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