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### Viewing cable 06MEXICO2220, TEN ECONOMIC CHALLENGES FACING MEXICO'S NEXT PRESIDENT   REFTELS: AS NOTED IN TEXT

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
06MEXICO2220 | 2006-04-26 19:07 | 2011-02-14 12:12 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Mexico
Appears in these articles: http://wikileaks.jornada.com.mx/notas/situacion-economica-de-mexico-como-parte-de-la-agenda-de-seguridad-de-eu

`

    VZCZCXRO5871
    RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
    DE RUEHME #2220/01 1161946
    ZNR UUUUU ZZH
    R 261946Z APR 06
    FM AMEMBASSY MEXICO
    TO RUEHC/SECSTATE WASHDC 0524
    INFO RUEATRS/DEPT OF TREASURY WASHDC
    RUCPDOC/DEPT OF COMMERCE WASHDC
    RHEBAAA/DEPARTMENT OF ENERGY WASHDC
    RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
    RUEHFR/AMEMBASSY PARIS 0337
    RUEHOT/AMEMBASSY OTTAWA 2214

` `

    UNCLAS SECTION 01 OF 08 MEXICO 002220

    SIPDIS

    SENSITIVE
    SIPDIS

    STATE FOR WHA/MEX, WHA/EPSC
     STATE PASS USAID FOR LAC:MARK CARRATO
    TREASURY FOR IA MEXICO DESK: JASPER HOEK
     COMMERCE FOR ITA/MAC/NAFTA: ANDREW RUDMAN
    ENERGY FOR KATHY DEUTSCH  PARIS FOR USOECD

    E.O. 12958: N/A
    TAGS: ECON EFIN EINV PGOV PINR MX

    SUBJECT: TEN ECONOMIC CHALLENGES FACING MEXICO'S NEXT PRESIDENT   REFTELS: AS NOTED IN TEXT

      ------------------------
    SUMMARY AND INTRODUCTION
    ------------------------

    ¶1. (SBU) Whoever wins Mexico's presidential election on July 2  WILL inherit both the economic strengths built and bolstered  during the Fox Administration and the daunting challenges that Fox  leaves unfulfilled or simply unaddressed. Fox's major economic  legacy will be the macroeconomic stability that prevailed during  his six-year term and the fruits this stability have borne: low  inflation, a solid banking and financial sector, a middle-class  housing boom, and the rapid expansion of credit to business and  consumers. But as positive as this legacy is - and despite  efforts by Fox's economic team to "armor-plate" Mexico's economic  institutions against the political pressures his successor will face - the challenges Fox leaves are formidable. This cable  considers ten of them:   -- Reform the Tax System and Maintain Fiscal Balance.  -- Defuse the Pensions Time Bomb.  -- Confront Declining Oil Reserves and Reform the Energy Sector.  -- Take on the Unions without Shutting Down the Country.  -- Plan for a Transition to Fully Open Agricultural Trade.  -- Stop Talking about Competitiveness and Do Something About It.  -- Institutionalize the Rule Of Law And Confront the Violence.  -- Cultivate Respect For Intellectual Property Rights.  -- Invest in Human Capital Needed For a Knowledge-Based Economy.  -- Address Mexico's Persistent Poverty.

    ¶2. (SBU) Any future Mexican government faces the challenge of  creating sufficient economic growth. The conventional wisdom is  that Mexico needs to at least match the growth rates of its most  competitive peers - 6% to 8% annual growth on a sustained basis -  in order to create enough employment to lift millions of its  citizens from poverty and provide an attractive alternative to  illegal migration to the U.S. Mexico is unlikely to achieve this  without substantial investments in key sectors including energy,  telecommunications, infrastructure, and education. Furthermore, a  lack of public security, corruption, and outdated bureaucratic and  regulatory structures combine to hinder Mexico's global  competitiveness and sap economic vitality.

    ---------------------------------
     MACROECONOMIC STABILITY UNDER FOX
     ---------------------------------

    ¶3. (SBU) Mexico's next president will inherit a stable, growing  economy (Mexico 1070, 161). The Mexican economy, which is tightly  linked to U.S. economic cycles, rebounded from near zero growth in  the first years of this decade to 4.4% growth in 2004 and 3.0% in  2005. Forecasts are for continued growth of 3% to 4% growth  in 2006 and 2007. Inflation has been controlled and is expected  to remain in the current 3% to 4% range (Mexico 106, 05 Mexico  3721). Thanks to increased appetite for emerging market debt in  general and a perception of political, economic, and institutional  stability in Mexico, international investors seeking higher yields  embraced Mexican bonds.

    ¶4. (SBU) Boosted by record high oil prices, public finances have  steadily improved under Fox, with the broad measure of the budget  deficit (which includes the parastatal companies and other off-  budget items) at just 1.4% of GDP. International reserves, thanks  to oil exports, spectacular growth in remittances (Mexico 443,  2042, 2097, 2123, 2154, 05 Mexico 4186), and a healthy tourism  sector (05 Mexico 3385), have grown to nearly USD 70 billion.

    ¶5. (SBU) An able cadre of leaders at the Finance Ministry  (Hacienda) has taken advantage of the favorable environment to pay  down Mexico's foreign debt by borrowing on the domestic market,  which has grown in depth and sophistication. Total net public  debt stands at just 38% of GDP, of which foreign debt is just over  12% of GDP. To smooth any ripples created by the upcoming  presidential elections and subsequent transition, Hacienda has pre-  financed all foreign debt payments due in 2006 and 2007 (05 Mexico  5032). This favorable macroeconomic picture has kept the peso and  investor confidence in Mexico stable.    MEXICO 00002220 002 OF 008

    -----------------------------
     I. REFORM THE TAX SYSTEM AND  MAINTAIN FISCAL BALANCE  -----------------------------

    ¶6. (SBU) One of Mexico's most pressing public policy problems is  its fiscal system, which currently relies on oil-related revenues  for 37% of the federal budget (05 Mexico 5998, 04 Mexico 9273).  States and municipalities in turn rely on transfers, largely  linked to oil-revenues, from the federal government for nearly all  their revenues (05 Mexico 6865). Non-oil-related taxes, including  individual and corporate income taxes and a value-added tax (VAT),  accounted for less than 10% of GDP. This low tax base and an over-  dependence on volatile oil revenues have hindered adequate long-  term investments in education, health, and transportation  infrastructure (05 Mexico 6966, 5852) and will limit the ability  of Fox's successor to respond - responsibly - to the relentless  demands he will face from his various constituencies. The next  president will need to expand the tax take, especially from the  middle class and the rich.

    ¶7. (SBU) Due to a prohibition against private investment in the  energy sector, the government must provide the tens of billions of  dollars needed in energy investments in the coming decade. An  inefficient state-controlled energy sector also eats away some 1%  of GDP in annual electricity subsidies alone. Booming oil  revenues have largely been squandered on subsidizing electricity,  gasoline, and natural gas consumption (05 Mexico 5635). Luckily,  oil revenues have been high enough to keep public finances healthy  for the time being. However, the current system, which spends  rather than saves excess oil revenues (05 Mexico 2460), will not  withstand a major drop in oil prices without either drastic budget  cuts or increased borrowing. Proposed fiscal reforms center on  expanding the tax base by applying the VAT to food and medicine  (currently not taxed), lowering taxes on the state-oil monopoly,  Pemex, and improving state and municipal capacities to raise their  own revenues (04 Mexico 6480).

    ----------------------------------
    II. DEFUSE THE PENSIONS TIME BOMB
    ----------------------------------

    ¶8. (SBU) Perhaps the weakest point in Mexico's longer-term budget  picture is a public pensions system with enormous and growing  unfunded liabilities which each year consume a greater portion of  the budget. The actuarial deficit (the money that would be  required to fully fund) of Mexico's pension promises to government  and parastatal workers is estimated at well over 100% of GDP (05  Mexico 1804, 922). Mexico's government workers, workers at Pemex  and the state-owned electricity companies, and employees of  Mexico's Social Security Institute (IMSS) enjoy extremely generous  pension benefits that can exceed 100% of final salary upon  retirement. These benefits are almost entirely unfunded and  payments to retirees now come out of annual budget appropriations.

      9. (SBU) Without meaningful reforms, successive administrations will see less and less money available for other public needs. A  step was made in the right direction in 2004 when Congress  mandated that IMSS, whose workers have Mexico's most generous  pension system, could not hire new employees without fully funding  their pensions (04 Mexico 6089). This reform, however, was  thwarted by a new deal between the union and IMSS following the  resignation of longtime IMSS director and union opponent Santiago  Levy (Mexico 1655, 05 Mexico 6084). A reform to the government  employees' pension system (ISSSTE), whose actuarial deficit is  estimated at 45% of GDP, has languished (05 Mexico 184). A new  president will have to find a way to move pension reform forward.

      -------------------------------------
     III. CONFRONT DECLINING OIL RESERVES  AND REFORM THE ENERGY SECTOR
     -------------------------------------

    ¶10. (SBU) Oil revenue accounts for about one third of the GOM  budget. In December 2005 a leaked Pemex study revealed that  production in Mexico's Cantarell oil field, the second largest on  earth and representing 61 percent of Mexican oil production, would  decline by as much as 75 percent by 2008 (Mexico 1174). While  rejecting the report, Pemex executives tell us they are reasonably   MEXICO 00002220 003 OF 008    comfortable with their own projected decline rate of "less than ten percent per year" which they call "not trivial, but not  catastrophic either." Pemex has several opportunities to make up  production lost from Cantarell, but these are medium- and long-  term projects that hinge on Pemex's ability to partner with  foreign firms to bring the necessary expertise and billions of  dollars of investment capital. Mexico's greatest potential lies  in deep water of the Gulf of Mexico, but constitutional  restrictions prevent Mexico from sharing ownership of the reserves  with a foreign partner, a necessary condition for attracting  outside participation.

      11. (SBU) Investments during Fox's term will likely permit Pemex  to maintain production at relatively constant rates through 2010.  After that, Mexico's situation will require legislative changes  which would enable Pemex to maintain total production volumes near  the current 3.3 MMBD level. Without these reforms, production  will certainly fall. The only reforms now under discussion,  however, are modest changes to Pemex's corporate structure that  would allow the company to retain and invest a greater share of  its earnings. Despite reports from all political parties of broad-  based support for these changes (Mexico 1526), Congress will be  unable to pass even a limited set of changes before it adjourns  April 30. More fundamental changes to Mexico's constitution and  laws prohibiting foreign investment in the sector are not even on  the horizon right now. Discounting the possibility of a  precipitous fall in Cantarell production, and assuming oil prices  stay at least flat, Mexico's new leadership will still have to  begin to confront needed reforms immediately upon taking office to  permit the new developments needed to offset a significant medium-  term fall in production.

      --------------------------------------------- ------------
     IV. TAKE ON THE UNIONS WITHOUT SHUTTING DOWN THE COUNTRY
     --------------------------------------------- ------------

     12. (SBU) Few major reform proposals will move forward without  some confrontation or deal with the unions representing the  affected industries. Unions gained power and influence over many  decades of working closely with the PRI, delivering votes in  exchange for unaffordable benefits for workers and untold riches  for union leaders. Due to union protections, for example, the  state-owned Mexico City electric utility (LyFC) has what is in  effect its own construction and manufacturing subsidiaries with  some 10,000 employees. LyFC retirees not only retire at full  salary, but also receive the same annual union-negotiated raises  that active employees receive. In addition to unions for government and parastatal employees - including the 1.2 million  strong teachers union - powerful unions exist for  telecommunications, transportation, and mining workers, among  others.

    ¶13. (SBU) When the PRI lost its absolute control over Mexican  institutions, the PRI-controlled unions became juggernauts, and  the threat of strikes in any of the major sectors they dominate is  usually enough to force the government to back down on whatever  reforms it may be contemplating. In 2004, for example, Congress  passed a reform to the IMSS pension system in the face major  marches and protests by IMSS employees that shut down parts of  Mexico City for days - protests against a reform that only  affected future employees. IMSS Chief Santiago Levy was forced to  resign and a new contract was signed largely because the 300,000  plus strong union threatened to shut down the country's public  health system. While few would argue against the need for worker  protections, Mexico's unions have become a force against needed  reforms and in favor of economic stagnation. The economy is  especially harmed because heavily-unionized sectors (e.g. oil and  gas, telecommunications, electricity, health) are controlled by  one or few entities whose workers can literally paralyze the  country. Labor market rigidity may actually be one of the biggest  obstacles to economic growth in Mexico. Without labor market  reforms that would make it easier and less costly to hire and fire  workers, and limit their extremely generous benefits and severance  packages, investment and industrial growth here WILL be  handicapped.

    ----------------------------------
    ¶V. PLAN FOR A TRANSITION TO FULLY  OPEN AGRICULTURAL TRADE   MEXICO 00002220 004 OF 008
       ----------------------------------

     14. (SBU) Mexico's next President will face one of NAFTA's last  remaining, and most emotionally charged, issues: the scheduled  full opening of agricultural trade in 2008, when all agricultural  tariffs and quotas between the three NAFTA members will be  eliminated. Two of the most sensitive products in Mexico are corn  and dried beans; considered by many to be part of Mexico's  cultural patrimony and therefore deserving of special protection.  In addition to this cultural argument, protection advocates point  out that a substantial number of small farmers rely on these crops  for their livelihood. According to 2003 data from the Secretariat  of Agriculture, Mexico has over two million corn farmers, 85% of  whom have less than five hectares, and 56% cultivate even less  than two hectares. Although significant, there are far fewer bean  farmers - 140,000 total, about half of whom have five hectares or  less.

      15. (SBU) Some agricultural organizations have argued that a full  opening of agricultural trade in 2008 would cause severe social  upheavals, as large numbers of farmers are forced out of business  and further impoverished. This has led to calls to renegotiate or  delay open and free trade in agriculture. Lopez Obrador has made  some public statements that call into question his support for the  2008 opening and many observers doubt that PRD would follow  through on the commitment if AMLO becomes president. The PRI has  also suggested delaying measures that would open Mexican produced  corn and beans to NAFTA competition. However, current Ministry of  Economy officials and most politicians have stated that  renegotiating NAFTA is not an option and that the opening must  take place as scheduled. Many organizations appear realistic and  determined, and have begun developing plans to deal with the  transition and become more competitive by 2008. Others are simply  counting on the disproportionate political clout of the farming  sector to protect their inefficient industry and allow them to  muddle through. Those involved in corn trade point out that most  of these subsistence farmers are not really affected by the trade  since only about one-third of domestic corn actually enters into  the market, and Mexico is already exceeding their NAFTA quota for  corn imports. Nevertheless, the emotional arguments have led to  call to renegotiate. (Mexico 1839)

    ---------------------------------------
    VI. STOP TALKING ABOUT COMPETITIVENESS  AND DO SOMETHING ABOUT IT
    ---------------------------------------

    ¶16. (SBU) Mexico's waning international competitiveness as a  destination for foreign direct investment has become an obsession  among Mexican business leaders and politicians. There are no  shortage of analyses, all of which point to badly needed reforms  to Mexico's labor code, constitutional changes to allow foreign  private participation in the energy sector, reforms to the fiscal  regime, and greater respect for rule of law. But what has been  lacking is the political will to take on extremely entrenched  interests, particularly in an increasingly charged political  environment.

    ¶17. (SBU) While it is true that the combination of relatively low  wages and proximity to the U.S. is an advantage that is difficult  to match in India and China, particularly for production of heavy  and bulky items such as automobiles and refrigerators, Mexico  cannot rely on these industries if it expects to continue  attracting high levels of foreign direct investment. (Mexico 203,  206) One obstacle is Mexico's own domestic industries, many of  them powerful monopolies that have grown fat and happy in an  environment of bureaucratic inefficiencies that indirectly protect  them from foreign competition.

    ¶18. (SBU) Although Mexico last year appointed a widely respected  official to head the Federal Competition Commission, they have  thus far been unable to level the playing field for competition in  areas where the major Mexican monopolies are dominant, including  telephones, broadcasting, and cement. New investors are thus  unable to offer competitive services and lower prices. Telmex,  for example, continues to control 95 percent of the fixed line  market and charges high prices for network access (Mexico 1123, 05  Mexico 5375). Telmex fights attempts to increase competition in  the sector, using court injunctions to delay or alter regulatory   MEXICO 00002220 005 OF 008    decisions that favor other companies. Telmex and the broadcasting  giants Televisa and TV Azteca (Mexico 1080) can derail competition  in the broadcast sector by playing off of politicians' nationalist  rhetoric and old habits of protectionism. These practices have  prevented Mexico from adopting new technologies and expanding  networks.

    ¶19. (SBU) The GOM's sale of government-owned airlines Mexicana and  pending sale of AeroMexico is proof that increased competition has  positive affects on the Mexican economy. With waning market share  and ties with the government severed, Mexicana and AeroMexico are  no longer able to protect themselves from competition. Easing of  market restrictions and increased commercial opportunities enabled  new airlines to emerge and compete with the public monopolies.  The result: airline travel is becoming more affordable for the  average Mexican and niche specialty markets are being developed,  increasing employment opportunities and Mexico's client base.

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    VII. INSTITUTIONALIZE THE RULE OF LAW  AND CONFRONT THE VIOLENCE
    --------------------------------------

    ¶20. (SBU) When asked which single factor is the most troublesome  for U.S. businesses operating in Mexico, the answer is invariably  rule of law. Mexico's record on law enforcement, investigation,  and prosecution is poor, and Federal and local police departments  and judiciary are widely considered corrupt and ineffective.  Although this has an effect on many aspects of life in Mexico, it  has a particular impact on the business community. Without  stronger respect for the rule of law, and greater competence,  transparency, and reliability in Mexico's judiciary and law  enforcement agencies, U.S. businesses must compete with local  companies which have historically relied on political connections  and bribery - and have often thrived doing so. Even those  companies which are comfortable operating in such an environment  waste hundreds of millions of dollars annually doing so, whether  paying "fees" to have permits processed, settling lawsuits under  egregious terms in order to keep their cases out of the court  system, or fighting criminal procedures that often arise here  against plaintiffs in civil suits.

    ¶21. (SBU) Another aspect of rule of law is the effect of  criminality and violence on businesses in Mexico. As one Mexican  businessman stated, "violence is not the friend of investors," and  indeed the Mexican Institute on Competitiveness published a report  (Mexico 1536) which estimated that Mexico loses 15 percent of GDP,  or USD 1.8 billion, annually due to crime. Although no business  or association was WILLing to identify a specific investment that  was lost due to the security situation in Mexico, they all  acknowledge that it raises the cost of doing business here.  Security costs have doubled over the last two years and companies,  while not afraid to invest, note that they are fearful of losses  from hijackings and threats of kidnappings directed at their  executives.

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    VIII. CULTIVATE RESPECT FOR INTELLECTUAL  PROPERTY RIGHTS  -----------------------------------------

      22. (SBU) Although Mexican government officials under the Fox  Administration increased their dedication to protecting  intellectual property, the scope and scale of IPR abuses across  multiple industries continues to outpace their efforts. The  International Intellectual Property Alliance estimates over $1.25  billion in trade losses in 2005 for sound and video recordings,  business and gaming software, and books. The textiles industry is  also extremely hard hit by trademark piracy. There are an  estimated 50,000 street vendors in Mexico selling pirated  merchandise.

    ¶23. (SBU) There is general agreement that Mexico has decent,  though not perfect, IPR laws on its books. The challenge for the  new administration is not legislative, but improved enforcement.  Although PGR, IMPI and Aduanas annually seize and destroy millions  of counterfeit and smuggled merchandise, there is little follow-on  prosecution. IPR violators in Mexico are safe in the knowledge  that although they may lose some merchandise to official raids,   MEXICO 00002220 006 OF 008    there is little chance that they will face jail time or monetary  sanctions (Mexico 1522). Improved prosecution depends on two  factors - agencies must improve their investigation and case-  building techniques, and the Mexican judiciary must be willing to  enforce the law. Unfortunately, judges and magistrates here have  historically shown little understanding or appreciation for the  importance of IPR protection and the ties between IPR piracy and  other serious crimes (Mexico 969).

      24. (SBU) The stakes for Mexico are high if the situation does not  improve. The Mexican Recording Industry Association estimates job  loss for their industry alone at over 25,000 due to piracy. And,  industry efforts to cut prices to compete with cheap pirated  copies means they now have little profits to invest in launching  new, home-grown talents. According to the Association president,  the last time they launched a major Mexican artist was 8 years  ago. Other industries face similar job losses and disincentives  for innovation.

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     IX. INVEST IN THE HUMAN CAPITAL NEEDED FOR  A KNOWLEDGE-BASED ECONOMY
    -------------------------------------------

    ¶25. (SBU) With over 100 million people and the 12th largest  economy in the world, Mexico could be a major economic power. But  Mexico lags badly in most socio-economic indicators (05 Mexico  7288), including the vital area of education and technology. Some  50% of Mexican adults over age 15 have had only a primary school  education. Mexico's education spending per student at the primary  and secondary levels is just 28% and 29%, respectively, of the  OECD average. Relatively well-paid teachers are simply not  delivering results. The percentage of Mexican 15 year-olds  reading at the two highest levels of a standardized test is just  6.9, compared to an OECD average of 31.8 and a U.S. figure of  33.7. This neglect of education and a general lack of  entrepreneurial spirit, perhaps quashed by decades of corrupt PRI  rule that promoted dependence on the state, have resulted in a big  lag in technological innovation and adoption. This lag will  handicap Mexico's prospects in an age of globalization where the  creation and adoption of technology are keys to improved  competitiveness.

    ¶26. (SBU) Mexico's lack of global competitiveness, coupled with government bureaucracy, deters potential innovators, especially  Mexicans, from setting up business in Mexico. Lengthy patent  processes, a lack of markets for specific products, and a lack of  venture capitalists willing to risk money on new companies with  little or no-track record hinder the development of Mexico's high  technology sectors. In addition, most businesses and citizens  have little access to more common technological tools like the  internet and they lack the knowledge of how to efficiently utilize  them.

    ¶27. (SBU) OECD statistics confirm the need for Mexico to nurture  its technology sector. Mexico has just one-third the OECD average  of internet users per 1,000 people, and just one-fifth the U.S.  figure. Mexico has just 0.8 broadband internet subscribers per  100 people vs. an OECD average of 10.1 and 24.9 in Korea, one of  its global competitors. The International Telecommunications  Union's "Digital Access Index" ranks Mexico 64th, well behind  nearly all other OECD members. If modern economies depend and  thrive on innovation, Mexico, judged by patent applications, is in  trouble. With one-third the U.S. population, Mexico receives only  one-fourteenth the number of patent applications as the U.S., and  of those, only 4% are filed by Mexicans (05 Mexico 7316). In  order for Mexico to increase access, utilization, and technology  investment, it will have to find new ways to attract foreign  investors and build global confidence in its technology and R D  sectors. Streamlining the patent process, easing licensing  regulations, and developing technology investment incentives would  also boost output, lower costs, and increase access in the sector.

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    ¶X. ADDRESS MEXICO'S PERSISTENT POVERTY  ----------------------------------------

    ¶28. (SBU) For a country as rich in natural resources as Mexico,  and with its physical proximity to the largest market in the   MEXICO 00002220 007 OF 008    world, Mexico's poverty is a persistent national shame. This is  perhaps Mexico's greatest economic challenge, and not one that can  be solved by simply tweaking one policy or another. To Fox's  credit, the "Oportunidades" program has been recognized as one of  the best government poverty reduction programs in Latin America  (recently featured in the Economist). It is structured as an  incentive program for families (in rural areas particularly) to  keep kids in school and to make regular visits to the doctor. The  incentives include support payments and a discount/coupon system  for families to have access to lower cost staple foods. A World  Bank study indicated the Oportunidades coverage of 4 million  families (now covering more than 5 million of the poorest families  living in rural areas) resulted in increased enrollment for both  boys and girls in middle school.

      29. (SBU) Mexico's widespread poverty has nevertheless created the  phenomenon of large numbers of migrants traveling legally or  illegally in the U.S. to earn a living and support their family.  This in turn has created a massive remittance flow to Mexico -  largely to Mexico's poorest regions - that itself has created  certain opportunities for economic development. The level of  remittance income in 2005 grew by 17%, to $20 billion USD, and was  up 27% in January 2006 (to $582 million USD) compared to January  2005. Officially, remittances are equal to approximately 2.4% of  national GDP, while unofficial sources claim a much higher total  (some as high as 10%). Remittances may equal as much as 30% of  the GDP of rural states such as Michoacan and in some rural  agricultural communities, remittances are responsible for 60-70%  of the total economic activity.

    ¶30. (SBU) There are numerous organizations attempting to take  advantage of the opportunity presented by the skyrocketing flow of  remittance income, but they are inadequate to promote large-scale  investment and capital-building. The government development bank,  Bansefi, has been leading these efforts for the GOM; other  organizations, including USAID, also have programs encouraging  rural development by bringing residents into the formal financial  system. Banks, which have traditionally shied away from offering  services in rural areas, now claim to be reaching out to  previously under serviced populations. However, in reality, most  national banking chains are still avoiding communities of less  than 25,000 inhabitants, where a majority of remittance recipients  live. The next administration will face the challenge and  opportunity of turning remittances - Mexico's second largest  source of foreign exchange (after oil) - into a productive engine  of economic growth and continuing the expansion - begun under Fox  - of the financial sector into rural areas.

      -----------------------
    CONCLUSIONS AND COMMENT
    -----------------------

    ¶31. (SBU) These are considerable challenges, and there is no  reason to believe that any of the three major candidates will be  able to confront all of them, or even many of them, in a concerted  and effective way. These challenges are all interdependent.  Increased competitiveness is dependent on lower energy,  telecommunications, and transportation costs, as well as a better-  educated workforce and greater use of technology. Energy reform  is impossible without some form of fiscal reform that would  replace lost oil-related budget revenues. Increased investments  in education, health, and infrastructure are made much more  possible by pension and fiscal reforms. Pension, energy, and  regulatory reforms, are dependent on dealing with unions. It will  be very difficult for future president to successfully link these  various reforms into a comprehensive strategy for the next six  years, but their interplay will be impossible to avoid. Hanging  over all these challenges is one that is more intangible, though  nevertheless critical: how not to squander the macroeconomic  stability that has prevailed throughout the Fox years. The challenges facing Fox's successor will be difficult enough, and  the pressures on him sufficiently daunting, without having to  confront an environment of inflation, high interest rates, and  stagnant growth.

    ¶32. (SBU) Fundamentally, Mexico is a land of privilege (or lack  thereof) rather than opportunity. Its political debates, as  Mexican columnist Luis Rubio often points out, tend to be backward-  rather than forward-looking. There is little awareness among the   MEXICO 00002220 008 OF 008    Mexican general public of how fast the world outside is changing,  and how much Mexico needs to change just to avoid slipping further  behind. The next president, even if genuinely reform-minded, and  even if he has a working majority in the Congress, will only have  enough political capital to try two or three major reforms. The  protected special interests will ensure that those efforts will be  difficult and drawn-out, and likely will lead to a scaling-back  from the original level of ambition. But, as this message  indicates, two or three major reforms will not be enough. The way  out of the dilemma for Mexico is to undergo some sort of sweeping  cultural transformation, leading to a strong national consensus in  favor of policies leading to higher productivity and economic  growth. The visionary leadership that might be capable of  inducing such a transformation is not (so far) evident in the  three major candidates currently running for president in Mexico.  Such transformations have taken place in East Asia, but so far,  not in Mexico or elsewhere in Latin America. We need to continue  to push for growth-oriented policies here, through both bilateral  and trilateral mechanisms. But the leadership to make them happen  must be home-grown.
    GARZA

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