicans don't need any lessons from Hugo Chavez in Venezuela about being socialists," groused an official of the Fox government when asked about the prospect of a left-wing win in Mexico's July presidential election. "When Andres Manuel Lopez Obrador wins power," says the same source, "the period of stability in Mexico will be over."

Over the past six years, foreign investors and political leaders have become accustomed to stability, even torpor, in Mexico's once volatile political economy. The government of Vicente Fox Quesada, who nominally represents Mexico's conservative PAN party, has avoided the assassinations and scandals of his predecessors, albeit while accomplishing almost nothing in terms of structural reforms of Mexico's exquisitely corrupt governing institutions. More important for Washington, Fox has been reliably pro-United States even when the Bush Administration has treated him with indifference and contempt.

So successful has Fox been at avoiding destabilizing events that Washington has basically been able to forget about Mexico. The once-double digit risk premium seen in Mexican debt and currency markets has almost disappeared. Consumers south of the border can obtain fifteen-year peso mortgages with interest rates in single digits, while consumer financing for autos and household appliances is likewise plentiful. Mexicans, its seems, are also beneficiaries of the easy-money polices of the U.S. Federal Reserve under Alan Greenspan from 2000 to 2004.

"Fox has proven to be a decent administrator, especially compared with past governments," argues Jorge Castaneda, the controversial writer and former foreign minister who waged an unsuccessful campaign to start a new political party after his resignation in 2003. "There has been no crisis, no repression, no assassinations or devaluations," says Castaneda, who admits that key goals such as raising economic growth above 3 percent and structural reforms went by the wayskte early in the Fox sexenio, or six-year term.

"Vicente was unable to articulate a path to reform," says Castaneda. "He could not tell the people why institutional change was needed or how it would benefit them. As a result, Fox very early on lost the opportunity for change. The corrupt institutional interests of Mexico's political parties and the government bureaucracy then effectively stifled any chance for transformation." Showing more than a little bitterness that these same institutional interests blocked his presidential candidacy, Castaneda laments the lack of movement in, areas such as the judiciary and police corruption.

Despite the lack of progress by Fox during his six-year term, as the July elections approach the situation in Mexico is viewed by foreign investors with almost total equanimity. The prospect of Lopez Obrador, who is known as "AMLO," gaining power in Mexico is...