PRI GOVERNORS NEEDED TO ACHIEVE STRUCTURAL REFORMS

UNCLAS SECTION 01 OF 02 MEXICO 003961 SIPDIS SENSITIVE SIPDIS STATE FOR WHA/MEX, WHA/EPSC, AND EB/IFD STATE PASS USAID FOR LAC:MARK CARRATO USTR FOR JMELLE TREASURY FOR IA MEXICO DESK:JASPER HOEK COMMERCE FOR ITA/MAC/NAFTA:ANDREW RUDMAN E.O. 12958: N/A TAGS: ECON EFIN ELAB ENRG PGOV MX SUBJECT: PRI GOVERNORS NEEDED TO ACHIEVE STRUCTURAL REFORMS (FIRST OF THREE-PART SERIES ON MEXICAN FEDERAL-STATE RELATIONS) -------------- Summary and Introduction -------------- ¶1. (U) Summary: Given the upcoming Mexican government transition and the slim margin with which a new president will take office, this is a good time to review federal-state relations and their implications for Mexico's prospects for structural change. The views expressed in this three-part series represent a summary of discussions with a number of specialists in this area, including GOM officials, think tank analysts, and academics. We are presenting the analysis in three parts. This report contains an overall summary and early perspectives on when and with whom Mexican presidents need to negotiate at the state level in order to pass legislation. In addition, the report covers current views regarding the ability of a new administration to pass structural reforms. ¶2. (SBU) Summary continued: A major conclusion is that fiscal reform, which many analysts believe is the least contentious of Mexico's structural needs, seems possible in the nearer term; reforms requiring constitutional change will remain elusive. While federal transfers form the major source of state revenues, we were told that the GOM's ability to compel state backing for reforms is severely limited. Most analysts stress that the new president will need to rely on his negotiating skills to build political support across the political and federal spectrum. By contrast, the governors have a variety of tools with which to indirectly influence national legislation. As the new administration prepares to take office, many see PRI governors as key to helping the next president achieve momentum on one or two reform initiatives. End summary. -------------- Negotiate, Senor Presidente -------------- ¶3. (SBU) Econoff's discussions with private sector political analysts underline the perception that the Mexican president needs to be a skilled negotiator willing to reach out to the political opposition and the states. President Fox is broadly viewed as not having exercised effective political consensus-building skills, and his reform efforts were routinely stymied by the obstructionist tactics of the PRI. Many observers believe that Felipe Calderon would be a better negotiator than his predecessor and face more favorable political conditions owing to the PRI's poor showing in the recent elections. ¶4. (SBU) By most accounts, it remains too early to tell with whom the next president should focus negotiations in order to build successful coalitions. The general view is that it would make sense for him to wait and see how internal divisions within the PRI shake out, let the progressive-minded governors take control of the PRI, and then reach out to those who support negotiations with the PAN. Those governors could prove crucial to helping the next president build a majority in Congress. Our interlocutors stressed that the president will need to negotiate directly with the key governors and central party structures, but the question will be at what price is he able to gain their support. ¶5. (SBU) Given the PRD's large political base, private sector analysts and Mexican government officials also believe the next president should work to gain PRD support to the extent possible for macroeconomic reforms. However, as one economist put it, the PRD's ideology and expected lingering bitterness over the 2006 presidential election will dampen prospects for substantive PAN-PRD cooperation in the near term. That said, there are indications that Convergencia, a political party in coalition with the PRD, would be open to macroeconomic reforms. -------------- Reform on the horizon? -------------- ¶6. (SBU) Senior GOM economic officials and private sector economists believe that Mexico's next president will face MEXICO 00003961 002 OF 002 more favorable conditions than did President Fox for passing some structural reforms. They give great credit to the professionalism and stability of key institutions such as the Bank of Mexico and Hacienda (Treasury). That said, the political system is being re-written in the aftermath of the 2006 national elections, which will likely lead to the emergence of new political forces. At this point, and for the first time in six years, Mexican analysts perceive that pro-reform parties will have space for political maneuver and the possibility of building a national consensus on one or two major reform challenges. No analysts were willing to venture more optimistic scenarios at this stage. ¶7. (SBU) Over the coming years, PAN and PRD governors can be expected to dance to the tune of their party leadership. The current consensus is that PRI governors, who tend to be more pragmatic than PRI members of Congress, could hold the key to advancing macroeconomic reforms. As the PRI reflects on its electoral losses and seeks to set a new course for the party, it is likely that the governors will play a major, possibly even dominant, role. Many PRI officials recognize that their political party paid a heavy price in the 2006 national elections for having publicly been viewed as obstructing reform initiatives during the Fox administration. We were told that this could be a motivating factor for PRI governors, especially those with a stronghold in the north who depend on Mexican competitiveness. This dynamic, combined with the plurality the PAN now enjoys in Congress, means that Mexico may face its best opportunity yet to legislate fiscal reform and secondary reforms relating to more labor flexibility, greater competitiveness, and increased autonomy for Pemex. Still, energy reform requiring constitutional change remains much more uncertain in the near term. Visit Mexico City's Classified Web Site at http://www.state.sgov.gov/p/wha/mexicocity GARZA