Identifier
Created
Classification
Origin
06MEXICO2220
2006-04-26 19:46:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Mexico
Cable title:  

TEN ECONOMIC CHALLENGES FACING MEXICO'S NEXT PRESIDENT

Tags:  ECON EFIN EINV PGOV PINR MX 
pdf how-to read a cable
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UNCLAS SECTION 01 OF 08 MEXICO 002220 

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
ENERGY FOR KATHY DEUTSCH
PARIS FOR USOECD

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV PINR MX
SUBJECT: TEN ECONOMIC CHALLENGES FACING MEXICO'S NEXT PRESIDENT

REFTELS: AS NOTED IN TEXT

------------------------
SUMMARY AND INTRODUCTION
------------------------

UNCLAS SECTION 01 OF 08 MEXICO 002220

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
ENERGY FOR KATHY DEUTSCH
PARIS FOR USOECD

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV PINR MX
SUBJECT: TEN ECONOMIC CHALLENGES FACING MEXICO'S NEXT PRESIDENT

REFTELS: AS NOTED IN TEXT

--------------
SUMMARY AND INTRODUCTION
--------------


1. (SBU) Whoever wins Mexico's presidential election on July 2
will inherit both the economic strengths built and bolstered
during the Fox Administration and the daunting challenges that Fox
leaves unfulfilled or simply unaddressed. Fox's major economic
legacy will be the macroeconomic stability that prevailed during
his six-year term and the fruits this stability have borne: low
inflation, a solid banking and financial sector, a middle-class
housing boom, and the rapid expansion of credit to business and
consumers. But as positive as this legacy is - and despite
efforts by Fox's economic team to "armor-plate" Mexico's economic
institutions against the political pressures his successor will
face - the challenges Fox leaves are formidable. This cable
considers ten of them:

-- Reform the Tax System and Maintain Fiscal Balance.
-- Defuse the Pensions Time Bomb.
-- Confront Declining Oil Reserves and Reform the Energy Sector.
-- Take on the Unions without Shutting Down the Country.
-- Plan for a Transition to Fully Open Agricultural Trade.
-- Stop Talking about Competitiveness and Do Something About It.
-- Institutionalize the Rule Of Law And Confront the Violence.
-- Cultivate Respect For Intellectual Property Rights.
-- Invest in Human Capital Needed For a Knowledge-Based Economy.
-- Address Mexico's Persistent Poverty.


2. (SBU) Any future Mexican government faces the challenge of
creating sufficient economic growth. The conventional wisdom is
that Mexico needs to at least match the growth rates of its most
competitive peers - 6% to 8% annual growth on a sustained basis -
in order to create enough employment to lift millions of its
citizens from poverty and provide an attractive alternative to
illegal migration to the U.S. Mexico is unlikely to achieve this

without substantial investments in key sectors including energy,
telecommunications, infrastructure, and education. Furthermore, a
lack of public security, corruption, and outdated bureaucratic and
regulatory structures combine to hinder Mexico's global
competitiveness and sap economic vitality.

--------------
MACROECONOMIC STABILITY UNDER FOX
--------------


3. (SBU) Mexico's next president will inherit a stable, growing
economy (Mexico 1070, 161). The Mexican economy, which is tightly
linked to U.S. economic cycles, rebounded from near zero growth in
the first years of this decade to 4.4% growth in 2004 and 3.0% in

2005. Forecasts are for continued growth of 3% to 4% growth
in 2006 and 2007. Inflation has been controlled and is expected
to remain in the current 3% to 4% range (Mexico 106, 05 Mexico
3721). Thanks to increased appetite for emerging market debt in
general and a perception of political, economic, and institutional
stability in Mexico, international investors seeking higher yields
embraced Mexican bonds.


4. (SBU) Boosted by record high oil prices, public finances have
steadily improved under Fox, with the broad measure of the budget
deficit (which includes the parastatal companies and other off-
budget items) at just 1.4% of GDP. International reserves, thanks
to oil exports, spectacular growth in remittances (Mexico 443,
2042, 2097, 2123, 2154, 05 Mexico 4186),and a healthy tourism
sector (05 Mexico 3385),have grown to nearly USD 70 billion.


5. (SBU) An able cadre of leaders at the Finance Ministry
(Hacienda) has taken advantage of the favorable environment to pay
down Mexico's foreign debt by borrowing on the domestic market,
which has grown in depth and sophistication. Total net public
debt stands at just 38% of GDP, of which foreign debt is just over
12% of GDP. To smooth any ripples created by the upcoming
presidential elections and subsequent transition, Hacienda has pre-
financed all foreign debt payments due in 2006 and 2007 (05 Mexico
5032). This favorable macroeconomic picture has kept the peso and
investor confidence in Mexico stable.


MEXICO 00002220 002 OF 008


--------------

I. REFORM THE TAX SYSTEM AND
MAINTAIN FISCAL BALANCE
--------------


6. (SBU) One of Mexico's most pressing public policy problems is
its fiscal system, which currently relies on oil-related revenues
for 37% of the federal budget (05 Mexico 5998, 04 Mexico 9273).
States and municipalities in turn rely on transfers, largely
linked to oil-revenues, from the federal government for nearly all
their revenues (05 Mexico 6865). Non-oil-related taxes, including
individual and corporate income taxes and a value-added tax (VAT),
accounted for less than 10% of GDP. This low tax base and an over-
dependence on volatile oil revenues have hindered adequate long-
term investments in education, health, and transportation
infrastructure (05 Mexico 6966, 5852) and will limit the ability
of Fox's successor to respond - responsibly - to the relentless
demands he will face from his various constituencies. The next
president will need to expand the tax take, especially from the
middle class and the rich.


7. (SBU) Due to a prohibition against private investment in the
energy sector, the government must provide the tens of billions of
dollars needed in energy investments in the coming decade. An
inefficient state-controlled energy sector also eats away some 1%
of GDP in annual electricity subsidies alone. Booming oil
revenues have largely been squandered on subsidizing electricity,
gasoline, and natural gas consumption (05 Mexico 5635). Luckily,
oil revenues have been high enough to keep public finances healthy
for the time being. However, the current system, which spends
rather than saves excess oil revenues (05 Mexico 2460),will not
withstand a major drop in oil prices without either drastic budget
cuts or increased borrowing. Proposed fiscal reforms center on
expanding the tax base by applying the VAT to food and medicine
(currently not taxed),lowering taxes on the state-oil monopoly,
Pemex, and improving state and municipal capacities to raise their
own revenues (04 Mexico 6480).

--------------
II. DEFUSE THE PENSIONS TIME BOMB
--------------


8. (SBU) Perhaps the weakest point in Mexico's longer-term budget
picture is a public pensions system with enormous and growing
unfunded liabilities which each year consume a greater portion of
the budget. The actuarial deficit (the money that would be
required to fully fund) of Mexico's pension promises to government
and parastatal workers is estimated at well over 100% of GDP (05
Mexico 1804, 922). Mexico's government workers, workers at Pemex
and the state-owned electricity companies, and employees of
Mexico's Social Security Institute (IMSS) enjoy extremely generous
pension benefits that can exceed 100% of final salary upon
retirement. These benefits are almost entirely unfunded and
payments to retirees now come out of annual budget appropriations.


9. (SBU) Without meaningful reforms, successive administrations
will see less and less money available for other public needs. A
step was made in the right direction in 2004 when Congress
mandated that IMSS, whose workers have Mexico's most generous
pension system, could not hire new employees without fully funding
their pensions (04 Mexico 6089). This reform, however, was
thwarted by a new deal between the union and IMSS following the
resignation of longtime IMSS director and union opponent Santiago
Levy (Mexico 1655, 05 Mexico 6084). A reform to the government
employees' pension system (ISSSTE),whose actuarial deficit is
estimated at 45% of GDP, has languished (05 Mexico 184). A new
president will have to find a way to move pension reform forward.

--------------
III. CONFRONT DECLINING OIL RESERVES
AND REFORM THE ENERGY SECTOR
--------------


10. (SBU) Oil revenue accounts for about one third of the GOM
budget. In December 2005 a leaked Pemex study revealed that
production in Mexico's Cantarell oil field, the second largest on
earth and representing 61 percent of Mexican oil production, would
decline by as much as 75 percent by 2008 (Mexico 1174). While
rejecting the report, Pemex executives tell us they are reasonably

MEXICO 00002220 003 OF 008


comfortable with their own projected decline rate of "less than
ten percent per year" which they call "not trivial, but not
catastrophic either." Pemex has several opportunities to make up
production lost from Cantarell, but these are medium- and long-
term projects that hinge on Pemex's ability to partner with
foreign firms to bring the necessary expertise and billions of
dollars of investment capital. Mexico's greatest potential lies
in deep water of the Gulf of Mexico, but constitutional
restrictions prevent Mexico from sharing ownership of the reserves
with a foreign partner, a necessary condition for attracting
outside participation.


11. (SBU) Investments during Fox's term will likely permit Pemex
to maintain production at relatively constant rates through 2010.
After that, Mexico's situation will require legislative changes
which would enable Pemex to maintain total production volumes near
the current 3.3 MMBD level. Without these reforms, production
will certainly fall. The only reforms now under discussion,
however, are modest changes to Pemex's corporate structure that
would allow the company to retain and invest a greater share of
its earnings. Despite reports from all political parties of broad-
based support for these changes (Mexico 1526),Congress will be
unable to pass even a limited set of changes before it adjourns
April 30. More fundamental changes to Mexico's constitution and
laws prohibiting foreign investment in the sector are not even on
the horizon right now. Discounting the possibility of a
precipitous fall in Cantarell production, and assuming oil prices
stay at least flat, Mexico's new leadership will still have to
begin to confront needed reforms immediately upon taking office to
permit the new developments needed to offset a significant medium-
term fall in production.

-------------- --------------
IV. TAKE ON THE UNIONS WITHOUT SHUTTING DOWN THE COUNTRY
-------------- --------------


12. (SBU) Few major reform proposals will move forward without
some confrontation or deal with the unions representing the
affected industries. Unions gained power and influence over many
decades of working closely with the PRI, delivering votes in
exchange for unaffordable benefits for workers and untold riches
for union leaders. Due to union protections, for example, the
state-owned Mexico City electric utility (LyFC) has what is in
effect its own construction and manufacturing subsidiaries with
some 10,000 employees. LyFC retirees not only retire at full
salary, but also receive the same annual union-negotiated raises
that active employees receive. In addition to unions for
government and parastatal employees - including the 1.2 million
strong teachers union - powerful unions exist for
telecommunications, transportation, and mining workers, among
others.


13. (SBU) When the PRI lost its absolute control over Mexican
institutions, the PRI-controlled unions became juggernauts, and
the threat of strikes in any of the major sectors they dominate is
usually enough to force the government to back down on whatever
reforms it may be contemplating. In 2004, for example, Congress
passed a reform to the IMSS pension system in the face of major
marches and protests by IMSS employees that shut down parts of
Mexico City for days - protests against a reform that only
affected future employees. IMSS Chief Santiago Levy was forced to
resign and a new contract was signed largely because the 300,000
plus strong union threatened to shut down the country's public
health system. While few would argue against the need for worker
protections, Mexico's unions have become a force against needed
reforms and in favor of economic stagnation. The economy is
especially harmed because heavily-unionized sectors (e.g. oil and
gas, telecommunications, electricity, health) are controlled by
one or few entities whose workers can literally paralyze the
country. Labor market rigidity may actually be one of the biggest
obstacles to economic growth in Mexico. Without labor market
reforms that would make it easier and less costly to hire and fire
workers, and limit their extremely generous benefits and severance
packages, investment and industrial growth here will be
handicapped.

--------------

V. PLAN FOR A TRANSITION TO FULLY
OPEN AGRICULTURAL TRADE

MEXICO 00002220 004 OF 008


--------------


14. (SBU) Mexico's next President will face one of NAFTA's last
remaining, and most emotionally charged, issues: the scheduled
full opening of agricultural trade in 2008, when all agricultural
tariffs and quotas between the three NAFTA members will be
eliminated. Two of the most sensitive products in Mexico are corn
and dried beans; considered by many to be part of Mexico's
cultural patrimony and therefore deserving of special protection.
In addition to this cultural argument, protection advocates point
out that a substantial number of small farmers rely on these crops
for their livelihood. According to 2003 data from the Secretariat
of Agriculture, Mexico has over two million corn farmers, 85% of
whom have less than five hectares, and 56% cultivate even less
than two hectares. Although significant, there are far fewer bean
farmers - 140,000 total, about half of whom have five hectares or
less.


15. (SBU) Some agricultural organizations have argued that a full
opening of agricultural trade in 2008 would cause severe social
upheavals, as large numbers of farmers are forced out of business
and further impoverished. This has led to calls to renegotiate or
delay open and free trade in agriculture. Lopez Obrador has made
some public statements that call into question his support for the
2008 opening and many observers doubt that PRD would follow
through on the commitment if AMLO becomes president. The PRI has
also suggested delaying measures that would open Mexican produced
corn and beans to NAFTA competition. However, current Ministry of
Economy officials and most politicians have stated that
renegotiating NAFTA is not an option and that the opening must
take place as scheduled. Many organizations appear realistic and
determined, and have begun developing plans to deal with the
transition and become more competitive by 2008. Others are simply
counting on the disproportionate political clout of the farming
sector to protect their inefficient industry and allow them to
muddle through. Those involved in corn trade point out that most
of these subsistence farmers are not really affected by the trade
since only about one-third of domestic corn actually enters into
the market, and Mexico is already exceeding their NAFTA quota for
corn imports. Nevertheless, the emotional arguments have led to
call to renegotiate. (Mexico 1839)

--------------
VI. STOP TALKING ABOUT COMPETITIVENESS
AND DO SOMETHING ABOUT IT
--------------


16. (SBU) Mexico's waning international competitiveness as a
destination for foreign direct investment has become an obsession
among Mexican business leaders and politicians. There are no
shortage of analyses, all of which point to badly needed reforms
to Mexico's labor code, constitutional changes to allow foreign
private participation in the energy sector, reforms to the fiscal
regime, and greater respect for rule of law. But what has been
lacking is the political will to take on extremely entrenched
interests, particularly in an increasingly charged political
environment.


17. (SBU) While it is true that the combination of relatively low
wages and proximity to the U.S. is an advantage that is difficult
to match in India and China, particularly for production of heavy
and bulky items such as automobiles and refrigerators, Mexico
cannot rely on these industries if it expects to continue
attracting high levels of foreign direct investment. (Mexico 203,
206) One obstacle is Mexico's own domestic industries, many of
them powerful monopolies that have grown fat and happy in an
environment of bureaucratic inefficiencies that indirectly protect
them from foreign competition.


18. (SBU) Although Mexico last year appointed a widely respected
official to head the Federal Competition Commission, they have
thus far been unable to level the playing field for competition in
areas where the major Mexican monopolies are dominant, including
telephones, broadcasting, and cement. New investors are thus
unable to offer competitive services and lower prices. Telmex,
for example, continues to control 95 percent of the fixed line
market and charges high prices for network access (Mexico 1123, 05
Mexico 5375). Telmex fights attempts to increase competition in
the sector, using court injunctions to delay or alter regulatory

MEXICO 00002220 005 OF 008


decisions that favor other companies. Telmex and the broadcasting
giants Televisa and TV Azteca (Mexico 1080) can derail competition
in the broadcast sector by playing off of politicians' nationalist
rhetoric and old habits of protectionism. These practices have
prevented Mexico from adopting new technologies and expanding
networks.


19. (SBU) The GOM's sale of government-owned airlines Mexicana and
pending sale of AeroMexico is proof that increased competition has
positive affects on the Mexican economy. With waning market share
and ties with the government severed, Mexicana and AeroMexico are
no longer able to protect themselves from competition. Easing of
market restrictions and increased commercial opportunities enabled
new airlines to emerge and compete with the public monopolies.
The result: airline travel is becoming more affordable for the
average Mexican and niche specialty markets are being developed,
increasing employment opportunities and Mexico's client base.

--------------
VII. INSTITUTIONALIZE THE RULE OF LAW
AND CONFRONT THE VIOLENCE
--------------


20. (SBU) When asked which single factor is the most troublesome
for U.S. businesses operating in Mexico, the answer is invariably
rule of law. Mexico's record on law enforcement, investigation,
and prosecution is poor, and Federal and local police departments
and judiciary are widely considered corrupt and ineffective.
Although this has an effect on many aspects of life in Mexico, it
has a particular impact on the business community. Without
stronger respect for the rule of law, and greater competence,
transparency, and reliability in Mexico's judiciary and law
enforcement agencies, U.S. businesses must compete with local
companies which have historically relied on political connections
and bribery - and have often thrived doing so. Even those
companies which are comfortable operating in such an environment
waste hundreds of millions of dollars annually doing so, whether
paying "fees" to have permits processed, settling lawsuits under
egregious terms in order to keep their cases out of the court
system, or fighting criminal procedures that often arise here
against plaintiffs in civil suits.


21. (SBU) Another aspect of rule of law is the effect of
criminality and violence on businesses in Mexico. As one Mexican
businessman stated, "violence is not the friend of investors," and
indeed the Mexican Institute on Competitiveness published a report
(Mexico 1536) which estimated that Mexico loses 15 percent of GDP,
or USD 1.8 billion, annually due to crime. Although no business
or association was willing to identify a specific investment that
was lost due to the security situation in Mexico, they all
acknowledge that it raises the cost of doing business here.
Security costs have doubled over the last two years and companies,
while not afraid to invest, note that they are fearful of losses
from hijackings and threats of kidnappings directed at their
executives.

--------------
VIII. CULTIVATE RESPECT FOR INTELLECTUAL
PROPERTY RIGHTS
--------------


22. (SBU) Although Mexican government officials under the Fox
Administration increased their dedication to protecting
intellectual property, the scope and scale of IPR abuses across
multiple industries continues to outpace their efforts. The
International Intellectual Property Alliance estimates over $1.25
billion in trade losses in 2005 for sound and video recordings,
business and gaming software, and books. The textiles industry is
also extremely hard hit by trademark piracy. There are an
estimated 50,000 street vendors in Mexico selling pirated
merchandise.


23. (SBU) There is general agreement that Mexico has decent,
though not perfect, IPR laws on its books. The challenge for the
new administration is not legislative, but improved enforcement.
Although PGR, IMPI and Aduanas annually seize and destroy millions
of counterfeit and smuggled merchandise, there is little follow-on
prosecution. IPR violators in Mexico are safe in the knowledge
that although they may lose some merchandise to official raids,

MEXICO 00002220 006 OF 008


there is little chance that they will face jail time or monetary
sanctions (Mexico 1522). Improved prosecution depends on two
factors - agencies must improve their investigation and case-
building techniques, and the Mexican judiciary must be willing to
enforce the law. Unfortunately, judges and magistrates here have
historically shown little understanding or appreciation for the
importance of IPR protection and the ties between IPR piracy and
other serious crimes (Mexico 969).


24. (SBU) The stakes for Mexico are high if the situation does not
improve. The Mexican Recording Industry Association estimates job
loss for their industry alone at over 25,000 due to piracy. And,
industry efforts to cut prices to compete with cheap pirated
copies means they now have little profits to invest in launching
new, home-grown talents. According to the Association president,
the last time they launched a major Mexican artist was 8 years
ago. Other industries face similar job losses and disincentives
for innovation.

--------------
IX. INVEST IN THE HUMAN CAPITAL NEEDED FOR
A KNOWLEDGE-BASED ECONOMY
--------------


25. (SBU) With over 100 million people and the 12th largest
economy in the world, Mexico could be a major economic power. But
Mexico lags badly in most socio-economic indicators (05 Mexico
7288),including the vital area of education and technology. Some
50% of Mexican adults over age 15 have had only a primary school
education. Mexico's education spending per student at the primary
and secondary levels is just 28% and 29%, respectively, of the
OECD average. Relatively well-paid teachers are simply not
delivering results. The percentage of Mexican 15 year-olds
reading at the two highest levels of a standardized test is just
6.9, compared to an OECD average of 31.8 and a U.S. figure of
33.7. This neglect of education and a general lack of
entrepreneurial spirit, perhaps quashed by decades of corrupt PRI
rule that promoted dependence on the state, have resulted in a big
lag in technological innovation and adoption. This lag will
handicap Mexico's prospects in an age of globalization where the
creation and adoption of technology are keys to improved
competitiveness.


26. (SBU) Mexico's lack of global competitiveness, coupled with
government bureaucracy, deters potential innovators, especially
Mexicans, from setting up business in Mexico. Lengthy patent
processes, a lack of markets for specific products, and a lack of
venture capitalists willing to risk money on new companies with
little or no-track record hinder the development of Mexico's high
technology sectors. In addition, most businesses and citizens
have little access to more common technological tools like the
internet and they lack the knowledge of how to efficiently utilize
them.


27. (SBU) OECD statistics confirm the need for Mexico to nurture
its technology sector. Mexico has just one-third the OECD average
of internet users per 1,000 people, and just one-fifth the U.S.
figure. Mexico has just 0.8 broadband internet subscribers per
100 people vs. an OECD average of 10.1 and 24.9 in Korea, one of
its global competitors. The International Telecommunications
Union's "Digital Access Index" ranks Mexico 64th, well behind
nearly all other OECD members. If modern economies depend and
thrive on innovation, Mexico, judged by patent applications, is in
trouble. With one-third the U.S. population, Mexico receives only
one-fourteenth the number of patent applications as the U.S., and
of those, only 4% are filed by Mexicans (05 Mexico 7316). In
order for Mexico to increase access, utilization, and technology
investment, it will have to find new ways to attract foreign
investors and build global confidence in its technology and R&D
sectors. Streamlining the patent process, easing licensing
regulations, and developing technology investment incentives would
also boost output, lower costs, and increase access in the sector.

--------------

X. ADDRESS MEXICO'S PERSISTENT POVERTY
--------------


28. (SBU) For a country as rich in natural resources as Mexico,
and with its physical proximity to the largest market in the

MEXICO 00002220 007 OF 008


world, Mexico's poverty is a persistent national shame. This is
perhaps Mexico's greatest economic challenge, and not one that can
be solved by simply tweaking one policy or another. To Fox's
credit, the "Oportunidades" program has been recognized as one of
the best government poverty reduction programs in Latin America
(recently featured in the Economist). It is structured as an
incentive program for families (in rural areas particularly) to
keep kids in school and to make regular visits to the doctor. The
incentives include support payments and a discount/coupon system
for families to have access to lower cost staple foods. A World
Bank study indicated the Oportunidades coverage of 4 million
families (now covering more than 5 million of the poorest families
living in rural areas) resulted in increased enrollment for both
boys and girls in middle school.


29. (SBU) Mexico's widespread poverty has nevertheless created the
phenomenon of large numbers of migrants traveling legally or
illegally in the U.S. to earn a living and support their family.
This in turn has created a massive remittance flow to Mexico -
largely to Mexico's poorest regions - that itself has created
certain opportunities for economic development. The level of
remittance income in 2005 grew by 17%, to $20 billion USD, and was
up 27% in January 2006 (to $582 million USD) compared to January

2005. Officially, remittances are equal to approximately 2.4% of
national GDP, while unofficial sources claim a much higher total
(some as high as 10%). Remittances may equal as much as 30% of
the GDP of rural states such as Michoacan and in some rural
agricultural communities, remittances are responsible for 60-70%
of the total economic activity.


30. (SBU) There are numerous organizations attempting to take
advantage of the opportunity presented by the skyrocketing flow of
remittance income, but they are inadequate to promote large-scale
investment and capital-building. The government development bank,
Bansefi, has been leading these efforts for the GOM; other
organizations, including USAID, also have programs encouraging
rural development by bringing residents into the formal financial
system. Banks, which have traditionally shied away from offering
services in rural areas, now claim to be reaching out to
previously under serviced populations. However, in reality, most
national banking chains are still avoiding communities of less
than 25,000 inhabitants, where a majority of remittance recipients
live. The next administration will face the challenge and
opportunity of turning remittances - Mexico's second largest
source of foreign exchange (after oil) - into a productive engine
of economic growth and continuing the expansion - begun under Fox
- of the financial sector into rural areas.

--------------
CONCLUSIONS AND COMMENT
--------------


31. (SBU) These are considerable challenges, and there is no
reason to believe that any of the three major candidates will be
able to confront all of them, or even many of them, in a concerted
and effective way. These challenges are all interdependent.
Increased competitiveness is dependent on lower energy,
telecommunications, and transportation costs, as well as a better-
educated workforce and greater use of technology. Energy reform
is impossible without some form of fiscal reform that would
replace lost oil-related budget revenues. Increased investments
in education, health, and infrastructure are made much more
possible by pension and fiscal reforms. Pension, energy, and
regulatory reforms, are dependent on dealing with unions. It will
be very difficult for future president to successfully link these
various reforms into a comprehensive strategy for the next six
years, but their interplay will be impossible to avoid. Hanging
over all these challenges is one that is more intangible, though
nevertheless critical: how not to squander the macroeconomic
stability that has prevailed throughout the Fox years. The
challenges facing Fox's successor will be difficult enough, and
the pressures on him sufficiently daunting, without having to
confront an environment of inflation, high interest rates, and
stagnant growth.


32. (SBU) Fundamentally, Mexico is a land of privilege (or lack
thereof) rather than opportunity. Its political debates, as
Mexican columnist Luis Rubio often points out, tend to be backward-
rather than forward-looking. There is little awareness among the

MEXICO 00002220 008 OF 008


Mexican general public of how fast the world outside is changing,
and how much Mexico needs to change just to avoid slipping further
behind. The next president, even if genuinely reform-minded, and
even if he has a working majority in the Congress, will only have
enough political capital to try two or three major reforms. The
protected special interests will ensure that those efforts will be
difficult and drawn-out, and likely will lead to a scaling-back
from the original level of ambition. But, as this message
indicates, two or three major reforms will not be enough. The way
out of the dilemma for Mexico is to undergo some sort of sweeping
cultural transformation, leading to a strong national consensus in
favor of policies leading to higher productivity and economic
growth. The visionary leadership that might be capable of
inducing such a transformation is not (so far) evident in the
three major candidates currently running for president in Mexico.
Such transformations have taken place in East Asia, but so far,
not in Mexico or elsewhere in Latin America. We need to continue
to push for growth-oriented policies here, through both bilateral
and trilateral mechanisms. But the leadership to make them happen
must be home-grown.
GARZA