SCENESETTER FOR DEPUTY SECRETARY'S TRIP TO MEXICO

C O N F I D E N T I A L SECTION 01 OF 03 MEXICO 005535

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E.O. 12958: DECL: 10/19/2017
TAGS: PGOV PREL SNAR PTER PINR ECON ELAB ENRG PHUM
SENV, MX
SUBJECT: SCENESETTER FOR DEPUTY SECRETARY'S TRIP TO MEXICO
OCTOBER 28 - NOVEMBER 1

Classified By: CDA Leslie A. Bassett. Reason: 1.4 (b),(d).


1. (C) Ambassador Garza and Mission Mexico warmly welcome you
to Mexico City. Your visit is an opportunity to underscore
the broad, deep relationship between the U.S. and Mexico and
our appreciation for Calderon's demonstrated leadership. His
administration is prioritizing security and economic growth
through an ambitious federal campaign to combat organized
crime and implement structural reforms designed to promote
competitiveness. The most important challenges his
government faces are maintaining the upper hand in the battle
against violent crime and making greater headway against
poverty and its accompanying social ills. The U.S. and
Mexico continue to expand the solid set of institutional
relationships that allow us to work productively on common
priorities, even as tensions surrounding immigration issues
lead some Mexican political leaders to approach the bilateral
relationship in more insistent tones.
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Security First
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2. (C) Mexico is key to USG success in combating trafficking
in drugs, persons, arms and precursors, terrorism, and other
transnational threats. Since entering office last December,
Calderon's government has moved with unprecedented speed to
improve public security, not waiting for the USG and often
taking us by surprise. Specific measure include: launching
aggressive anti-drug operations into ten states; raising pay
for the military; replacing numerous high-ranking federal
police officers in an anti-corruption campaign; launching a
billion dollar project to create real-time interconnectivity
between all police and prosecutors, as well as a unified
national crime database; and, proposing congressional bills
to unify federal police forces and reform the judicial
system. The GOM has greatly strengthened law enforcement
cooperation with the USG, while a more flexible attitude by
the courts has allowed for the extradition of a record 72
criminals to the U.S. this year, already exceeding 2006's
record level. The GOM is now extraditing cartel kingpins of
significance and has seized record hauls of cocaine,
methamphetamine precursors, and bulk cash and other assets.


3. (C) The ongoing security campaign has reduced the broad
geographic range and legal impunity which the cartels have
traditionally enjoyed in Mexico, although progress is tenuous
and uneven. Addressing personal security challenges ranks
regularly as the number one priority in public opinion polls,
and the most recent polls show that 83% of the public
supports military involvement to fight drug-traffickers.
While some Mexican pundits worry that the campaign so far
represents more "smoke and mirrors" than a meaningful
reduction in organized crime, in fact Calderon has
accomplished more in his first year than almost any other
recent Mexican president in countering unlawfulness and
murder. But the human price Mexico has paid has been high:
in the past 10 months, almost 250 police and military
officials have been killed. Mexican political leaders are
not shy about reminding us that U.S. demand for drugs, money
laundering, and illegal arms flows from our side of the
border help fuel Mexico's drug war.


4. (C) Members of the political opposition and human rights
groups have expressed concern about the continued use of the
military for internal security and the potentially corrupting
influence this fight poses to the institution. The
semi-autonomous National Human Rights Commission (CNDH) has
investigated and reported on several incidents which occurred
in the course of military operations. To date, the
Secretariat of Defense has shown a willingness to deal with

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abuses committed by soldiers, including investigating
individuals accused of violations in the state of Michoacan
and prosecuting soldiers who killed a family at a roadblock
in the state of Sinaloa. A number of outstanding allegations
remain pending investigation.


5. (C) EPR attacks on Pemex pipelines in July and early
September have added another dimension to Mexico's security
concerns, raising the specter of home-grown terrorism.
Despite GOM protests to the contrary, it seems inevitable
that the military and civilian security forces will divert
resources to protect the pipelines and other major assets
from future attacks, which might also contaminate the
investment climate. Continued criminality and violence
countrywide (directed with virtual impunity) and now a new
spate of guerilla activity will pressure the government to
show it retains the upper hand and can overcome these
threats. Calderon also recognizes that Mexico's own southern
border remains extremely vulnerable to immigration,
trafficking in persons, and the smuggling of contraband, and
that securing this border is of vital importance to U.S.

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security.

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Competitiveness is the Key
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6. (C) The Calderon administration has registered some
impressive economic accomplishments during its first year,
maintaining macroeconomic stability, keeping inflation at a
reasonable 4% for 2007, and lowering barriers to trade. The
president secured congressional approval of the 2007 budget,
and won passage of an unpopular but necessary government
workers' social security reform. His effort to reform
Mexico's tax system paid off September 14 when Congress
approved a tax reform that will boost government revenues by
2.1% of GDP by 2012. This string of victories will help
ensure sufficient government revenue to meet rising health
and pension commitments, but is not enough to ensure
sufficient revenue in the medium term as oil production
continues to decline. Much remains to be done to arrest
Mexico's slipping global competitiveness. Mexican growth
will likely register a disappointing 3% in 2007. The GOM's
challenge is to implement structural reforms required for
growth sufficient to raise 40% of Mexicans out of persistent
poverty.


7. (C) Oil revenues cover 40% of the government budget.
While high oil prices are providing a temporary reprieve,
they are also distracting officials from the hard task of
energy reform. If current trends continue, Mexico will run
out of oil in eight to 10 years. Mexico likely has
sufficient oil reserves, but lacks investment capital and
know-how to extract much of it, especially deep water
reserves. Reversing dangerously declining oil production
would require a genuine energy reform to end the
constitutional ban on private sector involvement in the
petroleum sector. Many doubt this country is ready to
overcome the strong nationalist taboo on private investment
in oil. Mexico also needs to address the detrimental impact
its monopolies and oligopolies have on competitiveness,
entrepreneurship, and foreign investment.


8. (C) Calderon has demonstrated limited readiness to take on
Mexico's powerful media companies, and the somewhat
strengthened Federal Competition Commission is standing up in
some areas to TELMEX (the private sector telecom monopoly
owned by Carlos Slim). Yet it remains to be seen to what
extent Calderon is prepared to take on entrenched monopolies,
especially those that helped contribute to his election in

2006. The GOM needs to curb labor rigidities and rampant
infringement of intellectual property rights -- both of which
negatively affect the country's business environment and job
creation. Meaningful education reform is essential to
prepare Mexican youth for the 21st century. Yet Calderon has
so far proved reluctant to move on this front, in part given
his alignment with the powerful teachers' union leader Elba
Esther Gordillo.

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Environmental Issues
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9. (SBU) Despite Calderon's criticism of the U.S. climate
change record, he remains committed to cooperating with us,
and sees Mexico as a natural bridge between the developed and
developing worlds on this issue. On water, Mexico has
finally delivered the remaining 14 percent of Rio Grande
water owed the U.S. for the 2002-2007 water cycle under the
1944 Treaty. Our job now is to raise the priority of these
deliveries in Mexico's next Rio Grande water allocation plan.
In the West, the International Boundary and Water Commission
(IBWC) is exploring with Mexico how we can reduce allocations
from the Colorado River to be compatible with the ongoing
drought in the area.

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A President with Increasing Political Capital
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10. (C) Having completed nearly 11 months in office, Felipe
Calderon has crafted an image as an activist president,
consolidating his own political position and the power of the
Mexican state -- no small feat given tensions surrounding the
2006 elections and the law enforcement challenges the country
faces. The president is known for excellent political
instincts and is choosing his battles carefully, moving
forward on priorities in a way commensurate with his
political capital. It will take some time before the full
impact of his security and economic initiatives is known, but
Calderon has in his favor 68% personal approval ratings and
impressive political skills. Additionally, Mexico's

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legislature has demonstrated increasing political maturity
and begun to advance critical bills.

11. (C) Yet the political climate here remains conflictive,
with the PRI willing to negotiate with the president's party
only when convenient and the PRD seeking to exact steep
concessions to overcome its predisposition to block
legislation. Some observers worry that the president is not
pushing hard enough for comprehensive reforms and that PAN
collaboration with the PRI, where it occurs, will further
entrench the economic privileges Mexico's elites have long
enjoyed at the expense of Mexico's democratic institutions
and long-term development. Although considerably weakened as
a result of its confrontational tactics, the PRD can still
slow Calderon's momentum. The leftist party remains a voice
for millions of Mexicans trapped in poverty, and the
simmering social tensions that fed the candidacy of failed
presidential hopeful Andres Manuel Lopez Obrador have hardly
evaporated. Prosperity ranks with security as the key
priority in the minds of most Mexicans. If his programs and
policies prove unsuccessful in generating the kind of growth
necessary to create sufficient jobs and reduce poverty,
Calderon could quickly find himself vulnerable to a
reinvigorated political opposition. All three of the main
political parties have their eyes on bellwether 2009
congressional elections.

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U.S.-Mexico Relations
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12. (C) The Calderon government has demonstrated pragmatism
in its posture toward the United States and bilateral
cooperation, particularly in law enforcement, has never been
stronger. However, the failure of immigration reform in the
United States was a political setback for the president. The
result is that he enjoys less political space in which to
openly cooperate with the U.S. on issues of mutual bilateral
importance, and the GOM is careful to term any discussion of
security cooperation as an outcome of our common struggle
against organized crime rather than as assistance. Your
visit is an opportunity to outline security cooperation, and
demonstrate that despite occasional tensions in the
relationship over issues like immigration, bilateral ties are
deepening and expanding to the good of both our societies.
It will also be a reassuring sign of our dedication to one of
our most important hemispheric allies and support for the
Calderon administration.


Visit Mexico City's Classified Web Site at
http://www.state.sgov.gov/p/wha/mexicocity and the North American
Partnership Blog at http://www.intelink.gov/communities/state/nap /
BASSETT