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Cablegate: President Calderon's Economic Development Strategy

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PP RUEHCD RUEHGD RUEHHM RUEHHO RUEHJO RUEHMC RUEHNG RUEHNL RUEHPOD
RUEHRD RUEHRS RUEHTM
DE RUEHME #0949/01 0941648
ZNR UUUUU ZZH
P 031648Z APR 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 1165
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUEHXI/LABOR COLLECTIVE
RUEHBE/AMEMBASSY BELIZE 0017
RUEHGT/AMEMBASSY GUATEMALA 3662
RUEHMU/AMEMBASSY MANAGUA 1008
RUEHZP/AMEMBASSY PANAMA 2280
RUEHSJ/AMEMBASSY SAN JOSE 1801
RUEHSN/AMEMBASSY SAN SALVADOR 2551
RUEHTG/AMEMBASSY TEGUCIGALPA 1738
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
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 12 MEXICO 000949

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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 EINT ETRD PINR MX
SUBJECT: PRESIDENT CALDERON'S ECONOMIC DEVELOPMENT STRATEGY
FOR MEXICO

Corrected copy. Formatting corrected.

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Summary
-------

1. (U) The pillar of President Calderon's 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 1980's and
1990's. 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 Mexico's 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
Mexico's 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 macro-economic stability,
while chipping away at some of the barriers preventing
Mexico's 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 Stability, The Pillar for Economic Development
--------------------------------------------- -------

2. (U) The pillar of President Calderon's 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 1980's and 1990's 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 Mexico's economy stable since 2002.
Calderon has continued those policies. As the Chief of
Calderon's 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 country's debt
profile. The government continues to operate with only a
small budget deficit. Under President Calderon, inflation

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remains at a reasonable 4% annual rate, and wage increases
and interest rates are carefully managed to keep inflationary
pressures in check.

3. (U) President Fox's and Calderon's 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 Mexico's 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. Calderon's and Fox's
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 Mexico's
future, the "2030 Vision," 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 Calderon's 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
"social development" is set to increase by 8.8% in real terms
in the 2008 federal budget, while spending on "economic

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development" is set to increase 13.6%. The Secretariat of
Social Development received one of the largest budget hikes
this fiscal year (37.8%).

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

7. (U) Even prior to assuming office, Calderon made sure his
economic team consistently conveyed the message that
Calderon's 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 "if 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." 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 "food-based poverty." Calderon has been
clear that maintaining macro-economic 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 Calderon's 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 Calderon's 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 "society,"
including "the person with the most modest job." 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 Calderon's stated goal of
increasing per capita income to USD 30,000 by 2030. (Note:
Mexico's 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
"graduate" from the programs to a better life.

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

9. (U) Calderon has continued the policy of Mexican leaders
since the early 1990's 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

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year. End Comment) In March 2008, Secretary of the Economy
Eduardo Sojo reminded the Mexican public that prior to NAFTA,
Mexico's yearly inflow of foreign direct investment was only
USD 3.7 billion.

10. (U) Mexico currently has 13 bilateral and multilateral
regional free trade agreements covering 43 countries.
President Calderon's 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 Mexico's economy. While
not solely geared toward small- and medium-sized enterprises,
ProMexico works in concert with the Secretariat of Economy's
Subsecretariat for small- and 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 Mexico's economy, especially given
increased exports from China and India. In February 2008, the
Secretariat of Economy announced a series of measures to

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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 further actions

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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.

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 "dredge" 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 Mexico's 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) Calderon's 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 "niche bank" 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 Mexico's
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 Mexico's 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

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system. Calderon has spoken publicly about the need for a
fundamental transformation of Mexico's education system. Yet
the politically powerful teachers' union continues to block
reform. In a country with rapidly declining oil production,
the employees' union of state oil monopoly PEMEX and related
special interests, including populist leftist politicians,
are vehemently condemning Calderon's public calls for even
modest energy reform. Companies say 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
government's competition watchdog agency COFECO, more
significant progress has been blocked in the Congress.
Companies and the World Bank have identified Mexico's 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.

--------------------------------------------- ---------
Calderon's 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. Calderon's 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 Fox's reform of private pensions, has
eliminated most of the threat that retirement systems in
Mexico would become insolvent. There is still about 20% of
Mexico's 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 Mexico's urgent need to increase tax revenues now
that production from Mexico's main oil field (Cantarell) is
declining as the field becomes exhausted. Calderon's initial
proposal would have generated about half of the tax revenue
international and Mexican experts believe is needed.
Calderon's narrow political support in Congress has limited

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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.

21. (U) So far, Calderon's 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 Mexico's 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 Mexico's long-neglected infrastructure.
His National Infrastructure Plan seeks to reinvigorate
Mexico's infrastructure network, develop and connect the
backward and/or isolated parts of Mexico (particularly in the
poorer south) and boost the country's international
competitiveness. The program envisages unprecedented
increases in public and private investment in infrastructure
(excluding hydrocarbons). The government's 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 country's
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

MEXICO 00000949 008 OF 012


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 social
programs with other government agencies. Among the most
successful programs is "Oportunidades." A program that
existed before Calderon took office, it has become Mexico's
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 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 Calderon's 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 Mexico's poorest states in
2007, Calderon announced the implementation of the "100x100"
Program to improve the social and economic development of the
country's 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 government's 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 "First Job
Program" (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

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cover subsidies to be granted during the first year of the
program's 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 year's
resources had yet to be used. PPE did not have the impact the
government had hoped for during its first year. Most of
Mexico's 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.

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

28. (U) The government's health insurance programs are
primarily designed to help those who cannot afford private
healthcare. Mexico's 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 "Health 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 government's 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
Mexico's 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%,

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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 government's financial support for the 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 "GOM Actions to Promote the
Corn, Dry Beans, Sugar Cane and Milk Competitiveness for the
2007-2012 Period." 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 Mexico's exports go to the United
States, Mexico's 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. Calderon's strategy of carefully negotiating with

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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 Calderon's 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 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
States' 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 neighbor's 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

MEXICO 00000949 012 OF 012


phytosanitary 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 Mexico's 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
Mexico's 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 America's overall global competitiveness via
the various working groups of the Security and Prosperity
Partnership of North 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 society's most vulnerable, ultimately,
Mexico's ability to achieve the growth rates needed to create
decently paying jobs and reduce poverty hinge on Calderon's
ability to tackle the economy's structural shortcomings. The
list of outstanding reforms is long, and includes:
implementing energy reform to reduce the government's
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.


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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