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Cablegate: President Calderon's Economic Development

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RUEHRD RUEHRS RUEHTM
DE RUEHME #0944/01 0941336
ZNR UUUUU ZZH
P 031336Z APR 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 1150
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
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RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHINGTON DC
RUEHXI/LABOR COLLECTIVE
RUEHSN/AMEMBASSY SAN SALVADOR 2539
RUEHGT/AMEMBASSY GUATEMALA 3650
RUEHZP/AMEMBASSY PANAMA 2268
RUEHBE/AMEMBASSY BELIZE 0005
RUEHTG/AMEMBASSY TEGUCIGALPA 1726

UNCLAS SECTION 01 OF 12 MEXICO 000944

SIPDIS

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
TREASURY FOR IA (ANNA JEWEL, LUYEN TRAN)
NSC FOR RICHARD MILES, DAN FISK
STATE PASS TO USTR (EISSENSTAT/MELLE)
STATE PASS TO FEDERAL RESERVE (ANDREA RAFFO)
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND ALOCKWOOD
DOT WASHDC FOR DAVID DECARME

E.O. 12958: N/A
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: President Calderon's Economic Development
Strategy for Mexico

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Summary
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1. (U) The pillar of President CalderonQs economic
development strategy for Mexico is to preserve macro-
economic stability in order to prevent a return to economic
crises that periodically devastated Mexico during the
1980Qs and 1990Qs. While the economic stability Mexico has
enjoyed since 2001 has put Mexico on a path of average
long-term real GDP growth of around 3 to 4 percent, the
OECD, World Bank and other analysts believe MexicoQs
economy must achieve sustained annual GDP growth of at
least 6 to 8 percent in order to reduce widespread poverty.
Calderon has declared that fighting poverty is the top
economic goal of his Administration. He has repeatedly
stressed his dedication to creating well paying jobs in
Mexico as a solution to poverty, and Mexican immigration to
the United States. His means to create jobs include further
opening Mexico to trade and investment, record spending to
develop infrastructure, increased spending on social
programs, eliminating unnecessary government regulation,
and seeking reforms to MexicoQs moribund internal economy.
While Calderon has achieved more economic reforms in 18
months than his predecessor President Fox did in six years,
his lack of a congressional majority, and the lack of wide
consensus within Mexico on basic economic policy, have so
far prevented him from undertaking the serious structural
reforms needed to achieve higher growth rates. Faced with
strong special interests that have long blocked such
reforms, Calderon has chosen a pragmatic approach of
pushing a steady series of politically achievable reforms.
These reforms have addressed the most immediate challenges
to macroeconomic stability, while chipping away at some of
the barriers preventing MexicoQs economy from creating
sufficient decently paying jobs. Given U.S. strategic
interests in economic development in Mexico, the U.S.
Mission has a range of programs to support Mexican
development efforts. End Summary.

------------------------
Macro-economic Stability QThe Pillar for Economic
Development
------------------------

2. (U) The pillar of President CalderonQs economic
development strategy is to preserve the macro-economic
stability Mexico has enjoyed since 2002. This is
understandable because periodic economic and banking crises
in the 1980Qs and 1990Qs wiped out the savings and cost the
jobs of many Mexicans, and pushed members of the working
class into poverty. The World Bank, IMF, OECD and other
financial institutions widely praise the sound economic
policies that have kept MexicoQs economy stable since 2002.
Calderon has continued those policies. As the Chief of
CalderonQs Economic Cabinet, Felipe Duarte, told a public
academic/business forum in February 2008, the Calderon
Administration has strengthened public finances via fiscal
and pension reform, its commitment to maintain fiscal
discipline, and efforts to improve the countryQs debt
profile. The government continues to operate with only a
small budget deficit. Under President Calderon, inflation
remains at a reasonable 4% annual rate, and wage increases
and interest rates are carefully managed to keep
inflationary pressures in check.

MEXICO 00000944 002 OF 012

3. (U) President FoxQs and CalderonQs efforts to preserve
macro-economic stability have been key to promoting
development in Mexico. Rising foreign investment shows
that that investors and financial institutions have faith
that Mexico will continue to pursue policies to keep
inflation and budget deficits in check. A concrete display
of international confidence in MexicoQs economy occurred in
late 2006 when Mexico became the first country in Latin
America to launch a 30-year bond denominated in the local
currency (pesos). The bond was oversubscribed by six times.
CalderonQs and FoxQs policies have attracted record levels
of foreign investment and allowed the development of a
mortgage industry including 30-year peso-denominated fixed
rate mortgages. Thanks to macro-economic stability and
specific efforts under the Fox and Calderon Administrations
to improve housing and credit to the private sector, more
and more Mexicans are enjoying the first-ever opportunity
to own their own homes. Between 2001 and 2006, accumulated
investment from mortgages was USD 78 billion, equivalent to
over 4.3 million mortgages financed by various lending
institutions. In 2007 alone, lenders expect to grant about
1.1 million mortgages.

-------------------------
National Development Plan
-------------------------

4. (U) Prior to assuming office, Calderon held a series of
meetings throughout Mexico to present his vision for
MexicoQs future, the Q2030 Vision,Q under which by that
year Mexico would become one of the five largest economies
in the world with a per capita GDP of USD 30,000. Calderon
said his purpose in presenting this 2030 Vision was to
demonstrate that reducing widespread poverty and improving
the Mexican education system would take reform over a
generation.

5. (U) To demonstrate how he would advance toward that
vision during his term, in May 2007 Calderon unveiled a
National Development Plan for 2007-2012 for social and
economic development. The main pillars of CalderonQs plan
are: rule of law and public security (e.g. fighting drug
trafficking, reducing corruption, justice reform, police
reform, electoral and other political reforms); equal
opportunities for all; economic growth and competitiveness;
environmental sustainability; and effective democracy and
responsible foreign policy. Under this plan, the
government aims to achieve real GDP growth of 5% and to
reduce food-based poverty by 30% by 2012. (Comment: Food-
based poverty is based on an estimate of the income
required to purchase a food basket satisfying minimum
nutritional requirements. The overall poverty figure
considers estimated income required to satisfy minimum
requirements for nutrition, education, health services,
housing, clothing and transport. End Comment)

6. (U) To implement his development strategy, the Calderon
Administration has boosted funding for development-related
initiatives. Spending on the government-defined category of
Qsocial developmentQ is set to increase by 8.8% in real
terms in the 2008 federal budget, while spending on
Qeconomic developmentQ is set to increase 13.6%. The
Secretariat of Social Development received one of the

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largest budget hikes this fiscal year (37.8%).

MEXICO 00000944 003 OF 012

----------------------------------
Poverty Reduction the Top Priority
----------------------------------

7. (U) Even prior to assuming office, Calderon made sure
his economic team consistently conveyed the message that
CalderonQs top economic priority was reducing poverty. The
July 2006 Presidential elections threw a spotlight on
persistent poverty and rising inequality in Mexico --
particularly between economic progress in northern Mexico
and stagnation in southern Mexico. Shortly after taking
office in December 2006, Calderon publicly said fighting
poverty was the top economic priority, noting that Qif
something demands urgent action and all the power of the
Mexican state, it is taking care of millions of families
who still live in poverty.Q Poverty rates have declined,
but according to Mexican government statistics as of 2006,
42.6% of the population still lives in poverty, while 13.8%
of the population lives in Qfood-based poverty.Q Calderon
has been clear that maintaining macroeconomic stability is
a basic requirement of fighting poverty, but repeatedly
stresses the need to do more, especially by creating
decently paying jobs in Mexico.

8. (U) Finance Secretary Carstens is a key voice publicly
explaining CalderonQs development strategy. Carstens has
often said publicly that stability and economic growth are
necessary conditions for poverty reduction, but policies
are also needed to help the poor improve their living
standards. Carstens echoes CalderonQs stress on having a
market economy generate jobs, publicly emphasizing that
governments cannot increase growth and reduce poverty by
themselves, because such progress comes from development of
the Qsociety,Q including Qthe person with the most modest
job.Q Carstens and Calderon have said the Administration
will put emphasis on programs that develop human capital in
order to make Mexico more competitive and to meet
CalderonQs stated goal of increasing per capita income to
USD 30,000 by 2030. (Note: MexicoQs per capita GDP was USD
8,300 in 2007, although Mexico has the highest income
inequality in the OECD.) Carstens also joins Calderon in
publicly highlighting the need to make social programs more
efficient and productive so they create sustainable jobs
that allow participants to QgraduateQ from the programs to
a better life.

------------------------------------
Creating Jobs by Further Opening to Trade and Investment
------------------------------------

9. (U) Calderon has continued the policy of Mexican
leaders since the early 1990Qs of creating jobs in Mexico
through further opening Mexico to trade and foreign
investment. Thanks in large part to opportunities created
by the North American Free Trade Agreement (NAFTA), foreign
direct investment in 2007 reached a record level of USD
23.2 billion. (Comment: The second highest amount ever
recorded, surpassed only in 2001 when Citibank acquired
Mexican Bank Banamex for USD 12.5 billion, skewing FDI
figures for that year. End Comment) In March 2008,
Secretary of the Economy Eduardo Sojo reminded the Mexican

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public that prior to NAFTA, MexicoQs yearly inflow of
foreign direct investment was only USD 3.7 billion.


MEXICO 00000944 004 OF 012


10. (U) Mexico currently has 13 bilateral and multilateral
regional free trade agreements covering 43 countries.
President CalderonQs new initiative has been to make these
free trade agreements more efficient by reducing
inconsistencies among them that increase business costs and
opportunities for corruption. Recognizing that the U.S.
domestic debate on free trade makes it difficult for the
United States to consider further harmonizing free trade
agreements, Calderon has had his government take unilateral
measures, including lowering tariff rates, harmonizing
trading rules, and eliminating procedural barriers to
trade. The Calderon Administration is also actively
pressing its other trading partners to harmonize tariff
rates, rules of origin, and other trading rules in their
respective free trade agreements with Mexico.

11. (U) On June 13, 2007, Calderon created ProMexico, a
federal entity charged with promoting Mexican exports
around the world and attracting foreign direct investment
to Mexico. Through ProMexico, federal and state government
efforts as well as related private-sector activities work
to harmonize programs, strategies, and resources for common
objectives, while supporting the globalization of MexicoQs
economy. While not solely geared toward small- and medium-
sized enterprises, ProMexico works in concert with the
Secretariat of EconomyQs Subsecretariat for small- and

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medium-Sized Businesses. As ProMexico develops it will also
seek to incorporate export promotion assistance programs
from other government departments, including farmers
assistance programs currently managed by the Secretariat of
Agriculture and Fisheries.

-------------------------
Creating Jobs By Improving Competitiveness
-------------------------

12. (U) President Calderon has publicly stressed that
creating jobs in Mexico requires urgent action to improve
the competitiveness of MexicoQs economy, especially given
increased exports from China and India. In February 2008,
the Secretariat of Economy announced a series of measures
to increase competitiveness. The measures include
elimination or reduction of more than 6,000 outdated
tariffs and import duties on goods that are no longer made
in Mexico and that raise input costs for other Mexican
industries, simplification of import procedures,
strengthening of the automobile and information technology
sectors, fostering software development, and simplification
of import procedures for the maquila and manufacturing
industries. Congress authorized USD 128 million to
implement this program.

13. (U) Recognizing that there were many cumbersome customs
procedures that prevented micro- and small- and medium-
sized enterprises from participating in foreign trade, on
March 31, 2008, the Secretariat of the Economy issued a
decree eliminating the most burdensome customs procedures
as of April 14. The decree also announced that the
Secretariat of Economy and Secretariat of Finance will take

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further actions to simplify customs and foreign trade
procedures, including reviewing and eliminating control
measures that increase process time and costs; and
reviewing, reducing or eliminating non-tariff restrictions;
and simplifying administrative procedures.


MEXICO 00000944 005 OF 012


14. (U) Other measures taken by the Calderon Administration
to improve competitiveness include a series of measures to
reduce the cost of doing business by reducing the time to
open a new business, lowering industrial electricity rates
during peak hours, strengthening development banks, and
fostering more competition in Liquefied Petroleum (LP) gas
distribution. To promote further progress, in 2007 the
Calderon Administration launched a major effort through the
OECD, using an OECD model developed by Australia to reduce
over-regulation of the economy. Calderon directed his
ministries to QdredgeQ through all government regulations
in order to eliminate those that are no longer necessary or
that unduly hinder business. Recognizing that much of the
over-regulation of business occurs at the state and
municipal level, in 2008 Calderon convinced MexicoQs state
governors to participate in the program, gaining their
commitment to review over 1,000 regulations using a version
of the OECD model.

15. (U) CalderonQs job-creation strategy includes
increasing credit to the private sector, particularly
small- and medium-sized enterprises. His Administration
has implemented financial sector reforms to facilitate
lending to the private sector and increase competition in
the banking sector. These measures include creating a
Qniche bankQ license, encouraging microfinance institutions
to become regulated and offer savings accounts in order to
increase competition and facilitate access to safe savings
services for low income people. Because a lack of
competition keeps banking fees high and lending low, the
Calderon Administration has also used anti-monopoly
investigations to spur greater competition in the banking
sector.

---------------------------------------
Further Economic Reform Needed to Create Jobs
---------------------------------------

16. (U) Much remains to be done, however, to arrest
MexicoQs slipping global competitiveness and allow Mexico
to achieve growth rates high enough to reduce widespread
poverty. Although the IMF, World Bank, OECD, members of the
Calderon Administration and much of the business community
agree consistently on the structural reforms needed, the
Mexican polity lacks sufficient consensus to achieve deeper
structural reforms. Special business, union and other
interests wanting to preserve economic privileges built up
under 70 years of one-party rule, and a strong left-leaning
opposition, still favor aspects of a more strongly state-
managed economy such as private and government monopolies
and oligopolies, and guaranteed benefits for workers in
privileged industries.

17. (U) Special interests have blocked needed reforms
throughout MexicoQs history. In a country where 60% of the
people do not graduate high school, people throughout the
country recognize the urgent need to reform the educational
system. Calderon has spoken publicly about the need for a
fundamental transformation of MexicoQs education system.
Yet the politically powerful teachersQ union continues to
block reform. In a country with rapidly declining oil
production, the employeesQ union of state oil monopoly
PEMEX and related special interests, including populist
leftist politicians, are vehemently condemning CalderonQs
public calls for even modest energy reform. Companies say

MEXICO 00000944 006 OF 012


a major barrier to expansion is the extremely high cost of
electricity, which is provided by two highly inefficient
government regional monopolies. Monopolies and oligopolies
continue to dominate key sectors of the economy, keeping
rates artificially high for telecommunications, cement,
retail goods, medicines and other key items. While Calderon
and Congress have implemented some measures to increase the
effectiveness of the governmentQs competition watchdog
agency COFECO, more significant progress has been blocked
in the Congress. Companies and the World Bank have
identified MexicoQs labor code as a major barrier to hiring
and firing employees. Calderon has called for labor reform,
but powerful unions and stiff political opposition will
make it very difficult to achieve.

-----------------------------
CalderonQs Pragmatic, Step-by-Step Strategy for Reform
-------------------------------

18. (U) Learning from the failure of President Fox to pass
the bold economic reforms he proposed, Calderon has taken a
pragmatic, incremental approach. Prior to proposing reforms
to Congress, he has directed key members of his Cabinet to
negotiate intensely with special interests and the
political opposition to ensure that reforms presented to
Congress are politically feasible. CalderonQs strategy is
to maintain his momentum by aiming for legislative battles
he can win, building additional political capital for the
tougher challenges ahead. This incremental strategy forces
Calderon to compromise and wait on the deeper reforms
needed to generate substantially higher growth rates.

19. (U) Given the fundamental need to avoid a return to
economic crises of the past, the first economic reforms
President Calderon put before Congress were to defuse
potential threats to economic stability. After only a few
months in office, Calderon got Congress to pass historic
reform of the government pension system. This initiative,
combined with President FoxQs reform of private pensions,
has eliminated most of the threat that retirement systems
in Mexico would become insolvent. There is still about 20%
of MexicoQs pension system that needs reform in order to
remain solvent over the long term, but these are the
pensions of the oil company workers, social security
institute employees and other powerful Mexican special
interests.

20. (U) The strategy of proposing politically feasible
reforms also allowed President Calderon to make progress in
addressing MexicoQs urgent need to increase tax revenues
now that production from MexicoQs main oil field
(Cantarell) is declining as the field becomes exhausted.
CalderonQs initial proposal would have generated about half
of the tax revenue international and Mexican experts
believe is needed. CalderonQs narrow political support in
Congress has limited his ability to go after the tax
privileges and exemptions built up during 70 years of one-
party rule. This left Calderon the less attractive option
of increasing taxes on the relatively small part of the
potential tax base that already pays taxes. Required
compromises with the business sector and opposition members
of Congress further watered down the reform, generating an
estimated 2.1% of GDP by 2012, which Mexican economic
officials say is about a third of the additional tax
revenue needed.

MEXICO 00000944 007 OF 012

21. (U) So far, CalderonQs step-by-step pragmatic approach
has made more progress in a year and a half than his
predecessor made in six years, but it remains to be seen if
he can tackle enough of MexicoQs special interests to
create a vibrant, competitive, open internal economy that
can create a sufficient number of jobs and properly
educated labor force to alleviate widespread poverty.

-----------------------------------
The National Infrastructure Program
-----------------------------------

22. (U) In addition to reforms to make the economy more
competitive, Calderon unveiled in July 2007 a record-
setting program to develop MexicoQs long-neglected
infrastructure. His National Infrastructure Plan seeks to
reinvigorate MexicoQs infrastructure network, develop and
connect the backward and/or isolated parts of Mexico
(particularly in the poorer south) and boost the countryQs
international competitiveness. The program envisages
unprecedented increases in public and private investment in
infrastructure (excluding hydrocarbons). The governmentQs
goal for each year it is in office is to have public and
private investment in infrastructure equal 4% of GDP; lead
to the creation of 720,000 jobs; and add 0.6 percentage
points to the countryQs economic growth. Specifically, the
Plan seeks to modernize highway, airport, port, energy, and
water infrastructure. It also aims to increase access to
electric power, drinking water, and drainage services.
Ultimately, the Calderon administration hopes the program
will catapult Mexico into the world's top 20th percentile
for infrastructure competitiveness by 2030.

23. (U) The Infrastructure Plan will be financed primarily
by private money through public-private partnerships,
particularly for investments in roads, airports and ports.
Government funding will come from the 2007 tax reform and
the National Infrastructure Fund (FONADIN). In addition,
the government is currently in the process of tendering
bids for several highways projects to obtain the needed
resources for other Infrastructure Plan projects. The
FONADIN will begin operating with USD 3.7 billion, but the
government expects to be able to increase this figure to
USD 25 billion within five years.

---------------------
Anti-Poverty Programs
---------------------

24. (U) Shortly after assuming office, Calderon gave his
economic ministries specific objectives to develop the
impoverished rural areas of Mexico, such as improving
postal and telecommunications services. He has also
expanded successful anti-poverty programs started under
previous Administrations, launched new programs and sought
to make existing programs more effective. Currently, the
Secretariat of Social Development coordinates more than 16

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social programs with other government agencies. Among the
most successful programs is QOportunidades.Q A program
that existed before Calderon took office, it has become
MexicoQs flagship social assistance program, which aims to
help poor families invest in human capital. Oportunidades
is designed to combat poverty by providing cash payments to
families in exchange for regular school attendance and

MEXICO 00000944 008 OF 012


health clinic visits. Oportunidades includes: grants for
purchasing school materials; scholarships for high school
and university students; basic health care services for the
entire family; and monetary transfers for improved food
consumption as well as nutritional supplements for young
children and pregnant women. Oportunidades is credited with
decreasing poverty and improving health and educational
attainment where it has been deployed. In response to
CalderonQs request to expand the program, the Congress
earmarked USD 3.5 billion for Oportunidades in the 2008
federal budget.

------------------------------
Support for Marginalized Areas
------------------------------

25. (U) During a tour of one of MexicoQs poorest states in
2007, Calderon announced the implementation of the
Q100x100Q Program to improve the social and economic
development of the countryQs poorest municipalities. The
government has invested USD 525 million to date improving
the infrastructure, education, housing, health,
environmental conditions, and productivity (mainly in
agriculture and handicrafts) of 125 municipalities.

26. (U) On March 13, 2008, Calderon launched a program
aimed at creating jobs, attracting investment, and reducing
inequality in the poorest areas of the country -- where 17
million Mexicans live. The program is a combination of
efforts to link the governmentQs actions to alleviate
poverty with its overall economic policy. Calderon has said
the program will help investors in marginalized areas cut
costs by 22%. The program includes government support for
employers to reduce the cost of numerous payroll taxes
including social security, health, and housing fees, and
allows companies in marginalized areas to deduct the cost
of the income tax and the Single Rate Corporate Tax (IETU).
Under the program, Mexican government development banks
will grant loans for the construction of plants,
warehouses, and factories in marginalized areas, while the
Labor Secretariat will grant scholarships for training
programs.

-----------------
First Job Program
-----------------

27. (U) In March 2007, Calderon launched the QFirst Job
ProgramQ (PPE) to help create jobs by granting a one-year
subsidy on the social security fees employers have to pay
to the Mexican Social Security Institute (IMSS) for newly
hired employees. In 2007, Congress approved USD 275 million
to cover subsidies to be granted during the first year of
the programQs operation. Of this amount, only 16% was
spent. For 2008, IMSS requested a budget of USD 138
million for the program, but resources were not allocated
since it was determined that more than 80% of the previous
yearQs resources had yet to be used. PPE did not have the
impact the government had hoped for during its first year.
Most of MexicoQs established labor unions view the program,
as originally implemented, as a well-intentioned failure.
In January 2008, officials made changes to the program to
encourage participation, but it is too early to tell if
these changes will make the program effective.


MEXICO 00000944 009 OF 012


-------------------------
Health Insurance Programs
-------------------------

28. (U) The governmentQs health insurance programs are
primarily designed to help those who cannot afford private
healthcare. MexicoQs public healthcare system is divided
into three types of coverage: 1) Coverage for workers in
the formal private sector, and their families, which is
managed by the Mexican Social Security Institute (IMSS); 2)
coverage for workers in the public sector, and their
families, which is managed by the Institute of Security and
Social Services for Government Workers (ISSSTE); and 3)
Popular Health Insurance, for workers outside the formal
economy, and workers who do not receive regular salaries,
and their families. Congress approved USD 2.4 billion in
2007 for the Popular Health Insurance program. (Comment:
While the Popular Health Insurance Program does help meet
the needs of the poorest Mexicans, it may unintentionally
hurt the goal of moving people into decently paying formal
sector jobs. The Governor of the Bank of Mexico has said
publicly that the Popular Health Insurance program
encourages people and micro-businesses not to join the
formal economy, which also means they do not pay taxes or
contribute to IMSS. Therefore, he has argued, the Popular
Health Insurance Program drains both the federal budget and
the health care system. End Comment)

29. (U) In his inauguration speech, Calderon announced a
new program called QHealth Insurance for a New Generation
-- a program that will cover medical expenses for children
born on or after December 1, 2006. Last year this program
covered 830,000 Mexicans. The governmentQs goal is to
cover 100% of the population by 2010.

-------------------------------------------
Agricultural and Rural Development Programs
-------------------------------------------

30. (U) Although Calderon proposed only a 0.2% increase in
the agricultural budget for 2008, he renewed several
existing agricultural support programs and created a few
new ones, including a forestry initiative that aims to
revitalize MexicoQs ailing forestry sector. The cornerstone
of these programs is the Concurrent Special Program (PEC),
an umbrella funding mechanism for all GOM activities aimed
at increasing agricultural production, stimulating rural
economies, and improving rural livelihoods. While Calderon
proposed only a 3.8% increase in funding, Congress
increased funding by 15%, to USD 18.7 billion in 2008, more
than double the funding first allocated to the PEC in
2000.(Comment: Congress increased overall spending on
agriculture by 11% in 2008. End Comment) The most important
program under the PEC is PROCAMPO (Direct Support to the
Countryside Program). PROCAMPO is a system of direct
payments to producers based on historic levels of area
planted; it benefits 2.8 million farmers.

31. (U) In December 2007, Calderon attempted to improve
support for impoverished farmers by changing the rules of
operation for agricultural programs and reducing the number
of such programs from 55 to 8, in order to get more of the
money to actual needy farmers, rather than the middlemen
and more prosperous farmers who had traditionally absorbed
much of the governmentQs financial support for the

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countryside. (Comment: This reform has generated
considerable controversy as local government officials,
organizations officially representing farmers, and the
richest farmers have loudly protested being cut off from
the agricultural subsidy train. End Comment)

32. (U) In addition to the PEC, in early 2007 the Calderon
Administration announced the QGOM Actions to Promote the
Corn, Dry Beans, Sugar Cane and Milk Competitiveness for
the 2007-2012 Period.Q This initiative is not a funded
program, but rather an effort to underscore the work that
is currently being done, or in the planning stages, within
the government to smooth the transition for the
agricultural products that had their tariff and quota
regimes lifted in January 2008 when the final phased
provisions of the NAFTA took effect.

-----------------------
Economic Support Package
------------------------

32. (U) Because over 80% of MexicoQs exports go to the
United States, MexicoQs year-to-year economic performance
has been closely linked to U.S. economic cycles. Seeking to
minimize the effects of the current U.S. economic slowdown,
on March 3, 2008 President Calderon announced a series of
measures to stimulate the economy. The package includes
reductions in provisional income tax payments between March
and June 2008; reductions in corporate payments to IMSS
this year; the lowering of electricity tariffs; a USD 935
million increase in Pemex expenditures to upgrade and
expand its pipeline network; USD 60 million of additional
funds for the National Employment System; and
simplification of administrative requirements for exporters
and importers. The government says the measures will cost
USD 5.6 billion.

---------------------
Some Progress to Date
---------------------

34. (U) Calderon has registered some impressive economic
accomplishments since assuming office -- inflation is at a
reasonable 4%, and foreign direct investment for 2007 was a
record high USD 23.2 billion. Although he fell short of his
stated goal of creating 1 million jobs a year, in 2007,
800,000 jobs were created in the formal sector of the
economy, the second-highest number of jobs ever created in
one year. CalderonQs strategy of carefully negotiating with
the opposition and special interests, and tabling only
politically feasible proposals, secured quick Congressional
approval of the 2007 and 2008 federal budgets, and won
passage of the unpopular but necessary government workers
pension reform. His success in getting Congress to pass a
tax reform to boost government revenues by 2.1% of GDP by
2012 has alleviated the immediate budget crunch caused by
declining oil production, and freed up revenues for
increased spending on social programs and infrastructure.

35. (U) Most of CalderonQs economic and social development
programs are still too new to determine whether they will
improve competitiveness or lift a significant number of
people out of poverty. The Oportunidades program is a
proven success. The First Job program has been re-worked
after failing to achieve expected results in its first

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year. The National Infrastructure Program is also just now
getting underway, but if implemented on schedule has the
potential to boost economic growth and create jobs.

------------------------------------
U.S. Support for Mexican Development
------------------------------------

36. (U) Our common border makes an increasingly prosperous
Mexico especially important to the United States for
several reasons including: it would reduce the incentive
for poor Mexicans to immigrate illegally to the U.S. in
search of good jobs; it would provide more formal sector
jobs that would reduce the relative attractions of narco-
trafficking and other forms of illegal commerce that have
direct negative impacts on U.S. security and economic
interests; it would expand opportunities for U.S. exporters
of goods and services in what is already our second largest
export market (Comment: U.S.-Mexico two-way trade in goods
and services was over USD one billion per day in both 2006
and 2007); and it would strengthen the hand of those in
Latin America who favor democratic politics and open
economies rather than authoritarianism and populist
economic policies. These considerations, and the fact that
Mexico is the United StatesQ third-leading source of
foreign oil, give the United States fundamental strategic
interests in sustainable, broad-based economic development
in Mexico.

37. (U) For this reason, the United States Government is
actively supporting Mexicans across a wide spectrum of the
above-mentioned development efforts. While our
interventions on their own are probably not decisive, they
are making real differences on the margins of indigenous
Mexican efforts and demonstrating in a very concrete
fashion our commitment to our neighborQs success. The
following examples are illustrative, but far from
exhaustive, of the many ways the U.S. Government is
promoting economic development in Mexico. USAID has
programs in Mexico aimed at expanding access to credit
among marginal populations, especially in areas of greatest
illegal out-migration to the United States. USAID has
programs to help increase overall economic competitiveness,
including by reforming the antiquated judicial system and
strengthening the federal competition watchdog agency. USDA
is working on several projects to smooth the transition for
Mexican corn and bean farmers to free trade. USDA is also
engaged in a number of sanitary and phyto-sanitary programs
that will help Mexico gain access to new markets, while
also protecting U.S. agriculture by making the animal and
plan health profiles of our two countries more similar. The
Department of Commerce Commercial Service is actively
supporting MexicoQs infrastructure expansion plans by
supporting feasibility studies and assisting U.S. firms to
participate in major infrastructure projects. The State
Department is funding a capacity building program to
improve MexicoQs protection of intellectual property
rights. Treasury helps train its Mexican counterparts on
best practices in improving tax collection, and combating
money laundering. And, both the U.S. and Mexican
governments are working together with the Canadian
government to facilitate the flow of trade and investment
among the three NAFTA partners and improve North AmericaQs
overall global competitiveness via the various working
groups of the Security and Prosperity Partnership of North

MEXICO 00000944 012 OF 012


America (SPP).

-------
Comment
-------

38. (U) While many of the social development programs
discussed above are substantive (e.g., Oportunidades and
increased infrastructure spending), some are less efficient
and/or more political in nature. Calderon undoubtedly
realizes that he needs to be seen as doing something to
boost employment and help Mexico weather a potential U.S.
recession. While effective social programs play an
important role in protecting societyQs most vulnerable,
ultimately, MexicoQs ability to achieve the growth rates
needed to create decently paying jobs and reduce poverty
hinge on CalderonQs ability to tackle the economyQs
structural shortcomings. The list of outstanding reforms is
long, and includes: implementing energy reform to reduce
the governmentQs dependence on oil-related revenues and
stem a fall in oil production; addressing the detrimental
impact monopolies and oligopolies have on competitiveness,
entrepreneurship, and foreign investment; curbing labor
rigidities and the rampant infringement of intellectual
property rights, both of which negatively affect the
business environment and job creation; and implementing
educational reform to prepare people to take advantage of
opportunities from NAFTA, globalization, and technological
advances. Despite his successes so far, and ongoing U.S.
support of his efforts, Calderon will be hard-pressed to
forge consensus in any of these areas given the strong
interests they threaten to undermine, and midterm
Congressional elections scheduled for July 2009. End
Comment.

GARZA

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