VZCZCXRO4981
RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #2577/01 1351538
ZNR UUUUU ZZH
R 151538Z MAY 06
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 0795
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE

UNCLAS SECTION 01 OF 03 MEXICO 002577 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD, AND EB/EPPD 
STATE PASS USAID FOR LAC:MARK CARRATO 
TREASURY FOR IA MEXICO DESK: JASPER HOEK 
COMMERCE FOR ITA/MAC/NAFTA: ANDREW RUDMAN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV MX
SUBJECT: THE CALDERON ECONOMIC PROGRAM 
 
Sensitive but unclassified, entire text. 
 
Summary 
------- 
 
¶1.  (SBU)  Senior staffers Ernesto Cordero and Carlos Montano 
confidently described National Action Party (PAN) 
presidential candidate Felipe Calderon's economic platform 
the week national polls showed Calderon capturing the lead 
from Party of the Democrat Revolution (PRD) candidate Andres 
Manuel Lopez Obrador (AMLO).  While the candidate has begun 
repeating the "jobs" mantra in campaign appearances,  Cordero 
and Montano explained that the jobs will come from improved 
foreign and domestic investment which will be spurred by : 
passing needed structural reforms; emphasizing rule-of-law 
improvements; maintaining macroeconomic stability; improving 
regional development efforts; and making selected additional 
social expenditures.   End summary. 
 
¶2.  (SBU) Econoff met with Ernesto Cordero, Chief of Staff 
for PAN Candidate Felipe Calderon and Carlos Montano, a 
longtime Calderon staffer, newly resigned from his Director 
General position at the Secretariat of Energy shortly 
following last week's release of polls showing the PAN 
candidate opening up a lead on PRD frontrunner Lopez Obrador. 
 
 
¶3.  (SBU) Both campaigners opened discussions with a quick 
review of the leading polls which showed their candidates 
leading by between one and ten points.   Cordero was 
cautiously optimistic.  He called the result a "positive" 
trend. Montano added that the Calderon campaign's decision to 
run adds drawing parallels between AMLO and Chavez and 
calling the PRD candidate a danger to Mexico, combined with 
AMLO's decision not to participate in the first debate, had 
raised sufficient questions in voters minds so that a large 
pool of undecided voters had swung, perhaps only temporarily, 
towards Calderon.  Montano hoped aloud that Lopez Obrador 
would be unable to mount a new message to recapture the 
momentum; while at the same time he outlined the "new" 
Calderon message that focused on job creation.  The one-word 
message that the candidate would repeat would not be 
investment, but rather "jobs."  Both aides added that the key 
to job creation would be to reverse Mexico's slide in 
worldwide rankings as recipient for inward investment. 
Montano pointed to AT Kearney's 2004 FDI confidence index, 
which saw Mexico drop from third to twenty-second place 
globally as a FDI destination as an example of the crisis. 
 
¶4.  (SBU) The staffers outlined a five pillar program to 
increase both domestic and foreign private investment: pass 
needed structural reforms, emphasize rule-of-law 
improvements, maintain macroeconomic stability, improve 
regional development efforts, and make selected additional 
social expenditures. 
 
Structural Reforms First -- Fiscal, Energy, and Labor 
--------------------------------------------- -------- 
 
¶5.  (SBU) Despite the broad script from which they were 
working, the staffers concentrated primarily on structural 
reforms as the most effective way to spur inward investment. 
Montano said it would be the first order of business for 
"President Calderon."   While pundits frequently provide a 
laundry list of essential Mexican reforms, Montano noted that 
the initial proposal of a Calderon administration would focus 
simultaneously on three -- energy, labor, and fiscal reform 
-- as a first step.  Montano said that the three areas were 
so closely related as to make it difficult to consider 
proposals separately. 
 
¶6.  (SBU) On energy, significant Mexican growth would be 
impossible without energy supplies at competitive prices. 
The PAN team understood and assumed that without additional 
development, Mexican crude production would begin to fall in 
the short term.  Deep-water development, Cordero said, would 
be essential to maintaining Mexican production.  Calderon 
would reintroduce a version of this legislative session's 
failed corporate governance proposals that diluted or 
eliminated the weight of the unions on Pemex's governing 
board and further simplified and reduced Pemex's payments to 
Hacienda.  Additionally, Calderon would also strengthen the 
role of the Energy Regulatory Commission (CRE). 
 
¶7.  (SBU) Beyond the initial reforms, Cordero, a former 
 
MEXICO 00002577  002 OF 003 
 
 
Hydrocarbon Undersecretary under Calderon at the Secretariat 
of Energy, added that Calderon believed that "complementary 
investment" in the hydrocarbon sector would enable Pemex to 
seek out foreign investors to build a refinery without first 
changing the Mexican constitution, though considerable 
legislative involvement would be necessary. 
 
¶8.  (SBU) On electricity, more liberalization would enable 
more attractive agreements with private producers.  Montano 
added that additional cross border connections with the U.S. 
should allow CFE to provide electricity in Texas, where, in 
many cases, CFE would be the lower cost producer, while 
making additional, lower cost power available to some Mexican 
consumers. 
 
¶9.  (SBU) Concurrent with energy reform, Calderon notes that 
Mexican income tax evasion rates among the self-employed 
reach 77 percent and VAT evasion is 39 percent.  Given its 
evasion and tax rate, Mexico is able to capture less than 
five percent of its GDP for government coffers.  Nonetheless, 
at 30 percent, Mexico's corporate tax rate is much higher 
than its competition -- China at 15 percent and Chile at 17 
percent.  To improve collection while making Mexico more 
competitive, Calderon proposes a single simplified rate, 
minimizing deductions, but improving collections. 
 
¶10.  (SBU) The Calderon team proposes addressing Mexico's 
rigid labor laws by relaxing work rules to increase 
opportunities for women and the young making part-time work 
more feasible and allowing for apprenticeships and paid 
training. 
 
Rule of Law Next 
---------------- 
 
¶11.  (SBU) Beyond these structural reforms, both Montano and 
Cordero listed rule of law at the second most important 
investment impediment the candidate would tackle.  While the 
candidate has an extensive series of proposals to reduce 
corruption and strengthen law enforcement, Montano boiled 
down the proposals saying that Calderon would improve police 
pay and provide them with necessary equipment.  He also spoke 
enthusiastically about instituting information technology 
tools and databases that would aid police work. 
 
Maintaining Macro Stability 
--------------------------- 
 
¶12.  (SBU) While both staffers were quick to praise the Fox 
administration for the stability and strength of the peso, 
they did note that any incoming president would have to work 
to maintain it.  While any Mexican president will be able to 
appoint four of five central bank governors, the terms are 
staggered, ending in the first, third, fourth, and fifth year 
of the presidency, so that sudden change will not be 
possible.  Still, Montano noted the close working 
relationship between Hacienda Secretary Gil Diaz and Central 
Bank Governor Ortiz and noted that such a relationship would 
continue in a Calderon Presidency. 
 
 
Regional Development 
-------------------- 
 
¶13.  (SBU) On regional development, Montano and Cordero both 
pointed to improvement of basic infrastructure and tourism as 
an engine for development.  Cordero noted Calderon would stop 
short of recommending specific projects for particular areas, 
adding that it would be economically inefficient for the 
government to pick winners.  In more general terms, Cordero 
noted that Mexico was particularly poor in transverse routes 
crossing mountain ranges.  The candidate generally supported 
rail and airport improvement as well, but the lead for these 
developments would need to come from the private sector. 
 
Social Expenditure 
------------------ 
 
¶14.  (SBU) Social expenditure, the final pillar of the 
Calderon program, would concentrate on three areas at first: 
health, education, and housing.  The key feature of 
Calderon's health package would combine federal, state, and 
private entities to create universal health coverage for 
Mexicans.  Recognizing Mexico's position of 30 out of 31 OECD 
member countries in education, Calderon also proposes 
 
MEXICO 00002577  003 OF 003 
 
 
improving the educational system with an extensive list of 
reforms, including extending school hours and requiring 
testing.  On housing, Calderon would continue the Fox 
administration's housing policies. 
 
 
Other Issues 
------------ 
 
¶15.  (SBU) Besides these broad campaign themes, we asked 
Cordero and Montano how they would confront other issues of 
concern to the U.S.  While the candidate and his staff had 
not defined specific proposals, on agriculture, Montano 
understood the pressures that 2008 NAFTA opening would bring. 
 Nonetheless, he agreed that keeping the U.S.-Mexican border 
closed to corn and bean imports would not do a great deal to 
alleviate the problems of the subsistence farmer.  Montano 
admitted that he and other staffers had recently discussed 
developing a policy for Calderon to confront Mexican 
monopolists as a way to improve economic competitiveness, but 
was not optimistic about such a proposal going much further 
in the campaign.  Montano was also quick to dismiss Fox's 
Mesoamerican energy plan, noting that Mexico needed foreign 
investment to build its own refineries. 
 
Comment 
------- 
 
¶16.  (SBU) Cordero and Montano as well as the other Ivy 
league-trained members of Calderon's staff understand and 
truly believe the liberal economic model will be the 
springboard to Mexican economic success.  Nonetheless, they 
remain realistic about the strength and pervasiveness of 
entrenched interests from Mexican monopolists to the unions. 
They are outwardly convinced that their candidate has the 
political skill to succeed at forging consensus between the 
parties where President Fox has failed. Following his 
heart-felt defense of the Calderon economic program, Montano, 
who had recently resigned from his USD 200 thousand plus per 
year Director General job at the Secretariat of Energy, 
confided that despite the excitement of the campaign, there 
were nights he worried so much about the election results, he 
could not sleep. 
 
 
Visit Mexico City's Classified Web Site at 
http://www.state.sgov.gov/p/wha/mexicocity 
 
GARZA