Analysis: Mexican ruling party faces defeat but may back reforms

TIJUANA, Mexico (Reuters) - Mexico's ruling party faces heavy defeat at a presidential election on Sunday and already is preparing for life in the opposition, where it could help pass economic reforms that it was unable to push through in power.

The conservative National Action Party, or PAN, ushered in a new era in Mexican democracy in a 2000 election that broke the Institutional Revolutionary Party's (PRI) 71-year grip on power and raised high hopes of change.

Twelve years on, however, Mexico is mired in a brutal drug war and the economy has suffered from sluggish growth, in part because two successive PAN governments have failed to get structural reforms through an opposition-controlled Congress.

Josefina Vazquez Mota, the PAN candidate, is paying for those failures. Running to become Mexico's first woman president, she is far behind front-runner Enrique Pena Nieto, who touts himself as the new face of the PRI.

Most polls show her in third place to succeed President Felipe Calderon, who is not allowed to seek re-election.

Faced with the possibility of a stinging defeat, PAN leaders already are looking back at what went wrong and plotting how to reshape their strategy in the future.

While polls show Pena Nieto winning the presidency comfortably, Congress will be a key battleground as he may need the support of PAN lawmakers for a series of economic reforms.

Calderon took office in 2006 with his own ambitious plans to lure private investment to state oil giant Pemex, reform restrictive labor laws and restructure the tax system in order to strengthen the economy and tackle poverty.

But his hopes were repeatedly dashed by PRI lawmakers loathe to hand victories to their rivals before this election.

Now Pena Nieto - a young former governor of Mexico's most populous state - has promised to change the PRI's ways, floating ideas for reform that look very similar to Calderon's old plans.

The PAN, which sees itself as a party of principles, may have to choose between helping to pass laws it believes in or looking for political payback.

Several PAN politicians interviewed by Reuters say they will not block positive change for Mexico even if it means collaborating with their often obstructive old foes.

"We cannot act like them," PAN Senator Alejandro Gonzalez Alcocer said of the PRI. "We know Mexico needs these structural reforms to jump ahead in growth. If Pena Nieto sticks to what he has said, we will pass his reforms."

PRI RESISTANCE

Polls show the PRI, joined in coalition by the small Green Party, could win a working majority in the Senate and possibly the lower house of Congress, too. But even then, Pena Nieto could face resistance from factions within his own party and the left.

Powerful public sector unions with close links to the PRI are opposed to labor reform, and the left - including some PRI lawmakers - is steadfastly against more private involvement in the oil industry.

The leftist coalition led by the Party of the Democratic Revolution, or PRD, is expected to have a fairly strong presence in Congress after a late surge in support for its candidate Andres Manuel Lopez Obrador, who is second in the polls, and it could vote against many free-market economic reforms.

That means Pena Nieto may well need the PAN, although he insists he can keep the various factions of his own party in line to support his action plan.

The PAN has worked with the PRI in the past to push through economic reforms. In the mid-1990s, PAN lawmakers backed the passage of the North American Free Trade Agreement (NAFTA) with the United States and Canada.

"My number one problem was to convince the PRI," said Pedro Aspe, finance minister under Carlos Salinas, the president who signed NAFTA and oversaw extensive privatizations.

"It was very complicated to convince the PRD, but in some cases we could. The PAN was very open to discuss and make deals," he said, noting that the PAN was a more reliable partner in Congress than his own party on financial reform.

Juan Bueno Torio, a PAN senator moving to the lower house after Sunday's elections, said the PRI, not his own party, was going to have to show the biggest change of heart to achieve results.

"I think we'll work well in the next Congress. The PAN has always been a party to drive the transformation of the country, even from opposition," he said. "The PRI is going to have to reform its statutes to carry out fiscal reform. They're not allowed to touch the subject of energy and the fiscal reform."

The PAN's support, though, is unlikely to come for free. The party used its cooperation in the 1990s as a lever to speed up democratic reforms that ultimately helped end PRI rule in 2000.

If it is in opposition and its support is needed, the PAN could for example ask for more guarantees of transparency inside the PRI-supported oil workers union, whose leaders have been embroiled in damaging corruption scandals, in exchange for a 'yes' vote on deeper energy reforms proposed by Pena Nieto.

RISE AND FALL

Working closely with its old rivals in Congress could still cause some soul searching for the PAN, which was founded in 1939 and for decades fought to end the PRI's iron grip on government.

The PAN became a haven for conservatives and Roman Catholics turned off by anti-clerical and left-wing government policies. Early organizers were persecuted and victims of fraud in rigged elections, said Rosalba Magallon, the daughter of a PAN founder in the northern state of Baja California, where the party finally won its first state governorship in 1989.

Eleven years later, Mexican voters rallied around PAN presidential candidate Vicente Fox, a maverick businessman, in a major democratic triumph for the country. But even in Baja California, where the PAN has controlled the governorship for more than 20 years, support for the party is sliding.

Business leaders here blame the ruling party for rising violence and a failure to boost growth. Last year, the PAN lost the state's five municipalities to PRI mayors.

"Calderon when he was campaigning promised he would be the 'jobs president' and I said, 'Thank God!' At last someone is going to focus on bringing more jobs to Mexico," said Gabriel Merino, president of Tijuana's largest manufacturing association, which groups more than 300 factories building everything from car parts to furniture to high-tech electronics.

"But then he became the 'drug war president' and that does not create jobs, it kills jobs. We need a change," Merino said.

On Sunday, apart from the presidential election, the PAN faces tough gubernatorial battles in three of its strongholds and is seen likely to lose two of them, Jalisco and Morelos. Both states have been hit by spiraling drug violence.

Congress reconvenes three months before Calderon hands power to the new president in December and both PAN and PRI lawmakers say bipartisan agreements could be reached during the window.

"We need to take advantage of this moment," said PAN lawmaker Adriana Gonzalez, who is heading for the lower house.

FIGHTING FOR A MIRACLE

Election polls show Pena Nieto with an average of about 41 percent support with Lopez Obrador in second place on 27 percent and the PAN's Vazquez Mota trailing with around 25 percent.

Vazquez Mota, a former education minister, refuses to give up hope. "Miracles do exist," she told supporters filling a main boulevard in the gritty border city of Tijuana during the weekend.

But the PAN's poor record in power has hurt Vazquez Mota's campaign and internal divisions have made it even tougher.

Critics say the drug war was a diversion from overhauling corrupt institutions and shaking up a sluggish economy dominated by monopolies, even as Calderon is credited with strong fiscal policies that helped steer Mexico out of a bruising recession.

"Whether it's fair or not, right now, the PAN is essentially viewed as the party of violence, chaos and economic stagnation," said David Shirk, a University of San Diego political science professor and author of a book on the party. "It has been 12 really hard years in Mexico and people have become disenchanted with so much sacrifice in the name of democracy."

Several prominent PAN politicians have jumped ship in recent months and Fox angered many party faithful when he said Mexicans should back the likely winner, without directly naming Pena Nieto.

Ernesto Ruffo, a businessman who won the PAN's first governorship in 1989, said the party has lost touch with its roots and been hurt by politicians seeking to cling to power, much like the PRI.

"Here in Baja California, it was David versus Goliath. I was David and the people wanted to topple the giant. There was passion among the citizens," said Ruffo, now running for Senate.

"There is a battle coming within the PAN," the 60-year-old added, his eyes glittering. "A battle between the party of the citizens and the party of the bureaucrats."

(Additional reporting by Michael O'Boyle, Lizbeth Diaz and Dave Graham; Editing by Dave Graham, Kieran Murray and Bill Trott)

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