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Cablegate: Pri Governors Needed to Achieve Structural Reforms

VZCZCXRO2383
RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #3961/01 1991812
ZNR UUUUU ZZH
R 181812Z JUL 06
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 2197
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 MEXICO 003961

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/MEX, WHA/EPSC, AND EB/IFD
STATE PASS USAID FOR LAC:MARK CARRATO
USTR FOR JMELLE
TREASURY FOR IA MEXICO DESK:JASPER HOEK
COMMERCE FOR ITA/MAC/NAFTA:ANDREW RUDMAN

E.O. 12958: N/A
TAGS: ECON EFIN ELAB ENRG PGOV MX
SUBJECT: PRI GOVERNORS NEEDED TO ACHIEVE STRUCTURAL REFORMS
(FIRST OF THREE-PART SERIES ON MEXICAN FEDERAL-STATE
RELATIONS)


------------------------
Summary and Introduction
------------------------

1. (U) Summary: Given the upcoming Mexican government
transition and the slim margin with which a new president
will take office, this is a good time to review federal-state
relations and their implications for Mexico's prospects for
structural change. The views expressed in this three-part
series represent a summary of discussions with a number of
specialists in this area, including GOM officials, think tank
analysts, and academics. We are presenting the analysis in
three parts. This report contains an overall summary and
early perspectives on when and with whom Mexican presidents
need to negotiate at the state level in order to pass
legislation. In addition, the report covers current views
regarding the ability of a new administration to pass
structural reforms.

2. (SBU) Summary continued: A major conclusion is that fiscal
reform, which many analysts believe is the least contentious
of Mexico's structural needs, seems possible in the nearer
term; reforms requiring constitutional change will remain
elusive. While federal transfers form the major source of
state revenues, we were told that the GOM's ability to compel
state backing for reforms is severely limited. Most analysts
stress that the new president will need to rely on his
negotiating skills to build political support across the
political and federal spectrum. By contrast, the governors
have a variety of tools with which to indirectly influence
national legislation. As the new administration prepares to
take office, many see PRI governors as key to helping the
next president achieve momentum on one or two reform
initiatives. End summary.

---------------------------
Negotiate, Senor Presidente
---------------------------

3. (SBU) Econoff's discussions with private sector political
analysts underline the perception that the Mexican president
needs to be a skilled negotiator willing to reach out to the
political opposition and the states. President Fox is
broadly viewed as not having exercised effective political
consensus-building skills, and his reform efforts were
routinely stymied by the obstructionist tactics of the PRI.
Many observers believe that Felipe Calderon would be a better
negotiator than his predecessor and face more favorable
political conditions owing to the PRI's poor showing in the
recent elections.

4. (SBU) By most accounts, it remains too early to tell with
whom the next president should focus negotiations in order to
build successful coalitions. The general view is that it
would make sense for him to wait and see how internal
divisions within the PRI shake out, let the
progressive-minded governors take control of the PRI, and
then reach out to those who support negotiations with the
PAN. Those governors could prove crucial to helping the next
president build a majority in Congress. Our interlocutors
stressed that the president will need to negotiate directly
with the key governors and central party structures, but the
question will be at what price is he able to gain their
support.

5. (SBU) Given the PRD's large political base, private sector
analysts and Mexican government officials also believe the
next president should work to gain PRD support to the extent
possible for macroeconomic reforms. However, as one
economist put it, the PRD's ideology and expected lingering
bitterness over the 2006 presidential election will dampen
prospects for substantive PAN-PRD cooperation in the near
term. That said, there are indications that Convergencia, a
political party in coalition with the PRD, would be open to
macroeconomic reforms.

----------------------
Reform on the horizon?
----------------------

6. (SBU) Senior GOM economic officials and private sector
economists believe that Mexico's next president will face

MEXICO 00003961 002 OF 002


more favorable conditions than did President Fox for passing
some structural reforms. They give great credit to the
professionalism and stability of key institutions such as the
Bank of Mexico and Hacienda (Treasury). That said, the
political system is being re-written in the aftermath of the
2006 national elections, which will likely lead to the
emergence of new political forces. At this point, and for
the first time in six years, Mexican analysts perceive that
pro-reform parties will have space for political maneuver and
the possibility of building a national consensus on one or
two major reform challenges. No analysts were willing to
venture more optimistic scenarios at this stage.

7. (SBU) Over the coming years, PAN and PRD governors can be
expected to dance to the tune of their party leadership. The
current consensus is that PRI governors, who tend to be more
pragmatic than PRI members of Congress, could hold the key to
advancing macroeconomic reforms. As the PRI reflects on its
electoral losses and seeks to set a new course for the party,
it is likely that the governors will play a major, possibly
even dominant, role. Many PRI officials recognize that their
political party paid a heavy price in the 2006 national
elections for having publicly been viewed as obstructing
reform initiatives during the Fox administration. We were
told that this could be a motivating factor for PRI
governors, especially those with a stronghold in the north
who depend on Mexican competitiveness. This dynamic,
combined with the plurality the PAN now enjoys in Congress,
means that Mexico may face its best opportunity yet to
legislate fiscal reform and secondary reforms relating to
more labor flexibility, greater competitiveness, and
increased autonomy for Pemex. Still, energy reform requiring
constitutional change remains much more uncertain in the near
term.


Visit Mexico City's Classified Web Site at
http://www.state.sgov.gov/p/wha/mexicocity

GARZA

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