ENGAGING THE NEW MEXICAN ADMINISTRATION ON

UNCLAS MEXICO 003324

SIPDIS

SIPDIS

STATE PLEASE PASS TO USAID

E.O. 12958: N/A
TAGS: PREL EAID SENV MX
SUBJECT: ENGAGING THE NEW MEXICAN ADMINISTRATION ON
DEVELOPMENT AND ENVIRONMENTAL ISSUES

REF: MEXICO 3322 AND PREVIOUS


1. Summary: This is the fifth in a series of six cables on
transition issues in Mexico. The central development
challenge for Mexico - and perhaps the main challenge for its
new president -- is reducing the poverty that continues to
afflict so many here and which drives so many to emigrate.
Complicating that task is the fact that Mexican
competitiveness has been slipping. Fixing that will require
local infrastructure development (which in turn requires
capital),unleashing the potential of small businesses, and
improving education. Mexico in addition faces a number of
environmental challenges, some of which, such as border water
issues, impact directly on the U.S. End summary.

Development
--------------


2. Mexico faces a steep development challenge. Despite
recent progress in reducing levels of extreme poverty,
perhaps a quarter of Mexico's 100 million citizens still live
on less than four dollars a day. The lack of viable
infrastructure hampers economic development, particularly in
rural areas. Each year hundreds of thousands of university
graduates spill out into an economy that has not created
enough jobs. Mexico's natural resources such as water and
forests that are essential to the country's long-term future
and greater prosperity in rural areas are being depleted.
Mexico's meeting this mounting challenge head-on is
ultimately the key to stemming the seemingly boundless
migration north of millions of its citizens in search of
better jobs and wages. Mexicans want more and better
opportunities in their own country - the new president will
have to address this as Job One.


3. Mexico's development challenge at its core is the
country's steadily slipping global competitiveness standing.
Reversing the trend is clearly a Mexican responsibility. But
as Mexico's challenge is inextricably linked to the migration
issue, the U.S. can and should play a catalytic role in
helping its neighbor strengthen competitiveness, increase
prosperity, and create jobs here. The USG should target
assistance and engage with the new administration early to
focus on Mexico's competitiveness, a topic that resonates
with all three major presidential candidates. Investors and
economists would point to a long and broad list of issues as
essential factors in Mexico's development challenge and
improving competitiveness. We propose just the following
three themes for immediate engagement with the new
administration: unleashing local infrastructure development;
small business as the engine of growth; and education and a
competitive work force

Unleashing Local Infrastructure Development
--------------


4. Mexico has a significant infrastructure deficit. This can
be addressed by increasing state and city access to Mexico's
dynamic capital market. Although the market is open to state
and municipal borrowers, private rating agencies believe it
can go much further - and ultimately become the largest
municipal bond market in the world after the U.S. To tap
Mexico's full potential, two key features of the U.S. market
-- municipal bond insurance and federal tax-exemption - are
worth exploring.


5. Engagement: All of the potential winners of Mexico's July
2 presidential election have promised job creation. They
have clearly and correctly linked the issue to migration.
Whoever the winner is, he will need to move quickly to show
results on this front, and his success or failure here will
define his administration. If the USG can offer advice and
modest support to efforts to generate private sector
investment in the infrastructure improvement needed for job
creation, this will be an attractive prospect to new
administration hungry for good ideas.


6. Activities:

-- We should offer the new GOM economic team a high-level
seminar on the potential for municipal bond insurance in
Mexico, including top U.S. Treasury and SEC officials, as
well as rating agencies and investment banks.

-- In the U.S. federal tax-exemption translates to lower
interest rates and cost savings for taxpayers. Mexican
E

states and municipalities currently pay 15 percent in
value-added-tax on their financing transactions. We should
propose that the new president order a study to look at the
impact of tax exemption for state and municipal
infrastructure financing. If this study concludes that the
long-term benefits of tax exemption override short-term
revenue concerns, and if the bond insurance feature resonates
with the GOM, we are prepared to provide assistance to them
to implement either or both changes.

Small Business as the Engine of Growth
--------------


7. The growth of the small business sector has been the key
to economic expansion and job creation virtually everywhere.
Small and medium enterprises (SMEs) in Mexico account for
almost half of the country's employment and 50 percent of its
GDP. Yet, the sector still faces serious obstacles.


8. Engagement: We should propose a high-level discussion on
SME development for the transition team, followed up with a
bilateral cabinet-level meeting within the first six months
of the new presidential term involving a range of Mexican and
U.S. agencies, as well as key chambers and business
associations. The goal would be to focus attention and
attain greater coordination on small business among the GOM's
and other donor programs.


9. Activities:

-- The new administration should be encouraged to do more to
improve the policy environment at the micro-level to
facilitate SME operations (including access to credit) and
permit continuous entry of new entrepreneurs.

-- We recently financed a World Bank Doing Business survey
here to measure how Mexican cities treat key issues like
business registration and contract enforcement. Doing
Business generated wide interest, and the GOM plans to use it
as an annual survey comparing all 32 states. With this as a
guide, we can approach the new administration, offering
assistance to help them make the most pressing policy
improvements.

Education and a Competitive Work Force
--------------


10. Access to quality education is fundamental to
competitiveness. While Mexico has advanced significantly in
terms of access, a significant gap in the quality of
education remains between rural and urban areas.


11. Engagement: The U.S. should support Mexico strategically
in closing the gap, echoing President Bush's enhanced
emphasis on education and the competitiveness theme, and
building on our experience with our widely supported
Education USA and university partnership programs.


12. Activities:

-- The Mission would look to support the new government's
education team in attaining the lofty goals already set for
quality education in rural schools.

-- The U.S. should engage with private organizations and
firms (Intel for example, is working with us to identify
areas for investment) in partnerships to support the
implementation of the Education Secretariat's (SEP)
Technology in the Classroom program in Grades 1-4.

-- In higher education, the U.S. should expand university
partnerships with Mexico that target competitiveness areas,
for example co-sponsoring with the Mexican National Science
Commission (CONACYT) scholarships, joint research, and both
faculty and student exchanges in key science and technology
areas.

The Environment
--------------


13. Environmental degradation and pollution impose a serious
drag on economic growth, incurring high costs and diverting
resources that could be better used to increase
competitiveness. Three issues - the border environmental
picture, air quality, and water -- merit early attention as
we engage with the new administration. Commercial promotion

of leading-edge U.S. environmental technology and services
will complement our efforts on these issues.


14. Engagement: There is no more important place to start
than where our countries physically come together - along a
2,000-mile border. Border 2012 is the third border plan
between U.S. and Mexican environmental authorities, but the
first to cover a ten-year planning horizon and to publish
hard numerical goals for each country to improve health and
the environment on the border. Border 2012 is widely
supported by state, municipal, and other partners who formed
this common agenda to address fundamental border issues. The
Mexicans are again falling behind in their water deliveries
to the Rio Grande Valley. The State of Texas has begun to
notice the low level of deliveries and is pushing for talks.
Mexico will need to deliver almost 600,000 acre-feet before
the current five-year delivery cycle ends in September 2007
to avoid another deficit situation. While air quality in
Mexico City has improved, it remains an issue - here and in
other cities. Regulations are in place for gasoline, cars
that take advantage of low sulfur fuel, and diesel engines.
However these regulations will not be implemented if funding
is not made available for converting refineries.


15. Activities:

-- As we near the halfway point, we recommend the USEPA
Administrator meet in October or November with Mexico's new
environmental players to review results of Border 2012 and
renew our mutual commitment to the plan.

-- To avoid an unnecessary irritant in US-Mexican relations,
the new Mexican government should be strongly encouraged by
senior Department of State officials to deliver sufficient
volumes of water in the remaining months of this cycle to
fulfill its treaty obligation.

-- The U.S., via the SPP environment and trade working group,
should urge continued support for the refining of ultra-low
sulfur fuels.


Visit Mexico City's Classified Web Site at
http://www.state.sgov.gov/p/wha/mexicocity

BASSETT