LOPEZ OBRADOR'S "ADVISORY COUNCIL"

UNCLAS SECTION 01 OF 03 MEXICO 001476

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/MEX, WHA/EPSC
STATE PASS USAID FOR LAC:MARK CARRATO
TREASURY FOR IA MEXICO DESK: JASPER HOEK
COMMERCE FOR ITA/MAC/NAFTA: ANDREW RUDMAN

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV PINR MX

SUBJECT: LOPEZ OBRADOR'S "ADVISORY COUNCIL"

REF:

--------------
SUMMARY
--------------


1. (SBU) PRD co-founder Porfirio Munoz Ledo leads an
"Advisory Council" created to feed economic proposals to the
AMLO campaign. The council includes some prominent PRD
economists whose views tend toward more government
intervention in the economy. The extent of the council's
influence on AMLO, however, is not clear. End summary.

--------------
AMLO'S "ADVISORY COUNCIL"
--------------


2. (SBU) On January 24, 2006 a group of politicians and
economists led by Porfirio Munoz Ledo, co-founder of Party
of the Democratic Revolution (PRD) and former Ambassador of
Mexico to the European Union, created an Advisory Council to
help PRD presidential candidate Andres Manuel Lopez Obrador
(AMLO) evaluate and adopt economic proposals offered by
outside groups. On February 28, the council held a forum at
which a group of left-leaning economists discussed the role
of the State in the economy, markets, investment,
employment, infrastructure, regional development, industrial
policy, and fiscal issues. Rogelio Ramirez de la O, AMLO's
official economic advisor, told us the group is not part of
the campaign and speaks on behalf of itself, not AMLO.
Ramirez said that of the participants at the February 28
meeting, only Ramirez himself is part of the campaign.


3. (SBU) AMLO's Advisory Council includes economists
Ifigenia Martinez and Arturo Huerta. Martinez, a former PRD
deputy and senator, is a professor at the National
Autonomous University of Mexico (UNAM),a PRD founder, and a
member of the PRD's governing board. According to her bio,
she has a Masters degree from Harvard, but she does not have
a doctoral degree. Arturo Huerta is also an economics
professor at UNAM, where he received his doctorate in
economics. Huerta also has strong PRD ties.

--------------
MORE STATE INTERVENTION IN THE ECONOMY
--------------


4. (SBU) The February 28 forum provided insight into the
economic thinking of many the members of this group.
Ramirez de la O said Mexico should allow the balanced
participation of private investment in infrastructure and
energy, wherever the constitution allows it. The more
radical Huerta believes the GOM should boost domestic demand
by increasing public expenditures, and that the Bank of
Mexico's goal should be modified to include an economic
growth target in addition to inflation control. According
to Huerta, private banks should increase their lending to
the government to make Mexico less dependent on
"international financing."

--------------
LABOR REFORM
--------------


5. (SBU) While advocating labor reform to make the labor
market more flexible, the council would like to see workers'
benefits protected. However, the advisors agree that union
leaders' privileges and power need to be reigned in.

--------------
PUBLIC INVESTMENTS
--------------


6. (SBU) The council has grand plans for public investments.
The advisors advocate increasing infrastructure investments
in energy, water, transportation, residential construction,
and a vague category best described as rehabilitation of
idle manufacturing facilities. Oil sector investments would
focus on producing more petroleum-based value-added
products. The advisors propose using surplus oil revenues
to finance such production facilities. The council believes
public investments in infrastructure need not be subject to
financial return criteria. The advisors expect investments
in construction will boost employment, especially if the

MEXICO 00001476 002 OF 003


government relies on domestic inputs. Public funds would
not be the sole source for all these infrastructure
investments, but details of the mechanisms for private
participation are lacking.

--------------
REGIONAL DEVELOPMENT
--------------


7. (SBU) To promote development in the states and rural
areas, the council proposes increasing state and municpal
budgets, developing policies for specific sectors,
redefining the state-federal fiscal relationship, and
granting concessions for the creation of regional
development banks. The advisors envision developing
"multimodal" communication and transportation infrastructure
to connect small- and medium-sized businesses to auto and
electronics manufacturing clusters. The economic
development, finance, agricultural, and labor secretaries of
each state would participate in a newly created Regional
Development Council. Arguing that because most of the
southern parts of Mexico are still under-developed, the
council believes the government should renegotiate certain
NAFTA provisions to prevent the opening of trade in corn and
beans by 2008. The group wants the agricultural sector
protected with guaranteed prices for basic grains. The
advisors would also like to shift Mexico's export economy
away from reliance on maquilas. They envision greater
participation by producers of higher value-added products,
and competitive replacement of imports by domestically
manufactured goods.

--------------
INDUSTRIAL POLICY
--------------


8. (SBU) The council seeks more joint efforts between
government and the private sector. It wants the government
to promote greater integratation of small- and medium-sized
business into the production chain by facilitating linkages
between them and larger companies. The advisors also seek
better better financing conditions and a more competitive
foreign exchange rate. According to some of these advisors,
tight monetary policy has strengthened the peso and hurt
manufacturing. To compete with Asia, they say, Mexico needs
to invest more in technology since it will no longer be able
to compete on labor costs.

--------------
TAXES AND FINANCING
--------------


9. (SBU) All the increased spending proposed by the group,
up to 8 percent GDP, would require raising both revenues and
deficits. Although AMLO has made pronouncements against VAT
on food and medicine, some of his economists propose
increasing VAT collection by reducing the tax to 12% and
restricting the zero tax to a basket of 20 products. Some
also favor increasing the income tax. Despite tax
increases, some still see the need for fiscal deficits to
rise by up to three percent of GDP. One proposal says the
government "should take control of the central bank" lower
the cost of government debt through lower interest rates.
The proposal also seeks to weaken the peso to boost exports
and hinder imports.

--------------
COMMENT
--------------


8. (SBU) Muoz Ledo seems to have summoned some of the most
leftist academics from the PRD and the old PRI for his
Advisory Council. Some of their proposals are prescriptions
for ruin, but we don't expect AMLO to support any of the
most radical ideas. The extent to which AMLO will listen to
the Advisory Council's proposals is still unclear. AMLO's
speeches contain some of the same populist rhetoric
contained in some council members' proposals, but the
credible Ramirez de la O continues to publicly and privately
maintain that AMLO will be a responsible economic steward.
AMLO wouldn't be the first presidential candidate to use
populist campaign promises to gain office. Indeed, his lead
may be due to this strategy. If AMLO intends to be more
responsible than he sounds, however, he should be more

MEXICO 00001476 003 OF 003


careful with his rhetoric and try to impose some discipline
on the rhetoric of his fellow PRD members. As several
analysts have pointed out, the markets tend to discipline
politicians once they are in office. AMLO should make it
easier on himself to accept that discipline. End Comment.
GARZA