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Cablegate: An Alternative View of President Calderon's

VZCZCXRO0053
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #1271/01 1191956
ZNR UUUUU ZZH
P 281956Z APR 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 1615
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RHEHNSC/NSC WASHINGTON DC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUEHC/DEPT OF LABOR WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

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

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