VZCZCXRO2901
OO RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #2890/01 2702132
ZNR UUUUU ZZH
O 262132Z SEP 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3381
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUEHBR/AMEMBASSY BRASILIA 1529
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 04 MEXICO 002890 
 
SIPDIS 
 
STATE PLEASE PASS TO USOAS (ASIERRA) 
 
E.O. 12958: N/A 
TAGS: ECON MX PGOV PREL OVIP MORALES HECTOR
SUBJECT: SCENESETTER FOR THE VISIT OF USOAS AMBASSADOR AND 
SUMMIT COORDINATOR HECTOR MORALES TO MEXICO, SEPTEMBER 29- 
OCTOBER 1, 2008 
 
¶1. (U) My staff and I warmly welcome you and your colleague 
to Mexico City and Monterrey. President Calderon recognizes 
the broad-ranging challenges his country faces and has the 
vision and political will to address them strategically.  He 
has demonstrated resolve in implementing his key policy 
objectives: improving security and the rule of law, attacking 
poverty, and creating jobs. The U.S. and Mexico have 
developed a solid set of institutional relationships that 
allow us to work productively on most of our priorities, 
including fundamental issues of homeland security and North 
American prosperity. Those links are set to expand.  Your 
visit is a sign of continuing U.S. support for the Calderon 
government and dedication to this complex, interdependent 
relationship. 
 
 
Bilateral Relations and Hemispheric Integration 
--------------------------------------------- -- 
 
¶2. (U) Calderon has demonstrated pragmatism in his posture 
toward the United States and is building on an already modern 
and mature U.S.-Mexico relationship.  The President's message 
is that Mexico will seek what it needs from us on the basis 
of equality, respect, and the close cooperation expected of 
neighbors that share wide-ranging interests and challenges. 
Our common border, responsible for extensive commercial, 
community, and family ties, is transforming our societies 
into two of the most deeply and broadly connected on earth. 
 
¶3. (U) Calderon's top officials have been supportive of our 
new ideas for hemispheric integration, the Pathways to 
Prosperity, announced September 24th by President Bush in New 
York.  President Calderon participated in that meeting, 
signed the communiquQ and the Mexican government has played a 
constructive role behind the scenes in helping shape the 
initiative.  Nevertheless they are anxious to see how this 
new initiative might fare in a new Administration, as well as 
how it would fit in with others, such as SOA, the FTAA and 
such Latin American initiatives such as the Pacific Arc 
Forum.  Calderon is eager to deepen commercial integration 
with the United States and the rest of the region, and is 
likely to support any forum that promotes economic 
development and broadening the benefits of free trade 
agreements. 
 
Security 
-------- 
 
¶4. (U) There is increasing public concern over the rise in 
violence in Mexico.  On August 30, more than 100,000 Mexicans 
marched peacefully throughout the country to demand 
government action against kidnappings and killings.  The 
Calderon administration has moved forcefully to improve 
public security, significantly increasing the security 
budget; launching surge operations against drug traffickers 
in ten of the most conflictive states; engaging the military 
in a significant way; working to overhaul Mexico's national 
police organization; getting the Congress to pass a major 
criminal justice reform; and authorizing the extradition to 
the United States of a record number of wanted criminals, 
including drug king-pins. The President's actions reflect his 
commitment to intensify security-related cooperation with the 
U.S., and his willingness to incur political risk in doing 
so.  On June 30, President Bush signed the Merida Initiative, 
a 450 million USD package that provides funding for technical 
assistance and equi 
pment for Mexico to use in their fight against 
narco-trafficking.  This assistance is a key example of our 
cooperation in the counter narcotics arena. 
 
Strong Leader in a Conflictive Environment 
------------------------------------------ 
 
¶5.  (U) President Felipe Calderon is showing strong 
leadership at home and abroad in a manner much appreciated by 
Mexicans.  Although he won election with a bare 36% plurality 
in a three-way race, an opinion poll published Sept. 1 in the 
major daily Reforma showed that 62% of Mexicans approve of 
his performance to date. Nevertheless, the political climate 
overall remains conflictive, with a congress closely divided 
between the president's right-of-center National Action Party 
(PAN), the leftist Democratic Revolutionary Party (PRD) and 
the left-of-center Institutional Revolutionary Party (PRI). 
Calderon faces significant domestic challenges in pursuing 
his security, economic and social reform agendas.  At the 
same time, he must chip away at the historic Mexican 
ambivalence toward the U.S. that has slowed progress on many 
 
MEXICO 00002890  002 OF 004 
 
 
common fronts, including security.  Because of this divided 
political environment, it is difficult to predict the results 
of the mid-term Congressional elections to be held in July 
¶2009. PRD' s fortunes seem to be waning and good showings by PRI 
candidates in state and local elections over the past year 
may be a harbinger of strong gains in next year's mid-term 
elections. 
 
Stable but Vulnerable Economy 
----------------------------- 
 
¶6. (U) U.S. strategic interests in Mexico are tied to three 
key economic factors:  (1) a population of 110 million 
bordering the United States with a poverty rate over 40 
percent, (2) the second largest supplier of oil to the U.S. 
in 2007 (though so far this year it has slipped to third 
behind Canada and Saudi Arabia), (3) over one billion dollars 
a day in two-way trade in goods and services, with a highly 
integrated production cycle between factories in the U.S., 
Mexico and Canada. 
 
Poverty and Economic Performance 
-------------------------------- 
 
¶7.  (U) Mexico has the highest income inequality of any 
nation in the OECD.  The latest Mexican government figures, 
(from 2006) show the poverty rate declined slightly to 42.6 
percent overall, with 10.3 percent living in "food-based 
poverty," unable to meet the nutritional needs of their 
families.  Widespread poverty encourages illegal immigration, 
narcotics smuggling to the United States, and other forms of 
illicit commerce.  Growing income inequality fuels the 
tensions that almost resulted in the election of a populist 
President, Andres Manuel Lopez Obrador, who openly embraced 
President Chavez of Venezuela. 
 
¶8. (U) President Calderon inherited a stable, growing economy 
tightly linked to U.S. economic cycles.  Mexico chalked up an 
estimated 3.3 percent growth rate in 2007, rebounding from 
near zero growth in the first years of the decade.  Real GDP 
growth is expected to slow to around 2.6 percent this year, 
primarily due to the U.S. economic slowdown.  Inflation, 
fueled by spiking international food and energy prices, has 
risen in recent months to over 5 percent, prompting the 
Central Bank to raise interest rates 
in June 2008, shortly after the government had reduced import 
tariffs for key food items, increased subsidies for poor 
consumers, and obtained voluntary price controls from 
producers.  Most jobs currently being created in Mexico are 
in the informal economy, which the World Bank estimates 
employs 27-45 percent of the working age population.  Many 
here are growing concerned about Mexico's ability to compete 
in an increasingly globalized world, as it loses market share 
to China and other emerging economies.  In his second State 
of the Union Address, issued on August 27, Calderon claimed 
that 800,000 formal jobs have been created in Mexico.  Mexico 
has achieved a 3 percent GDP growth, not bad for a global 
environment characterized by recession and high inflation, 
but still insufficient to progress. Calderon highlighted that 
Mexico, except Canada, had the lowest inflation in America. 
 
Need for Bolder Economic reform 
------------------------------- 
 
¶9.  (U) World Bank, OECD, Mexican and other economists say 
Mexico would need sustained, long-term growth rates of at 
least six percent to alleviate widespread poverty -- but 
cannot achieve that level of growth without structural 
economic reform beyond what President Calderon has currently 
proposed.  We agree with Finance Minister Agustin Carstens 
that in order to compete internationally and develop the 
poorest parts of Mexico, Mexico needs broad reform to improve 
tax collection, reduce reliance on oil income, confront 
growing pension liabilities and payments on government 
borrowing outside the federal budget, and provide needed 
spending on poverty alleviation, education, health and 
infrastructure. Mexico desperately needs education reform, 
since currently 60 percent of its people do not graduate high 
school.  In order to achieve sustained robust growth, Mexico 
must improve competition in an economy long dominated by 
business monopolies and oligopolies, and to take on powerful 
labor unions (including the natio 
nal teachers union) in order to amend labor laws that 
discourage job creation in the formal economy. 
 
¶10.  (U) While President Calderon has achieved more reform in 
his first two years in office than his predecessor did in six 
 
MEXICO 00002890  003 OF 004 
 
 
years, the lack of a majority in Congress has forced him to 
compromise with the special interests that have long slowed 
progress in Mexico's economy.  While the President's skill at 
pragmatic political negotiation has led to a series of 
successful economic reforms, it has also meant the reforms 
were watered down and are not yet sufficient to place Mexico 
on a sustained growth path sufficient to alleviate widespread 
poverty.  Reforms to date include a tax reform that solved 
about one-third of the need for additional collections, and a 
pension reform that combined with that of his predecessor 
solved about 80 percent of the insolvency crisis in Mexico's 
pension systems. 
 
¶11. (U) To overcome a key barrier to economic growth, 
President Calderon has announced a National Infrastructure 
Plan, under which his government would spend five percent of 
GDP for the next five years to improve Mexico's 
long-neglected infrastructure.  The President recently joined 
with the leader of the national teachers union to announce a 
program to improve primary education, although many are 
skeptical that the union will allow real reform.  On August 
6, Calderon named his pro-business former chief of staff, 
Gerardo Ruiz Mateos, to be the new Secretary of the Economy 
to aid him in the battles against rising inflation, falling 
remittances, and the informal sector. While Calderon's 
government has taken incremental steps to reduce the market 
dominance of monopolists and oligopolists in key sectors like 
telecommunications and banking, Congress has blocked serious 
reform.  Currently, Mexico is in the midst of a heated debate 
over the President's rather modest energy reform proposal 
(see below). 
 
Actively Seeking to Expand Trade and Investment 
--------------------------------------------- -- 
¶12. (U) President Calderon has made increased international 
trade and investment a cornerstone of his presidency.  In 
June 2007, he created ProMexico, a federal entity charged 
with promoting Mexican exports around the world and 
attracting foreign direct investment to Mexico.  He has also 
worked to strengthen economic relations with European and 
Asian countries in order to lessen Mexico's dependence on the 
U.S. economy.  Last year, Mexico's FDI inflows reached a 
record 23 billion USD while at the same time the percentage 
of such inflows originating in the U.S. decreased to 47.3 
percent, only the second time since NAFTA implementation that 
the U.S. has accounted for less than half of Mexico's FDI. 
Mexico has also seen its percentage of exports to the U.S. 
decrease from 87 percent in 2004 
to 82 percent in 2007.  As the U.S.'s economic slowdown 
continues, Mexico will expand efforts to diversify away from 
a U.S. centered economy. 
 
¶13. (U) That said, Calderon is eager to deepen commercial 
integration with the United States and the rest of the 
region, something his government views as essential to 
strengthening competitiveness vis-a-vis competitors, 
especially from Asia.  In March, Calderon stated that Mexico 
was ready to talk to Panama about restarting stalled 
discussions on a free trade deal.  Discussions over a 
Mexico-Peru FTA have entered the final round.  Mexico sees 
the August 15 entry into force of the CAFTA-DR textile 
accumulation provisions as a model for linking together the 
free trade agreements among common partners in the 
Hemisphere, and is working with like-minded Latin countries 
in the Pacific Arc Forum to harmonize rules of origin among 
common free trade partners. 
 
Energy 
------ 
 
¶14. (U) After Canada, Mexico was the largest source of U.S. 
oil imports last year.  We therefore have a strong strategic 
interest in continued stable supplies of Mexican oil. Within 
Mexico, energy is an extremely sensitive topic tied to 
national sovereignty, but the energy sector requires 
difficult reforms urgently.  Mexico's oil production and 
reserves continue to decline due to a lack of investment in 
oil exploration and production.  Sufficient investment funds 
are not available because of the constitutional prohibition 
on private investment and the fact that most of Pemex's 
revenue goes to pay for as much as 38% of the government's 
budget.  Pemex's liabilities have grown so large that it can 
no longer fund investment in exploration through borrowing in 
 international markets.  President Calderon understands that 
declining oil production can only be addressed through fiscal 
reform to reduce the amount of Pemex revenue sucked into the 
government budget, and through energy reform to improve the 
 
MEXICO 00002890  004 OF 004 
 
 
efficiency of Pemex operations and allow for private and foreign 
investment in the petroleum sector. 
 
¶15. (U) A comprehensive tax reform package was passed last 
year and there is currently a mild energy reform package 
being heatedly debated in the Mexican Congress as well as in 
the court of public opinion.  Initial indications are that 
some type of energy reform is likely to pass and could 
provide some additional flexibility for PEMEX and pave the 
way for further reform.  Analysts anticipate an intense month 
plus of congressional discussions which could lead to a 
consensus package being passed by early October.  (The 
Mexican Constitution requires that the federal revenue and 
appropriations bills be approved at the end of October and 
mid-November respectively, and both of these will be heavily 
impacted by any reform to PEMEX.) While the package that the 
Calderon administration submitted to Congress would not open 
Pemex up to the level of investment that it sorely needs, it 
seems to be a small but important step toward the large task 
of reforming Pemex. While polls indicate that most Mexicans 
now understand som 
ething needs to be done with PEMEX, unions and opposition 
parties reflect the views of many Mexicans who are skeptical 
of foreign involvement.  Even seemingly benign, factual 
statements by U.S. officials about Mexico's petroleum sector, 
such as those made by President Bush in March 2007 or former 
Fed Chairman Greenspan several months later set off a tempest 
of responses and front page condemnations, including from 
officials largely supportive of opening the sector. 
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 / 
BASSETT