Analysis - Missing students and murders eclipse reforms push in Mexico

By Dave Graham

IGUALA Mexico (Reuters) - For nearly two years, President Enrique Pena Nieto has sought to direct the Mexican public's gaze onto his efforts to open the economy and away from the brutal gang violence that blighted his predecessor's government.

But shocking abuses by security forces are overshadowing his economic reforms and threaten to ruin his efforts to recast Mexico as a country of progress and promise for investors.

Two recent atrocities and a brace of political murders have torn the veneer of calm Pena Nieto had carefully built around his economic agenda since he took office in December 2012.

On Sept. 26, police allegedly linked to a criminal gang shot dead at least three students and abducted dozens of others during clashes in the southwestern city of Iguala.

Forty-three of the students are still missing and public anger has mounted since the state government found mass graves filled with burned corpses in the hills outside Iguala and said it believes many of the students may be among the victims.

Separately, Mexico's attorney general said last week he had filed murder charges against three soldiers accused of executing 22 suspected gang members in late June.

Pena Nieto, who critics say has not paid enough attention to the fight against corruption, recognised that what he called a "barbaric" and "inhumane" attack in Iguala was hurting his efforts to improve the economy.

"These events tarnish the collective and national effort to really make Mexico a country of greater progress and development," he said on Thursday.

Tens of thousands of protesters marched through the streets of Mexico City to demand answers on the missing students, who investigators say were taken by police in cahoots with a local drug gang and corrupt Iguala officials.

"We've reached a crucial moment for the country," said Ricardo Pacheco, a congressman from Pena Nieto's ruling Institutional Revolutionary Party (PRI) who heads the justice committee in the lower house of Congress. "We have to fix these problems or we're going to be at a dead end."

Since assuming the presidency, the centrist Pena Nieto has ended the state's monopoly on oil and gas to attract foreign investment, moved to spur bank lending and rolled out anti-trust measures to breed competition and curb the power of moguls like telecoms billionaire Carlos Slim.

Government officials played down continuing violence, excised phrases like 'drug cartel' from their lexicon and stopped using gang boss nicknames to avoid glamorizing them.

For more than 18 months, the strategy paid dividends, helped by a dip in the murder rate and the capture of the country's top drug lord, Joaquin "Shorty" Guzman. Foreign direct investment hit a record high in 2013 and Mexico's image abroad improved.

But since authorities found 28 corpses in mass graves on a rocky hillside by Iguala last weekend, public unease has mushroomed into mass protests.

Lawmakers like Pacheco say the chaos risks unsettling the very investors the government hopes will spur economic growth and create hundreds of thousands of new jobs.

INFESTATION

Piling further pressure on Pena Nieto's government, two politicians have been murdered over the past three weeks.

A federal congressman for the PRI and his assistant were kidnapped by suspected drug cartel operatives on a highway in western Mexico and their charred bodies were found in a burned-out vehicle the following day.

And a regional leader of the conservative National Action Party in Guerrero, the home state of Iguala, was shot dead in Acapulco barely 24 hours after the attack on the students.

Along with the brutality in Guerrero and ongoing unrest in other states, the scenes have many Mexicans believing that Pena Nieto is stuck in the same quagmire of violence that trapped his conservative predecessor, Felipe Calderon.

"The country is infested with organised crime," said Sofia Mendoza, 32, a city councillor in Iguala for the leftist opposition Party of the Democratic Revolution (PRD), which governs both the city and Guerrero.

"Before, organised crime supported politicians to help them into power. Now the criminals are the ones in power."

To cement their hold on power, drug gangs often fund campaigns of politicians seeking election on their turf, having little to fear from the law, officials say.

Impunity is widespread with only around 2 percent of crimes resulting in convictions, according to the National Citizen Observatory, a group that monitors security.

Pena Nieto vowed to change Mexico's deep culture of political corruption when he came to power and within weeks his party sent a major anti-graft bill to Congress.

Since then, many complex laws have gone through, but the bill to tackle corruption is still stuck there.

Opposition lawmakers say the PRI, which ruled Mexico for most of the 20th century and became notorious for corruption, is reluctant to tackle the issue inside its own ranks.

While U.S. prosecutors have indicted two former PRI governors of oil-rich northern states for money laundering and other crimes, neither man has been charged in Mexico.

In August, critics accused Pena Nieto of making light of corruption in Mexico when he described it as a "cultural condition", but he has pledged to end the problem.

Oil majors of the kind Pena Nieto is counting on to plough billions of dollars into the economy say that they expect the law to be properly enforced in Mexico, a country where oil theft, extortion and kidnapping are widespread.

Oil company executives are reluctant to speak openly about the lawlessness, but in private they say it makes it hard to operate and raises security costs, putting business at risk.

Anadarko Petroleum Corp, one of the biggest oil and gas producers in the booming Eagle Ford shale formation in south Texas, said on Wednesday it had no current plans to develop projects just across the border in Mexico.

A company executive declined to comment on whether security concerns had affected its decision.

For relatives of the missing students waiting for news of the disappeared, Pena Nieto has got his priorities wrong.

"The government doesn't care about security, all it cares about are its reforms," said a 27-year-old farmer whose nephew is missing. He declined to give his name for fear of reprisals.

(Additional reporting by David Alire Garcia; Editing by Simon Gardner and Kieran Murray)