By Simon Gardner
MEXICO CITY (Reuters) - Mexico's new president takes office on Saturday seeking to shift the focus away from a grisly drug war and onto economic reforms aimed at sparking fast growth and pulling the country out of the shadow of regional powerhouse Brazil.
Enrique Pena Nieto inherits a $1.2 trillion economy that lagged other emerging markets for most of the past decade but has gained ground over the past two years, drawing in record investment despite continuing criminal violence.
The former state governor must grapple with the legacy of outgoing President Felipe Calderon - a raging battle with drug cartels that has killed over 60,000 people in the last six years and shaved an estimated percentage point off annual growth.
Returning to power the Institutional Revolutionary Party (PRI) that ruled Mexico for most of the past century, Pena Nieto has stepped back from Calderon's military offensive against the cartels, saying he will focus on reducing murders and crime.
"Where am I heading?" Pena Nieto said at a meeting of Mexican businessmen this month. "Toward a country with greater public security. So Mexicans can live more peacefully."
He says he will push through economic reforms and infrastructure projects to speed up trade with the United States and give young people an alternative to crime.
"The main problem we see in the United States and Mexico is the common challenge of lacking jobs," Emilio Lozoya, a close ally of Pena Nieto and likely member of his cabinet, told Reuters. "That's where we think we should focus more."
U.S. President Barack Obama told Pena Nieto during a private meeting at the White House on Tuesday that he does not want a "monothematic" relationship with Mexico based only on joint security, an aide to the new president said.
Pena Nieto, 46, wants to open up the state oil monopoly Pemex to more private investment, an idea that leftist opponents and some of the more traditional members of his own PRI balk at.
Mexico is the world's No. 7 oil producer and is heavily dependent on oil revenues, but crude output has slumped by about a quarter since reaching 3.4 million barrels a day in 2004, and Pena Nieto wants the private sector to help boost exploration.
He hopes to emulate the success of Petrobras, the partly privatized state-controlled Brazilian oil firm.
Brazil was for years the darling of investors in Latin America, boasting economic growth almost twice as fast as Mexico this past decade. Today Mexico is gaining ground and in 2012 has attracted much more investment in stocks and bonds than Brazil.
Pena Nieto is also planning to present a fiscal reform bill in his first year in office in a bid to increase the tax take, a step credit rating agencies say is vital if the credit rating on Mexican debt is to improve.
REFORMS MAY BE DILUTED
Congress this month approved a wide-reaching labor reform pushed by Calderon and his conservative National Action Party (PAN) in a sign of cooperation between Pena Nieto's PRI and the PAN that could bode well for the new administration.
But without a majority in either house of Congress, Pena Nieto will be forced to horse-trade.
"I think that he is focused on the right reforms," said Nader Nazmi, an economist with BNP Paribas in New York. "These are crucial for increasing potential growth in Mexico."
"There are interest groups involved in all these negotiations ... so there will be a watering down of reforms. The hope is that the watering down will not be substantial."
His hands tied by a hostile Congress, Calderon struggled to push through meaningful reforms, and changes to energy policies he oversaw in 2008 were significantly diluted.
Until the latter half of Calderon's administration, the economy barely expanded, and mustered average growth of just 1.9 percent per year over 12 years of PAN rule. In addition, Mexico's poverty rate rose to 46.2 percent in 2010 from 44.5 percent in 2008 according to official government data.
Public opinion has been highly critical of Calderon's management of the drug war. A survey published this week by pollster GCE found that nearly two thirds of Mexicans felt drug cartels were winning the battle with authorities.
Federico Guevara, a spokesman for the government of Chihuahua, the state hardest hit by the drugs war, criticized Calderon for trying to "fight fire with fire", and called his military deployment too much show and not enough substance.
"It was like the scene from 'Apocalypse Now' with the helicopters blasting Wagner out of the speakers," he said, referring to Francis Ford Coppola's 1979 Vietnam War film.
Images of headless corpses dangling from bridges and pickup trucks stuffed with parts of dismembered bodies are seared into the public consciousness after six years of relentless brutality.
Some Mexicans quietly hope the new government will come to an understanding with the cartels to calm the violence.
"Pena Nieto has to change the nature of the fight. I think there will be deals with drug traffickers and they will bring the killings down bit by bit," said Ruben Munoz, a shopkeeper in Ciudad Juarez, one of the cities worst affected by the violence.
But there is also skepticism over whether Pena Nieto's plan to unify security forces that have long squabbled among themselves into a 40,000-strong gendarmerie rather than rely on the military to lead the fight will make much difference.
"Building this new force in some ways will only be changing the cloth from the military cloth to something more civilian," said Carlos Ramirez, an expert on Mexico at the Eurasia Group consultancy. "It is a risky bet."
As a debate over possible drug liberalization grows in Latin America, especially after two U.S. states legalized recreational marijuana use, some within Pena Nieto's circle want to see the United States curb consumption more aggressively.
One of Pena Nieto's allies, Chihuahua state governor Cesar Duarte, went as far as to say Mexico should legalize export of marijuana after the votes in Washington and Colorado states.
(With reporting by Dave Graham, Miguel Gutierrez and Julian Cardona; Editing by Kieran Murray)