By Dave Graham
MEXICO CITY (Reuters) - By the time Mexico's president-elect, Enrique Pena Nieto, takes office in December, he will almost certainly have a labor reform law on the books and one less battle to fight with skeptics inside his party.
But plenty more skirmishes await as the youthful Pena Nieto, 46, faces a showdown with traditionalists in his Institutional Revolutionary Party (PRI), commonly dubbed "dinosaurs."
On Saturday, the lower house of Congress gave its approval to the biggest overhaul of Mexico's job market in over 40 years, a bill designed to restrict labor lawsuits, regulate outsourcing and make it easier for employers to hire and fire workers.
The reform was proposed by outgoing President Felipe Calderon, though Pena Nieto's support helped it along and he will be a major beneficiary when he takes power on December 1.
By the time it was approved, however, PRI legislators had stripped it of elements hostile to trade unions, a bastion of PRI support derided by many Mexicans as corrupt.
The labor proposal, which must still pass the Senate, would check off one of Pena Nieto's three main economic campaign pledges.
PRI officials are confident the bill will become law. But the bumpy ride it had in the lower house was a sample of the challenges Pena Nieto faces persuading his party to accept reforms that go against its natural instincts.
"Beyond the stuff that's said about people wanting to change or not wanting to change, I'll tell you this: I'm not going to change," said Patricio Flores, a PRI union leader in the lower house, defending amendments to the labor reform. "Because I think things are where society wants them to be at the moment."
Pena Nieto also plans to open up state oil monopoly Pemex to more private investment and find ways of increasing Mexico's paltry tax take. He hopes the changes will boost economic growth and create a platform for the PRI to keep the presidency when his six-year term tends.
However, the reforms will sit uneasily with those in the PRI who see themselves as defenders of the corporatist model that formed the basis for its long rule between 1929 and 2000.
"Our dinosaurs are good people, but the problem with them is that they live in the 1970s," said Francisco Arroyo, a reformist PRI congressman in the lower house.
Created by the PRI when it nationalized the oil industry in 1938, Pemex became a symbol of Mexican self-reliance.
But corruption within its powerful union and a huge tax burden - it provides nearly a third of the federal budget - have taken its toll, leaving it short of resources.
Pemex has fought off several attempts at reform over the years and the company's union, whose leader sits in the Senate for the PRI, still has considerable clout.
Pena Nieto wants the part-privatization of Brazil's state oil giant Petrobras to serve as a model for the revamp, but has given few details of his plans. He will likely have to act quickly if he wants to carry out far-reaching changes.
Pressure will gradually build on Pena Nieto to avoid unpopular steps ahead of regional elections in July, said Federico Berrueto, director general of polling firm GCE.
Pena Nieto can expect resistance on energy and fiscal reform from up to 20 percent of PRI lawmakers in Congress, he added.
"If Pena Nieto is decisive about confronting them, he'll win the battle," Berrueto said. "But they'll get stronger and stronger if Pena Nieto shows signs of weakness."
A senior official close to Pena Nieto said a party Congress to be held by February would be crucial in determining how far-reaching the PRI reforms on tax and energy would be.
The party could seek changes allowing it to levy value added tax (VAT) on food and medicines, breaking a longstanding taboo, and open up Pemex to more private investment.
"We'll be in trouble if we don't do it," the official said.
Pena Nieto will rely on a mix of young technocrats and party veterans to steer reforms through Congress, where he lacks a majority and is likely to need opposition support.
The lower house leadership falls to Manlio Fabio Beltrones, one of the most influential PRI politicians in Congress. Beltrones hands control of the Senate to Emilio Gamboa, who has been at the forefront of PRI politics for 30 years.
Both men are in their 60s and regular targets of PRI critics, who brand them relics of an era when corruption was widespread and top party officials could act with impunity.
But Pena Nieto has picked the two veterans to keep Congress in line with a government agenda being overseen by top aide Luis Videgaray, 44, a reform-minded economist who supporters say is the antithesis of the party's old guard.
If it cannot forge agreements in Congress, the party will only have itself to blame, said Brasil Acosta, a PRI congressman from Pena Nieto's home turf, the State of Mexico.
"This is the PRI's last chance to show it can govern, otherwise ... it's going to be very tough for it to return to office in the years that follow," said Acosta, 42.
BETWEEN A ROCK AND A HARD PLACE
Critics have seized upon the diluted labor bill as evidence that the PRI has not changed its ways.
"The primary obstacle to Pena's big idea of modernizing the Mexican economy is his own party," said Jesus Ortega, ex-leader of the leftist Party of the Democratic Revolution (PRD).
Pena Nieto left the door open for the PRI to ditch anti-union measures in Calderon's bill, mindful they were divisive. But reformers within his transition team privately express concern the party's old guard may emasculate his reforms too.
In many ways, he is between a rock and a hard place.
Even after the PRI changed the labor law, organizations that have long backed the party turned out to protest.
"The PRI has lost its social roots," said Jose Valdez, 72, a central committee member of the Regional Confederation of Mexican Workers, one of the oldest unions behind the PRI. "It used to be a center-left party, now it's center-right."
Leftist parties accuse the PRI of being in league with Calderon's conservative National Action Party (PAN), and they hope to pick up disgruntled voters in coming elections.
"PRI and PAN are the same," said Deborah Quiroz, a 45-year-old teacher blockading Congress during the labor bill debates.
Such accusations have made the PRI wary of taking big risks as it tries to boost Mexico's tax take, the lowest in the Organisation for Economic Co-operation and Development.
Allowing VAT on food and medicine could be costly in a country where half the population lives in poverty.
Pena Nieto has not yet revealed how far he wants to push the PRI, and its lawmakers are adamant the party must stay united.
But few doubt that Pena Nieto will achieve some kind of reforms. Even on the party's left, congressmen like Flores admit that without changes, institutions like oil giant Pemex that were long untouchable will struggle to compete internationally.
"We need to be open to different kinds of investment in terms of exploration, production and refining," Flores said of Pemex. "We can't wrap ourselves in the flag: we need to break with stereotypes if we want to progress."
(Additional reporting by Miguel Angel Gutierrez; Editing by Kieran Murray)