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FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 1682
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UNCLAS MEXICO 003324 
 
SIPDIS 
 
SIPDIS 
 
STATE PLEASE PASS TO USAID 
 
E.O. 12958: N/A 
TAGS: PREL EAID SENV MX
SUBJECT: ENGAGING THE NEW MEXICAN ADMINISTRATION ON 
DEVELOPMENT AND ENVIRONMENTAL ISSUES 
 
REF: MEXICO 3322 AND PREVIOUS 
 
¶1. Summary:  This is the fifth in a series of six cables on 
transition issues in Mexico.  The central development 
challenge for Mexico - and perhaps the main challenge for its 
new president -- is reducing the poverty that continues to 
afflict so many here and which drives so many to emigrate. 
Complicating that task is the fact that Mexican 
competitiveness has been slipping.  Fixing that will require 
local infrastructure development (which in turn requires 
capital), unleashing the potential of small businesses, and 
improving education.  Mexico in addition faces a number of 
environmental challenges, some of which, such as border water 
issues, impact directly on the U.S.  End summary. 
 
Development 
----------- 
 
¶2. Mexico faces a steep development challenge.  Despite 
recent progress in reducing levels of extreme poverty, 
perhaps a quarter of Mexico's 100 million citizens still live 
on less than four dollars a day.  The lack of viable 
infrastructure hampers economic development, particularly in 
rural areas.  Each year hundreds of thousands of university 
graduates spill out into an economy that has not created 
enough jobs.  Mexico's natural resources such as water and 
forests that are essential to the country's long-term future 
and greater prosperity in rural areas are being depleted. 
Mexico's meeting this mounting challenge head-on is 
ultimately the key to stemming the seemingly boundless 
migration north of millions of its citizens in search of 
better jobs and wages.  Mexicans want more and better 
opportunities in their own country - the new president will 
have to address this as Job One. 
 
¶3. Mexico's development challenge at its core is the 
country's steadily slipping global competitiveness standing. 
Reversing the trend is clearly a Mexican responsibility.  But 
as Mexico's challenge is inextricably linked to the migration 
issue, the U.S. can and should play a catalytic role in 
helping its neighbor strengthen competitiveness, increase 
prosperity, and create jobs here.  The USG should target 
assistance and engage with the new administration early to 
focus on Mexico's competitiveness, a topic that resonates 
with all three major presidential candidates.  Investors and 
economists would point to a long and broad list of issues as 
essential factors in Mexico's development challenge and 
improving competitiveness.  We propose just the following 
three themes for immediate engagement with the new 
administration:  unleashing local infrastructure development; 
small business as the engine of growth; and education and a 
competitive work force 
 
Unleashing Local Infrastructure Development 
------------------------------------------- 
 
¶4. Mexico has a significant infrastructure deficit.  This can 
be addressed by increasing state and city access to Mexico's 
dynamic capital market.  Although the market is open to state 
and municipal borrowers, private rating agencies believe it 
can go much further - and ultimately become the largest 
municipal bond market in the world after the U.S.  To tap 
Mexico's full potential, two key features of the U.S. market 
-- municipal bond insurance and federal tax-exemption - are 
worth exploring. 
 
¶5. Engagement:  All of the potential winners of Mexico's July 
2 presidential election have promised job creation.  They 
have clearly and correctly linked the issue to migration. 
Whoever the winner is, he will need to move quickly to show 
results on this front, and his success or failure here will 
define his administration.  If the USG can offer advice and 
modest support to efforts to generate private sector 
investment in the infrastructure improvement needed for job 
creation, this will be an attractive prospect to new 
administration hungry for good ideas. 
 
¶6. Activities: 
 
-- We should offer the new GOM economic team a high-level 
seminar on the potential for municipal bond insurance in 
Mexico, including top U.S. Treasury and SEC officials, as 
well as rating agencies and investment banks. 
 
-- In the U.S. federal tax-exemption translates to lower 
interest rates and cost savings for taxpayers.  Mexican 
E 
 
states and municipalities currently pay 15 percent in 
value-added-tax on their financing transactions.  We should 
propose that the new president order a study to look at the 
impact of tax exemption for state and municipal 
infrastructure financing.  If this study concludes that the 
long-term benefits of tax exemption override short-term 
revenue concerns, and if the bond insurance feature resonates 
with the GOM, we are prepared to provide assistance to them 
to implement either or both changes. 
 
Small Business as the Engine of Growth 
-------------------------------------- 
 
¶7. The growth of the small business sector has been the key 
to economic expansion and job creation virtually everywhere. 
Small and medium enterprises (SMEs) in Mexico account for 
almost half of the country's employment and 50 percent of its 
GDP.  Yet, the sector still faces serious obstacles. 
 
¶8. Engagement:  We should propose a high-level discussion on 
SME development for the transition team, followed up with a 
bilateral cabinet-level meeting within the first six months 
of the new presidential term involving a range of Mexican and 
U.S. agencies, as well as key chambers and business 
associations.  The goal would be to focus attention and 
attain greater coordination on small business among the GOM's 
and other donor programs. 
 
¶9.  Activities: 
 
-- The new administration should be encouraged to do more to 
improve the policy environment at the micro-level to 
facilitate SME operations (including access to credit) and 
permit continuous entry of new entrepreneurs. 
 
-- We recently financed a World Bank Doing Business survey 
here to measure how Mexican cities treat key issues like 
business registration and contract enforcement.  Doing 
Business generated wide interest, and the GOM plans to use it 
as an annual survey comparing all 32 states.  With this as a 
guide, we can approach the new administration, offering 
assistance to help them make the most pressing policy 
improvements. 
 
Education and a Competitive Work Force 
-------------------------------------- 
 
¶10. Access to quality education is fundamental to 
competitiveness.  While Mexico has advanced significantly in 
terms of access, a significant gap in the quality of 
education remains between rural and urban areas. 
 
¶11. Engagement:  The U.S. should support Mexico strategically 
in closing the gap, echoing President Bush's enhanced 
emphasis on education and the competitiveness theme, and 
building on our experience with our widely supported 
Education USA and university partnership programs. 
 
¶12. Activities: 
 
-- The Mission would look to support the new government's 
education team in attaining the lofty goals already set for 
quality education in rural schools. 
 
-- The U.S. should engage with private organizations and 
firms (Intel for example, is working with us to identify 
areas for investment) in partnerships to support the 
implementation of the Education Secretariat's (SEP) 
Technology in the Classroom program in Grades 1-4. 
 
-- In higher education, the U.S. should expand university 
partnerships with Mexico that target competitiveness areas, 
for example co-sponsoring with the Mexican National Science 
Commission (CONACYT) scholarships, joint research, and both 
faculty and student exchanges in key science and technology 
areas. 
 
The Environment 
--------------- 
 
¶13. Environmental degradation and pollution impose a serious 
drag on economic growth, incurring high costs and diverting 
resources that could be better used to increase 
competitiveness.  Three issues - the border environmental 
picture, air quality, and water -- merit early attention as 
we engage with the new administration.  Commercial promotion 
 
of leading-edge U.S. environmental technology and services 
will complement our efforts on these issues. 
 
¶14. Engagement:  There is no more important place to start 
than where our countries physically come together - along a 
2,000-mile border.  Border 2012 is the third border plan 
between U.S. and Mexican environmental authorities, but the 
first to cover a ten-year planning horizon and to publish 
hard numerical goals for each country to improve health and 
the environment on the border.  Border 2012 is widely 
supported by state, municipal, and other partners who formed 
this common agenda to address fundamental border issues.  The 
Mexicans are again falling behind in their water deliveries 
to the Rio Grande Valley.  The State of Texas has begun to 
notice the low level of deliveries and is pushing for talks. 
Mexico will need to deliver almost 600,000 acre-feet before 
the current five-year delivery cycle ends in September 2007 
to avoid another deficit situation.  While air quality in 
Mexico City has improved, it remains an issue - here and in 
other cities.   Regulations are in place for gasoline, cars 
that take advantage of low sulfur fuel, and diesel engines. 
However these regulations will not be implemented if funding 
is not made available for converting refineries. 
 
¶15. Activities: 
 
-- As we near the halfway point, we recommend the USEPA 
Administrator meet in October or November with Mexico's new 
environmental players to review results of Border 2012 and 
renew our mutual commitment to the plan. 
 
-- To avoid an unnecessary irritant in US-Mexican relations, 
the new Mexican government should be strongly encouraged by 
senior Department of State officials to deliver sufficient 
volumes of water in the remaining months of this cycle to 
fulfill its treaty obligation. 
 
-- The U.S., via the SPP environment and trade working group, 
should urge continued support for the refining of ultra-low 
sulfur fuels. 
 
 
Visit Mexico City's Classified Web Site at 
http://www.state.sgov.gov/p/wha/mexicocity 
 
BASSETT