AN ALTERNATIVE VIEW OF PRESIDENT CALDERON'S

UNCLAS SECTION 01 OF 05 MEXICO 001271 SIPDIS SENSITIVE SIPDIS STATE FOR A/S SHANNON STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, AND DRL/AWH STATE FOR EB/ESC MCMANUS AND IZZO USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD USDOC FOR ITS/TD/ENERGY DIVISION TREASURY FOR IA (RACHEL JARPE, ANNA JEWEL) DOE FOR INTL AFFAIRS KDEUTSCH, ALOCKWOOD, AND GWARD NSC FOR RICHARD MILES, DAN FISK EXIM FOR MICHELE WILKINS STATE PASS TO USTR (EISSENSTAT/MELLE) STATE PASS TO FEDERAL RESERVE (ANDREA RAFFO) E.O. 12958: N/A TAGS: ECON ELAB PINT PGOV MX SUBJECT: AN ALTERNATIVE VIEW OF PRESIDENT CALDERON'S MANAGEMENT OF THE MEXICAN ECONOMY -------------- Summary -------------- ¶1. (SBU) Econoffs met with several contacts associated with the Democratic Revolutionary Party (PRD) in recent months to better understand how they view the Calderon administration,s management of economic policy. Although these contacts generally agree with the Calderon government about what needs to be done (e.g. creating jobs, fighting poverty, reversing Pemex,s downfall),they have different ideas on how to accomplish these goals. Several of the ontacts remarked that Calderon has done little to address such important issues as poverty, education, monopolies, tax evasion, and the sustainability of oil production. Their views challenge a neoliberal approach to economic management by reserving an active role for the government in economic planning and the promotion of social welfare. Several of the contacts favored renegotiating NAFTA, and were more pessimistic than the GOM about prospects for economic growth. Two PRD deputies said that they would like to continue having an open dialogue with the Embassy. End Summary. -------------- Critical of Calderon,s Reform Efforts -------------- ¶2. (SBU) Econoffs met with several contacts associated with the Democratic Revolutionary Party (PRD) in recent months to better understand how they view the Calderon administration's management of economic policy. Recurrent themes during these meetings were how the Calderon government lacked a long-term strategy for tackling Mexico's economic problems, and how the GOM has done little to address such important issues as tax evasion, poverty, education, and Pemex's decline. Fiscal Reform -------------- ¶3. (SBU) Pablo Trejo Perez and Juan Guerra Ochoa -- PRD deputies on the Chamber of Deputies' Finance Committee -- told Emboffs that the 2007 fiscal reform failed to reduce exemptions and special tax regimes, improve the efficiency of the tax system, or crack down on tax evasion. They remarked that tax evasion and a lack of control at the borders result in billions of dollars of lost revenue. Although the deputies favor exemptions for food and medicine on the value-added tax because the poor spend a large proportion of their income on these items, they believe the income tax should be used to bring in more resources. This opinion was echoed by Aldofo Hellmund, a businessman who lives in Tampico, who added that the new tax regime disproportionately affects smaller companies because large firms have lawyers that help them reduce their tax burden. The PRD deputies said the fiscal reform should have boosted government revenues by 6-7% of GDP, and that, in their opinion, the 2007 reform represents a "lost opportunity" because it will be difficult to pass another reform during this sexenio. (Note: The 2007 fiscal reform is expected to increase government revenues by 2.1% of GDP by 2012. End Note.) These additional resources could have been used to boost social spending in poor communities, something the deputies strongly advocated. Pension Reform -------------- ¶4. (SBU) Trejo Perez and Guerra Ochoa criticized the 2007 state workers pension reform, noting that it did not fix the fundamental problem but rather gave an "illusion of progress." The deputies and their staffers stressed how the new system of individual accounts does not guarantee a MEXICO 00001271 002 OF 005 pension high enough for a "dignified retirement." Guerra Ochoa said that a person would have to work for 50 years without missing a single day to have a retirement that is equal to three times the minimum wage (roughly USD 15 per day). Energy Reform -------------- ¶5. (SBU) Energy reform was a hot topic for several contacts. Hellmund told Econoffs that Mexico's most pressing economic challenge is reducing its dependence on crude oil revenues. The deputies and Senator Arturo Nunez -- an ally of former PRD presidential candidate Andres Manuel Lopez Obrador (AMLO) -- remarked that Pemex needs more resources to invest in exploration and to modernize its facilities. To accomplish this, the government would have to stop treating Pemex like a piggybank, clean up deep-rooted corruption at the company, and make Pemex more efficient. The deputies and Rogelio Ramirez de la O -- a Mexico City economist who headed AMLO's economic policy team in the run up to the 2006 presidential election -- were in favor of Mexico building oil refineries, a proposal that the Finance Secretariat (Hacienda) has opposed. The PRD deputies and Ramirez de la O said Pemex needs to develop a long-term vision for its future -- its financial planning in particular. Trejo Perez and Guerra Ochoa opined that Mexico would have a "crisis" in 5-6 years unless Pemex is allowed to develop new technology and invest in itself. ¶6. (SBU) Ramirez de la O -- who unlike the PRD deputies favored some private sector participation in Mexico's energy sector -- told Econoff that the energy reform proposal Calderon tabled earlier this month is "timid" and "lacks conviction." He remarked that the government should have proposed changes to the constitution, but did not take this step because it wanted to minimize political costs. Ramirez de la O believes that energy reform will eventually be approved because the government needs "to check the box" on energy reform, but lamented that it will end up being "distorted" and fail to fulfill its original goal. He added that Congress will follow its usual pattern of only approving reforms when there is a non-transparent benefit to a particular businessman. In this respect, he noted that if allowing Pemex to do business with the private sector allowed Carlos Slim's company to gain a near monopoly on pipelines and transporting fuel, Mexico would yet again be harmed by another monopoly setting high prices for basic services. Educational Reform -------------- ¶7. (SBU) The PRD deputies and Hellmund (like most Mexico observers) agreed that educational reform is crucial. They were pessimistic, however, about the prospects for reform because of the government's "alliance" with the teachers union. Hellmund remarked that Calderon was "in bed" with the union, while the deputies called the union's relationship with political actors (mainly the PRI) "incestuous." Hellmund told Econoffs that AMLO would have been tougher with the teachers union, noting that when union leader Elba Esther Gordillo Morales offered to help AMLO win the election, he turned her down. AMLO wanted to be able to pass educational reform without "owing" the union. ¶8. (SBU) The deputies remarked that some teachers get paid for "doing nothing." They added, however, that teachers often face challenging conditions, particularly in sparsely populated areas, where resources are scarce and teachers sometimes have to teach several grades in the same classroom. Moreover, some teachers work a second job to make ends meet, so are not around after class to help students. The deputies MEXICO 00001271 003 OF 005 said that another serious problem that needs to be addressed is the inefficient allocation of resources. They want more spending on basic education and universities, and lamented the fact that students from well-off families get an even bigger advantage over other children because they are able to attend private schools. Labor Reform -------------- ¶9. (SBU) The PRD deputies did not comment on labor reform, but Hellmund remarked that this was not important for him because employers can easily fire employees, so even though Mexico has rigid labor laws, the labor market is flexible. (Comment: This assessment is significantly at odds with what other Embassy contacts say about Mexico's labor laws. Embassy labor and American Chamber of Commerce affiliated labor lawyers and human resources specialists often cite how difficult it is to fire employees. When an employee is fired, Mexican labor law requires the payment of a substantial severance package called "liquidation." Liquidation consists of three month wages plus additional payments based on the employee's years of service. Hellmund may be assuming that many employers simply ignore this law, but most legitimate companies do pay liquidation. Many Mexican employers avoid hiring new employees when possible due to the high cost of firing workers. A recent World Bank report on Mexico's informal economy said that the country's labor laws make it one of few counties in the world where unemployment can rise when the economy picks up because firms use their additional revenues to make these liquidation payments. End Comment.) -------------- NAFTA Failed to Deliver -------------- ¶10. (SBU) The PRD deputies said that NAFTA failed to produce the benefits that had been promised. They commented that the free market does not take care of the small farmer who only earns a pittance for his crop. Low salaries for some farmers, combined with the fact that many members of newer generations are not farmers but cannot find jobs in other sectors, prompt workers to migrate to the United States. For these reasons, they favored renegotiating NAFTA. The deputies also criticized the government for not having a policy on agriculture. ¶11. (SBU) Hellmund's comments echoed those of the deputies. He told Econoffs that Mexico's problems with agriculture and the January 2008 lifting of the remaining tariffs on sensitive agricultural products under NAFTA will create "social difficulties" for the government. (Note: The final opening of the corn, dried beans, milk powder, and sugar markets was phased in over a period of 14 months. End Note.) High corn prices are making the effects less pronounced, but once these prices fall, producers will be in a tough spot. Although Mexico is competitive in fruits and vegetables, it cannot compete with the U.S. in grain productivity. For Hellmund, the only immediate solution is to renegotiate NAFTA. He said that when NAFTA was signed, the United States thought Mexico would defend its most sensitive products when putting its proposal on the table, but it did not. The GOM naively thought that there would be enough jobs in other sectors to absorb the large number of farmers that would be displaced. -------------- Prospects for Growth -------------- MEXICO 00001271 004 OF 005 ¶12. (SBU) Ramirez de la O told Econoff that economic indicators for January and February were better than he had expected. He attributed this performance the fact that growth in the U.S. real sector was "just beginning to show weakness," the Mexican auto sector, and a weak base of comparison given the relatively poor performance of some economic indicators in the same months of 2007. He is predicting slower growth in the second quarter. The PRD deputies told Emboffs that real GDP growth will not exceed 1.6% this year. They criticized the government's "self compliments" on job creation, remarking that 45% of the jobs created last year were temporary. They said that the government wants to create 800,000 jobs in 2008, but it will be lucky to get 550,000. ¶13. (SBU) Hellmund stressed the need for Mexico to become more competitive to boost growth rates. To do this, he cited a number of tasks for the government, including the need to enforce existing antitrust laws; change the way energy prices are set to help improve the industry's competitiveness; and impose taxes on those who can afford to pay. -------------- Relations with the U.S. -------------- ¶14. (SBU) During the meeting, one of the PRD deputies stated that the U.S. and Mexico are "compadres" (friends). He added, however, that the United States needs a "longer-term vision regarding Mexico" because it is in the United States' interest for Mexico to be stable. The PRD deputies told Emboffs that they would like to continue having an open dialogue with the Embassy. -------------- Corruption and Transparency -------------- ¶15. (SBU) A recurring subject during these meetings was corruption. The PRD deputies, in particular, stressed the need to implement laws that would help reduce corruption at all levels of government. They noted that there were 1.2 billion acts of corruption last year, which amounted to 2.6% of GDP. ¶16. (SBU) Hellmund and Ramirez de la O commented on the lack of transparency in how windfall oil revenues are used. They criticized how the federal government transfers large amounts of money from these surpluses to the state governments without requiring the latter to be accountable for how the money is spent. (Note: Hacienda officials told Econoff last year that they wanted to improve the transparency of spending at the local level, but the 2007 fiscal reform made no progress on this front because of strong resistance from governors. End Note.) Hellmund said that these transfers are how the federal government gets governors to support its reform efforts. -------------- Bio Note on Secretary Carstens -------------- ¶17. (SBU) A PRD staffer told Emboffs that he has a constructive relationship with Finance Secretary Carstens, and that Carstens is one of the best people to ever fill the position. He characterized their relationship as cooperative and "conflictive in a constructive way." The only negative comment the PRD deputies made about Carstens is that while he listens to their proposals, he does not always incorporate their suggestions into his decision. Ramirez de la O MEXICO 00001271 005 OF 005 remarked that Carstens relies too heavily on IMF/World Bank guidance on economic issues. -------------- Comment -------------- ¶18. (SBU) Although these contacts generally agree with the Calderon government about what needs to be done on the economic front (e.g. creating jobs, fighting poverty, reversing Pemex's downfall),they have different ideas on how to accomplish these goals. Their emphasis on social welfare concerns, corruption, and the need for greater state control of the economy rang clear throughout these meetings. They appear to see themselves as the champions of the poor and promoters of real change in Mexico. 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 / GARZA