VZCZCXRO0053
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #1271/01 1191956
ZNR UUUUU ZZH
P 281956Z APR 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 1615
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
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 05 MEXICO 001271 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
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 
USDOC FOR ITS/TD/ENERGY DIVISION 
TREASURY FOR IA (RACHEL JARPE, ANNA JEWEL) 
DOE FOR INTL AFFAIRS KDEUTSCH, ALOCKWOOD, AND GWARD 
NSC FOR RICHARD MILES, DAN FISK 
EXIM FOR MICHELE WILKINS 
STATE PASS TO USTR (EISSENSTAT/MELLE) 
STATE PASS TO FEDERAL RESERVE (ANDREA RAFFO) 
 
E.O. 12958: N/A 
TAGS: ECON ELAB PINT PGOV MX
SUBJECT: AN ALTERNATIVE VIEW OF PRESIDENT CALDERON'S 
MANAGEMENT OF THE MEXICAN ECONOMY 
 
------- 
Summary 
------- 
 
¶1. (SBU) Econoffs met with several contacts associated with 
the Democratic Revolutionary Party (PRD) in recent months to 
better understand how they view the Calderon 
administration,s management of economic policy.  Although 
these contacts generally agree with the Calderon government 
about what needs to be done (e.g. creating jobs, fighting 
poverty, reversing Pemex,s downfall), they have different 
ideas on how to accomplish these goals.  Several of the 
ontacts remarked that Calderon has done little to address 
such important issues as poverty, education, monopolies, tax 
evasion, and the sustainability of oil production.  Their 
views challenge a neoliberal approach to economic management 
by reserving an active role for the government in economic 
planning and the promotion of social welfare.  Several of the 
contacts favored renegotiating NAFTA, and were more 
pessimistic than the GOM about prospects for economic growth. 
 Two PRD deputies said that they would like to continue 
having an open dialogue with the Embassy.  End Summary. 
 
------------------------------------- 
Critical of Calderon,s Reform Efforts 
------------------------------------- 
 
¶2. (SBU) Econoffs met with several contacts associated with 
the Democratic Revolutionary Party (PRD) in recent months to 
better understand how they view the Calderon administration's 
management of economic policy.  Recurrent themes during these 
meetings were how the Calderon government lacked a long-term 
strategy for tackling Mexico's economic problems, and how the 
GOM has done little to address such important issues as tax 
evasion, poverty, education, and Pemex's decline. 
 
Fiscal Reform 
------------- 
¶3. (SBU) Pablo Trejo Perez and Juan Guerra Ochoa -- PRD 
deputies on the Chamber of Deputies' Finance Committee -- 
told Emboffs that the 2007 fiscal reform failed to reduce 
exemptions and special tax regimes, improve the efficiency of 
the tax system, or crack down on tax evasion.  They remarked 
that tax evasion and a lack of control at the borders result 
in billions of dollars of lost revenue.  Although the 
deputies favor exemptions for food and medicine on the 
value-added tax because the poor spend a large proportion of 
their income on these items, they believe the income tax 
should be used to bring in more resources.  This opinion was 
echoed by Aldofo Hellmund, a businessman who lives in 
Tampico, who added that the new tax regime disproportionately 
affects smaller companies because large firms have lawyers 
that help them reduce their tax burden.  The PRD deputies 
said the fiscal reform should have boosted government 
revenues by 6-7% of GDP, and that, in their opinion, the 2007 
reform represents a "lost opportunity" because it will be 
difficult to pass another reform during this sexenio.  (Note: 
The 2007 fiscal reform is expected to increase government 
revenues by 2.1% of GDP by 2012.  End Note.)  These 
additional resources could have been used to boost social 
spending in poor communities, something the deputies strongly 
advocated. 
 
Pension Reform 
-------------- 
¶4. (SBU) Trejo Perez and Guerra Ochoa criticized the 2007 
state workers pension reform, noting that it did not fix the 
fundamental problem but rather gave an "illusion of 
progress."  The deputies and their staffers stressed how the 
new system of individual accounts does not guarantee a 
 
MEXICO 00001271  002 OF 005 
 
 
pension high enough for a "dignified retirement."  Guerra 
Ochoa said that a person would have to work for 50 years 
without missing a single day to have a retirement that is 
equal to three times the minimum wage (roughly USD 15 per 
day). 
 
Energy Reform 
------------- 
¶5. (SBU) Energy reform was a hot topic for several contacts. 
Hellmund told Econoffs that Mexico's most pressing economic 
challenge is reducing its dependence on crude oil revenues. 
The deputies and Senator Arturo Nunez -- an ally of former 
PRD presidential candidate Andres Manuel Lopez Obrador (AMLO) 
-- remarked that Pemex needs more resources to invest in 
exploration and to modernize its facilities.  To accomplish 
this, the government would have to stop treating Pemex like a 
piggybank, clean up deep-rooted corruption at the company, 
and make Pemex more efficient.  The deputies and Rogelio 
Ramirez de la O -- a Mexico City economist who headed AMLO's 
economic policy team in the run up to the 2006 presidential 
election -- were in favor of Mexico building oil refineries, 
a proposal that the Finance Secretariat (Hacienda) has 
opposed.  The PRD deputies and Ramirez de la O said Pemex 
needs to develop a long-term vision for its future -- its 
financial planning in particular.  Trejo Perez and Guerra 
Ochoa opined that Mexico would have a "crisis" in 5-6 years 
unless Pemex is allowed to develop new technology and invest 
in itself. 
 
¶6. (SBU) Ramirez de la O -- who unlike the PRD deputies 
favored some private sector participation in Mexico's energy 
sector -- told Econoff that the energy reform proposal 
Calderon tabled earlier this month is "timid" and "lacks 
conviction."  He remarked that the government should have 
proposed changes to the constitution, but did not take this 
step because it wanted to minimize political costs.  Ramirez 
de la O believes that energy reform will eventually be 
approved because the government needs "to check the box" on 
energy reform, but lamented that it will end up being 
"distorted" and fail to fulfill its original goal.  He added 
that Congress will follow its usual pattern of only approving 
reforms when there is a non-transparent benefit to a 
particular businessman.  In this respect, he noted that if 
allowing Pemex to do business with the private sector allowed 
Carlos Slim's company to gain a near monopoly on pipelines 
and transporting fuel, Mexico would yet again be harmed by 
another monopoly setting high prices for basic services. 
 
Educational Reform 
------------------ 
¶7. (SBU) The PRD deputies and Hellmund (like most Mexico 
observers) agreed that educational reform is crucial.  They 
were pessimistic, however, about the prospects for reform 
because of the government's "alliance" with the teachers 
union.  Hellmund remarked that Calderon was "in bed" with the 
union, while the deputies called the union's relationship 
with political actors (mainly the PRI) "incestuous." 
Hellmund told Econoffs that AMLO would have been tougher with 
the teachers union, noting that when union leader Elba Esther 
Gordillo Morales offered to help AMLO win the election, he 
turned her down.  AMLO wanted to be able to pass educational 
reform without "owing" the union. 
 
¶8. (SBU) The deputies remarked that some teachers get paid 
for "doing nothing."  They added, however, that teachers 
often face challenging conditions, particularly in sparsely 
populated areas, where resources are scarce and teachers 
sometimes have to teach several grades in the same classroom. 
 Moreover, some teachers work a second job to make ends meet, 
so are not around after class to help students.  The deputies 
 
MEXICO 00001271  003 OF 005 
 
 
said that another serious problem that needs to be addressed 
is the inefficient allocation of resources.  They want more 
spending on basic education and universities, and lamented 
the fact that students from well-off families get an even 
bigger advantage over other children because they are able to 
attend private schools. 
 
Labor Reform 
------------ 
¶9. (SBU) The PRD deputies did not comment on labor reform, 
but Hellmund remarked that this was not important for him 
because employers can easily fire employees, so even though 
Mexico has rigid labor laws, the labor market is flexible. 
(Comment:  This assessment is significantly at odds with what 
other Embassy contacts say about Mexico's labor laws. 
Embassy labor and American Chamber of Commerce affiliated 
labor lawyers and human resources specialists often cite how 
difficult it is to fire employees.  When an employee is 
fired, Mexican labor law requires the payment of a 
substantial severance package called "liquidation." 
Liquidation consists of three month wages plus additional 
payments based on the employee's years of service.  Hellmund 
may be assuming that many employers simply ignore this law, 
but most legitimate companies do pay liquidation.  Many 
Mexican employers avoid hiring new employees when possible 
due to the high cost of firing workers.  A recent World Bank 
report on Mexico's informal economy said that the country's 
labor laws make it one of few counties in the world where 
unemployment can rise when the economy picks up because firms 
use their additional revenues to make these liquidation 
payments.  End Comment.) 
 
----------------------- 
NAFTA Failed to Deliver 
----------------------- 
 
¶10. (SBU) The PRD deputies said that NAFTA failed to produce 
the benefits that had been promised.  They commented that the 
free market does not take care of the small farmer who only 
earns a pittance for his crop.  Low salaries for some 
farmers, combined with the fact that many members of newer 
generations are not farmers but cannot find jobs in other 
sectors, prompt workers to migrate to the United States.  For 
these reasons, they favored renegotiating NAFTA.  The 
deputies also criticized the government for not having a 
policy on agriculture. 
 
¶11. (SBU) Hellmund's comments echoed those of the deputies. 
He told Econoffs that Mexico's problems with agriculture and 
the January 2008 lifting of the remaining tariffs on 
sensitive agricultural products under NAFTA will create 
"social difficulties" for the government.  (Note: The final 
opening of the corn, dried beans, milk powder, and sugar 
markets was phased in over a period of 14 months.  End Note.) 
 High corn prices are making the effects less pronounced, but 
once these prices fall, producers will be in a tough spot. 
Although Mexico is competitive in fruits and vegetables, it 
cannot compete with the U.S. in grain productivity.  For 
Hellmund, the only immediate solution is to renegotiate 
NAFTA.  He said that when NAFTA was signed, the United States 
thought Mexico would defend its most sensitive products when 
putting its proposal on the table, but it did not.  The GOM 
naively thought that there would be enough jobs in other 
sectors to absorb the large number of farmers that would be 
displaced. 
 
-------------------- 
Prospects for Growth 
-------------------- 
 
 
MEXICO 00001271  004 OF 005 
 
 
¶12. (SBU) Ramirez de la O told Econoff that economic 
indicators for January and February were better than he had 
expected.  He attributed this performance the fact that 
growth in the U.S. real sector was "just beginning to show 
weakness," the Mexican auto sector, and a weak base of 
comparison given the relatively poor performance of some 
economic indicators in the same months of 2007.  He is 
predicting slower growth in the second quarter.  The PRD 
deputies told Emboffs that real GDP growth will not exceed 
1.6% this year.  They criticized the government's "self 
compliments" on job creation, remarking that 45% of the jobs 
created last year were temporary.  They said that the 
government wants to create 800,000 jobs in 2008, but it will 
be lucky to get 550,000. 
 
¶13. (SBU) Hellmund stressed the need for Mexico to become 
more competitive to boost growth rates.  To do this, he cited 
a number of tasks for the government, including the need to 
enforce existing antitrust laws; change the way energy prices 
are set to help improve the industry's competitiveness; and 
impose taxes on those who can afford to pay. 
 
----------------------- 
Relations with the U.S. 
----------------------- 
 
¶14. (SBU) During the meeting, one of the PRD deputies stated 
that the U.S. and Mexico are "compadres" (friends).  He 
added, however, that the United States needs a "longer-term 
vision regarding Mexico" because it is in the United States' 
interest for Mexico to be stable.  The PRD deputies told 
Emboffs that they would like to continue having an open 
dialogue with the Embassy. 
 
--------------------------- 
Corruption and Transparency 
--------------------------- 
 
¶15. (SBU) A recurring subject during these meetings was 
corruption.  The PRD deputies, in particular, stressed the 
need to implement laws that would help reduce corruption at 
all levels of government.  They noted that there were 1.2 
billion acts of corruption last year, which amounted to 2.6% 
of GDP. 
 
¶16. (SBU) Hellmund and Ramirez de la O commented on the lack 
of transparency in how windfall oil revenues are used.  They 
criticized how the federal government transfers large amounts 
of money from these surpluses to the state governments 
without requiring the latter to be accountable for how the 
money is spent.  (Note: Hacienda officials told Econoff last 
year that they wanted to improve the transparency of spending 
at the local level, but the 2007 fiscal reform made no 
progress on this front because of strong resistance from 
governors.  End Note.)  Hellmund said that these transfers 
are how the federal government gets governors to support its 
reform efforts. 
 
------------------------------ 
Bio Note on Secretary Carstens 
------------------------------ 
 
¶17. (SBU) A PRD staffer told Emboffs that he has a 
constructive relationship with Finance Secretary Carstens, 
and that Carstens is one of the best people to ever fill the 
position.  He characterized their relationship as cooperative 
and "conflictive in a constructive way."  The only negative 
comment the PRD deputies made about Carstens is that while he 
listens to their proposals, he does not always incorporate 
their suggestions into his decision.  Ramirez de la O 
 
MEXICO 00001271  005 OF 005 
 
 
remarked that Carstens relies too heavily on IMF/World Bank 
guidance on economic issues. 
 
------- 
Comment 
------- 
 
¶18. (SBU) Although these contacts generally agree with the 
Calderon government about what needs to be done on the 
economic front (e.g. creating jobs, fighting poverty, 
reversing Pemex's downfall), they have different ideas on how 
to accomplish these goals.  Their emphasis on social welfare 
concerns, corruption, and the need for greater state control 
of the economy rang clear throughout these meetings.  They 
appear to see themselves as the champions of the poor and 
promoters of real change in Mexico. 
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