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Challenges For A Postelection Mexico: Issues For U.S. Policy

Speaker: Pamela K. Starr, Eurasia Group; Author, Challenges For A Postelection Mexico: Issues For U.S. Policy
Presider: Julia E. Sweig, Nelson and David Rockefeller Senior Fellow for Latin America Studies and Director for Latin America Studies, Council On Foreign Relations
June 23, 2006
Council on Foreign Relations

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(Note: This event was fed in progress.)

JULIA SWEIG: (In progress)—Pamela Starr, who has most recently joined the Eurasia Group as a Latin America analyst and director for Mexico, but more importantly, she’s lent her time and energy and experience and intelligence to the Council on Foreign Relations—or as important—to generate what I think is a really first-class look at the institutional and political and economic issues and bilateral issues that the next Mexican president will face on July 3 rd or 4 th or in December; that is, when we know who he is and then, of course, after the inauguration in December. So I want to welcome you all here on behalf of the Latin America Program and the Council on Foreign Relations. We’ll have about an hour to have a discussion. Pam will take 10 or 12 minutes to lay out the argument and findings and recommendations of the report. And as small as we are, we have a lot of knowledge in this room, so I hope we can have a good discussion.

Let me tell you that this report is going to be released in a couple of different ways. It was—we put it live on our website, cfr.org, on Tuesday morning. Andrew Selee of the Wilson Center, who directs the Mexico Program there, and Pam, then, participated with Pam speaking and Andrew moderating in a press conference call with about 30 journalists from Mexico and the United States. And the coverage has been very good and very ample and will continue in both countries.

We’re having this discussion with you today. We’re translating the report into Spanish, and that will be available Amanda, I think, said in about a week in Spanish. That will also go on-line. And then, after the election, Pam will update the report once we know who the winner is, and we will re-release it again in both languages about in the middle of July at a New York program on July 12 th. And then, I hope closer to the inauguration, again, we’ll perhaps be able to take another look at it. So this is part of an institutional commitment to Latin America that Richard Haass has really jump-started.

And I want to tell you also that we have forthcoming reports, council special reports that we will release on Venezuela and a council special report that we will release on Bolivia in reverse order— Bolivia in August and Venezuela in September.

So without any further ado, the last thing is that this conversation is on the record, and that is because, as you know, our institution’s commitment to outreach and public discussion has gotten greater. And so we’re going to have this transcript go up on our website. So if that changes the tone a bit, well, I apologize, but I think it’s very worthwhile to have the knowledge in this room get broadcast. If you want to go off the record with something, you can say so, and we’ll go off the record, and then, we’ll go back on, and our transcribers will know that.

So Pam, congratulations on this report, and the floor is yours.

PAMELA K. STARR: Thank you. Thank you, Julia. I want to thank—particularly thank Julia not only for inviting me to write this report, but also helping me work my way through the Council on Foreign Relations process of creating such a report. I think the result is a better piece of written work than I could have done alone, and I think it’s probably one of the best things I’ve ultimately done, and it’s a consequence of the council’s process. So I do want to thank you and the council for this opportunity. Let me just lay out quickly the main things in the report. My sense is that most of you probably haven’t had the time to read it. What you’ve probably done is look at the introduction, the conclusion and blow through the recommendations, and that’s about it. So what I want to do is just emphasize the big picture, what I was trying to do in this report.

The main point of the report is that Mexico’s July 2 nd election will be very important not just for Mexico, but also for the United States and for the bilateral relationship. Given that main focus, the report spends some time proving that this indeed is true, and it shows how the election is apt to affect the U.S.-Mexico relationship and how the two countries might seize the opportunity that a new presidency in Mexico provides to put the bad feelings of the past few years behind them and to reenergize a positive and mutually beneficial relationship.

With regard to that last point, I then took it upon myself to write a series of recommendations to actors in both countries about how to rethink not only the bilateral relationship, but also some of the domestic policies that each country must deal with that has an impact on the other. And my guiding principle for these policy recommendations was to be realistic, to get both groups on both sides of the border to quit shooting for ideal solutions and figure out what is doable and thereby move both countries and the bilateral relationship forward.

Let me briefly lay out why I think this election is particularly important to Mexico. Many people are talking about it as, you know, the second democratic election in Mexico, which, in fact, it’s not; that it’s an opportunity to deepen democracy in Mexico, which, indeed, it is. I’m going to focus much more on the economic factors that are facing Mexico. Whoever’s elected president a week from Sunday is going to face many of the same economic policy challenges that Vincent Fox faced.

The country’s still faces fiscal problems. On the revenue side it collects very little in tax revenue; it’s in the range of 11 percent of GDP, one of the lowest in the Western Hemisphere. As a result, the federal budget is still dependent on petroleum revenues. This is less problematic now that prices are fairly high and stable, but it’s always a questionable practice to have fiscal reliance on income from a raw material. And on the spending side, Mexico has enormous pension fund liabilities that it’s going to have to deal with in the future.

But it also has a huge backlog of human and capital infrastructure investments that it hasn’t dealt with in recent years. And it lacks an enormous amount of investment in the energy sector, specifically in petroleum exploration, the later being a consequence of PEMEX’s need to transfer the vast majority, and in the last few years, more than 100 percent of its profits to the federal government in the form of tax revenue.

Mexico also has to deal with several long-term problems such as corruption, problems with the rule of law, and rising crime—common crime since the mid-1990s, and drug-related crime, particularly in the last few years.

All of these things have led to declining competitiveness in Mexico, weak growth, and weak job creation. Whoever the next president is, he is going to have to deal with this enormous list of policy problems.

This election is also particularly important for Mexico because for the first time in memory, the candidates who are leading the race offer very clear and different solutions to these kinds of problems. I want to emphasize they’re not offering radically different solutions; we’re not looking at a radical left and a radical right. What we’re looking at in Mexico is a center left and a center right, but they do have very different visions. One is a vision in which you rely heavily on the market and use the state only sparingly to help resolve economic problems, and the other vision is one in which, although you absolutely must rely on the market, you also must use the state more aggressively to help the market operate more effectively, more efficiently, both in the generation of wealth and particularly in the distribution of it.

Thirdly, the election is important because whoever is elected president is going to face many of the same obstacles to effective governance that faced Vicente Fox. I’ll only mention two here. I’ve mentioned several in the report. One is a fairly weak presidency constitutionally, and secondly is the fact that the president is going—let me restate that: A legislatively fairly weak presidency. And secondly a presidency that must deal with a sharply divided congress on issues that, in general, require legislative approval, mostly because they require budgetary funds.

But this election is also important for the United States. It’s important for the United States because solving some of the key problems the United States has today depends on Mexico. The United States cannot solve its migration problem without dealing with the country that’s the main source of these migrants. If Mexico doesn’t generate jobs for its own citizens, they will migrate north.

Secondly, security issues. The United States relies on Mexico for a large portion of its oil imports. So energy security in the United States depends on Mexico solving its problems in PEMEX. Border security. The United States cannot secure its southern border, prevent the influx of terrorists through the southern border, without working with the other country that controls that border— Mexico.

And finally, on the issue of—what we also don’t often talk about, is the issue of global competitiveness. The United States is relying more and more on Mexico as an integral part of its production process and as a way to maintain U.S. global competitiveness as the nature of the global economy changes, as the nature of its competitors change. Its future competitors are no longer the Western Europen countries so much as countries like China and India. And Mexico is becoming an increasingly important piece in that global competitiveness puzzle. Therefore, it’s important to the United States that Mexico resolve its own competitiveness problems.

So what does this mean for the bilateral relationship? I think one of the things we have to keep in mind is that whoever is elected president of Mexico is not going to dramatically change the U.S.-Mexico relationship. Whoever is the next president, he is not going to be hostile to the United States or embrace the radical left or distance Mexico entirely from the United States. As a reaction to the less-than-effective result of Fox’s tight embrace of the United States, we are going to see a change in tone but not a change in the actual content of the relationship.

That said, a Felipe Calderon presidency would have a very different type of foreign policy than would Lopez Obrador. Calderon would pursue the same basic line as Fox’s foreign policy, with two major changes which we can lump into one category – a change of tone. Calderon will still have a very close working relationship with the United States, but without Fox’s warm embrace. And he will also try to go back to the Mexicans’ traditional policy of trying to balance its dependence on the United States by getting closer to the rest of Latin America.

Lopez Obrador will have a very different approach in the sense that he really doesn’t care about foreign policy. My favorite way of describing Lopez Obrador’s foreign policy is to think of Bill Clinton when he was running for the presidency for the first time: “It’s the economy, stupid.” What Lopez Obrador cares about is reforming and reenergizing the Mexican economy. He doesn’t care about foreign policy. As a result, foreign policy will undoubtedly take a lower profile under a Lopez Obrador presidency. But to say he doesn’t care about foreign policy doesn’t mean he doesn’t understand that it matters. He understands that Mexico exists in a globalized environment; therefore, a Lopez Obrador foreign policy is going to be one in which you only deal with the world to the extent you have to. You have to deal with the United States, if you’re Mexico, in order to encourage domestic economic growth. So that means that Lopez Obrador is not going to do anything that will upset the United States. He wants that relationship to continue to function and function well. He will not embrace Hugo Chavez, he will not return to an embrace of Fidel Castro. He simply doesn’t want problems with the United States. But he also isn’t going to have a close, aggressively cooperative relationship, as was the case in the past.

He will continue to cooperate, but on a lower profile.

In terms of specific issues, there’s not an enormous difference on the candidates in terms of migration. They propose the same sort of policy, which is legalization and guest worker program.

In terms of security, they’re both saying the same thing: continue active cooperation with the United States on issues of security and on drug trafficking.

Where they are different is how they would resolve Mexico’s domestic economic problems and therefore how it would affect the bilateral relationship in terms of global competitiveness.

The report concludes with some policy recommendations, and I don’t want to go into them in detail but run through them quickly.

I have argued that Mexico’s importance to the United States is on three main areas: migration, competition and security. The recommendations are divided into those categories.

And I think one of the most controversial recommendations, from what I’m hearing so far, is on the issue of migration. The recommendation I make here is that both countries have to come to the realization that current circumstances in the United States mean that Mexico cannot be an active partner in a any migration negotiation, in the process of negotiating a bilateral migration deal. Both countries must realize that given the current political environment in the United States, this will be a unilateral U.S. domestic decision. The United States has to decide how it wants to deal with the migration issue. The more the United States tries to involve Mexico in negotiating the content of migration legislation which then has to be approved by the U.S. Congress, the more Mexico will fail to obtain what it wants from these negotiations. Mexico is not going to get legalization. It’s not going to get a very large temporary workers program in the current climate in the United States. So any attempt to incorporate Mexico in the process simply creates bilateral tensions that flow over into other parts of the relationship.

So what we need to do is get realistic, understand the circumstances that we’re working in and not create more irritants in the relationship.

The United States, for its part, must realize there is no quick fix to the migration problem. It needs to understand that you can’t just close the border, and it is not logistically feasible to throw illegal immigrants out. So we need to think about solutions in a longer term.

“Longer term” means creating jobs in Mexico. The United States must accept the fact that if Mexico doesn’t export goods to the United States, it’s going to export jobs. So the United States has to think about what it can do to help Mexico to create jobs.

And I point to two things: small-scale assistance projects that are targeted to regions in Mexico that are heavy sending regions. This is the original logic behind the economic assistance programs in the Partnership for Prosperity—revive those and reenergize them. But also think trade, not aid. The United States must stop insisting that Mexico accept subsidized U.S. agricultural exports, and it must be more willing to allow Mexico to export its goods even when these compete with important domestic producers. If the United States wants to deal with its immigration issue, it has to think about how it helps Mexico grow.

Tied closely to this is the question of North American competitiveness. If the United States wants to be more competitive on the global scale, it needs to help Mexico be more competitive. Part of that implies similar things—these targeted aid projects.

But part of it also means, especially in the case of the U.S. Congress, being basically quiet and being patient. Let Mexico resolve its own domestic economic problems. Any time anyone in the United States comments on Mexican fiscal policy, labor policy, energy policy, whatever it is, Mexico will probably do the opposite.

So if the United States wants Mexico to move forward, it needs to accept that Mexico must solve its own domestic problems. It may not be the ideal solution from the perspective of the United States, but its Mexico’s decision.

In terms of what Mexico should do, it needs to get its domestic political act together. Mexican politicians need to quit shooting for ideal solutions. Mexican politicians must figure out how to find a compromise deal that’s neither fish nor fowl, that’s neither state-based nor market-based but a compromise that can solve its key economic problems.

And finally, on security, the United States must understand that it cannot protect its southern border without Mexican cooperation. It needs to work with Mexico.

What are the key problems here? The key problems are the drug cartels and weak law enforcement in Mexico.

On the issue of the drug cartels—a kingpin strategy isn’t sufficient; you need to go beyond that, but you can’t go beyond that without effective law enforcement in Mexico. Since this is a threat to U.S. security and since Mexico as a developing country lacks to fiscal resources to deal with this problem, the United States must be ready to help pay for it. Mexico is not Canada. It needs fiscal assistance. The United States really wants Mexico to help protect US security, it needs to help Mexico to help.

Mexico, for its part, if it’s really serious, needs to aggressively attack the challenge of building up its law enforcement abilities, and that means an aggressive policy to fight corruption in law enforcement, and for the first time in Mexican history, fork out the money to pay a decent salary for law enforcement officials—that includes the judiciary – and for more effective training and equipment.

So there’s a lot that both countries need to do in order to improve their relationship, but also in order to meet the national interest that both countries share in a better, more effective, more efficiently operating bilateral relationship.

So with that, I’ll open it up to questions.

MS. SWEIG: Fantastic. Well, I’ll save mine for later and go ahead and call on you. Go ahead.

QUESTION: Thank you.

MS. SWEIG: Just introduce yourself, please.

QUESTION: Richard Soudriette with IFES, International Foundation for Election Systems. First off, I want to congratulate you. It’s an excellent paper.

There has been a number of countries around the world over the past year that have experienced close elections. And I know there’s a lot of concern in Mexico with regard to the strength of the electoral institutions that have been built up over the course of the last 10 years.

In your opinion, in the event that we have a cliffhanger in Mexico, do you think that the institutions, the IFE and the Tribunal Electoral, are strong enough to be able to withstand the pressures associated with that? And also, if it is a close election, do you think that the candidates will accept the result no matter how close, or will they send their supporters into the streets?

Thank you.

MS. STARR: I think people often underestimate the strength of the IFE and particularly the Federal Electoral Tribunal. The tribunal has existed for 10 years, and in that time it has overturned a number of elections, including two gubernatorial elections. In every case it has done that, all the politicians, winners and losers alike, have accepted the ruling of the tribunal. I see no reason why it should be different now.

The difference in this election is that the tribunal is not legally authorized to overturn a presidential election—or rather, it’s not legally authorized to annul a presidential election. What it can do is annul the results in particular polling stations if there is some evidence of irregularities; if there’s evidence that the voters were not able to express their votes freely and fairly.

If by overturning the outcome in individual polling stations you change the percentage of the vote going to the different candidates, in a very tight election that could be enough to overturn the result of the election. But the IFE cannot annul the election and call a new presidential election—excuse me, the tribunal cannot do that.

So raises the question of what happens if there are a number of polling results overturned? The biggest concern I have in that regard is Oaxaca, where there is a teacher strike and the teachers are threatening to disrupt the election. And it’s not hard to do, since about a fifth of the polling stations will be located in schools in Oaxaca. The IFE is currently trying to relocate those polling stations if they can. But if you have that many polling stations not established, that means the results in much of Oaxaca will be overturned. So in a close race this could be decisive.

The bigger question is, will the candidates accept the results? I think regardless of the circumstances, the candidates will accept the results, but that doesn’t mean there won’t be people in the streets. There will. And there will be people in the streets regardless of who wins. If Lopez Obrador wins by, you know, .2 percent or .5 percent, Calderon supporters will be on the street July 3 rd. This election has become incredibly tense and polarized. And so his supporters will be out there on the street expressing their anger. If Carderon wins by a narrow margin, Lopez Obrador supporters will take to the street. The difference is how long they will stay there. And I think without a doubt, Lopez Obrador supporters are more prone to stay there longer.

 

But I see no reason why Lopez Obrador will not accept the outcome of the election as it is ruled by the Federal Electoral Tribunal, not only because it doesn’t serve his purposes to undermine that particular institution, but it also doesn’t serve his purposes to govern the country without having—without being seen as a legitimately elected president.

 

He wants to make enormous changes in the way the Mexican economy functions. He wants to go after the privileges of special interest groups, particularly the business elite and the union elite. You cannot do that if you are not seen to be legitimately elected.

 

So what he would do is sustain protests, I would say, throughout—I would think—throughout the month of July and into August, but orderly protests in order to solidify his base, solidify support behind him so that he is in a position to block many of Calderon’s reforms in a legislature and position himself for 2012. That’s my read of him and his campaign team.

 

QUESTION: Thank you.

 

MS. SWEIG: I’ve got Sid and then Dane.

 

QUESTION: I enjoyed reading your paper. Thank you very much. (Off mike.)

 

Let me make a suggestion which is different from what you made, maybe just the opposite of what you made in one case.

 

MS. SWEIG: Try to speak up a tiny bit, because of the transcription.

 

QUESTION: Maybe just the opposite. It also may not be realistic in either country, but let me make it anyhow. (Off mike)—that was one of your caveats.

 

I think that the United States should provide a lot of aid. The aid ought to be in the billions. In other words, I’m not talking about small projects. It can be along the lines of what the European Union does for areas in the union that are behind.

 

And the purpose would be, really, to build up not farming, or not the corn growers, because they don’t have a future no matter what you do, in the rain-fed areas, or their future is to live in poverty for the rest of their lives or migrate to cities where they can get an education. Therefore, to try to build up regional centers, cities, where you can get manufacturing and other jobs and there’s a migration possibility within the region or by commuting to the region, not going great distances.

 

But I wouldn’t do that without a quid pro quo. And the kind of quid pro quo that I think I would like to see is that Mexico increase tax collections. Let’s pick a number. I don’t care what it is, 16 percent of GDP, 18 percent of GDP. The reason I suggest these, it deals with a whole bunch of issues. It deals with what you do with people in the rain-fed areas. No matter how you open up the U.S. market, they’re not going to benefit much. It deals with migration, maybe even create some jobs. It deals with the fact that they’re—(off mike)—PEMEX, and I don’t think the future of Mexico without—I don’t think it’s secure on energy, because exploration has been next to nothing and they found nothing.

But it’s controversial because I don’t think we like aid, and I’m not sure Mexico wants us to interfere in some of the very vitals of its system.

I have tested it on Mexicans, how they’d react, and I got a mixed reaction. (Laughter.)

MS. SWEIG: Where would that—I’m going to let Pam answer—but where the conversions funds—how would we raise all of that cash? Our tax situation has changed as well, and we’re more regressive than you’re suggesting Mexico adopt.

QUESTION: Well, I said it would be controversial—(laughter)—

MS. SWEIG: All right. Well, now I’ll let Pam take the—

MS. STARR: No, I mean, I completely agree, Sidney, in the sense that I think it’s something the United States ought to do. The United States ought to be able to see that Mexico—that having a well- developed Mexico is in the U.S. interest, and part of that would involve a much more aggressive assistance program. But I don’t think it’s politically viable, certainly not today, given the nature of U.S. public opinion about foreign assistance, U.S. public opinion about Mexico as being the source of all these illegal immigrants. Its not a really positive attitude about helping Mexico, since the perception is that Mexico’s not helping itself, and third, because of the size of the fiscal deficit.

It’s something I actually—a wording I had in the report but—

QUESTION: You think the Republicans care about the size of the fiscal deficit? (Laughter.)

MS. STARR: When it comes to sending aid to Mexico, yes. (Laughter.) Absolutely. In that sense, yes.

And I agree with you absolutely that Mexico needs to increase tax collection. It needs to capitalize PEMEX. It also needs to reduce labor costs. But Mexico’s got to figure out how it can do that itself, and it depends on who’s elected president how Mexico goes about doing that. All three candidates say we have to do that: raise revenues, reduce labor costs and capitalize PEMEX. But how do we go about doing it is very different. MS. SWEIG: Right. So—

QUESTION: I’m not going to argue. (Laughter.)

MS. SWEIG: I’ve got Dane and Michael—it’s Michael?—and then I don’t—I’m sorry—

QUESTION: Jeff, thanks.

MS. SWEIG: Jeff. So—

QUESTION: Dane Smith from American University.

You’ve suggested that the U.S. needs to move toward assistance to Mexico on law enforcement. Could you clarify what the positions of the two candidates are on this issue of the drug cartels in law enforcement, and what are the implications of the victory of one or the other on this—

MS. STARR: Yeah. The two candidates are very similar in the sense that they both realize that both common crime and drug-related crime is over the top, and it has become the number one concern of all voters in Mexico, but it’s not driving this election. Roberto Madrazo, the candidate of the former ruling party, tried to take that as his main campaign theme, that he is the man who could actually solve the security problem, and it didn’t get him very far. I mean, he’s still sitting in a respectable third position, but he is in third position.

All of them argue that we need to do—use the military more, continue—rely on the military in fighting the drug cartels in large measure because the military’s much, much less corrupt than local police forces. All three of them favor a national police force unifying the current—I believe it’s three federal police forces into a single national police force. They all say they want increased cooperation between federal and state authorities. Keep in mind that Mexico is a federal system, which means the states control the state and local—the states and the localities control their police forces, and that’s where the biggest problem is. The federal police forces have improved dramatically in the last 10 to 15 years, but the problem is serious a the state level, and it’s also uneven. In some states, the police forces are very good; in other states, they are very, very bad.

And in terms of what you can do or what needs to be done and what the candidates think need to be done, I think either candidate would be very, very receptive to any kind of U.S. assistance that would be designed to improve the training of police forces, particularly the training of the judiciary, which is not at all controversial, which—actually someone in the U.S. embassy said to me that it’s a really great backdoor way of getting at the cartels because they don’t think about the quality of judiciary as much as they do as the quality of the police forces. So they may not notice that that’s going on. The main problem both candidates have is that Mexico has limited fiscal revenues, so where do you find that money? Calderon is going to be more apt to spend, I think, on security, specifically on improving the quality of police forces, than Lopez Obrador. But they would be both willing to accept assistance from the United States.

That said, they both have—would have a problem with accepting joint operations with U.S. forces, whether they be military or police forces or the FBI, the Border Patrol, whoever it is. This is a historic sensitivity in Mexico. I think Felipe Calderon personally would have no trouble with it. But he has to deal with a country—and particularly a legislature—that would have enormous difficulty with it, and that is a big problem that Mexico needs to overcome in this process, I think, of working with the United States to help improve law enforcement in Mexico.

So, again, not enormous differences. It’s differences on the margins.

MS. SWEIG: Michael.

QUESTION: Yeah, Mike Mosettig with the NewsHour.

First of all, if I heard you right, you said at the very top, this is not the second democratic election in Mexico. I’d like your explanation of that.

MS. STARR: (Laughs.)

QUESTION: It’s an intriguing phrase/sentence.

And secondly, given how institutionalized corruption is throughout many aspects of the society, how much headway can one president make in one term?

MS. STARR: Mm-hmm. I’m going to start with the easier question first.

Mexico’s had several democratic elections throughout its history. Now, we can go back in time. There was one in 1860. There was one in 1912—was when Madero was elected—

QUESTION: ‘22.

MS. STARR: Huh?

QUESTION: ‘22.

MS. STARR: No, no, no, Madero.

QUESTION: I think ‘11.

MS. STARR: 1911? It was anyway, in there.

But it’s also how do you define a democratic election. Zedillo was elected freely and fairly, there’s no question about it. He was. By then the Electoral Institute existed, and nobody thinks there was fraud – significant fraud in that election. But it was the ruling party again. There were also other times in which there was lots of competition amongst individuals within the ruling party. So it’s all on how do you define what is a free and fair election. And so it’s just—it’s confusing.

If Lopez Obrador wins, it’s clearly the second time that an opposition candidate wins, and it’s the first time, clearly, that the winner comes clearly from the opposition and that the former ruling party doesn’t have a chance.

In terms of the tougher question, corruption is an ingrained behavior learned over time and it doesn’t go away overnight, there’s no question about it. One president cannot change it, just as Vicente Fox couldn’t change it. But it’s a process. Fox dramatically reduced corruption in the highest levels of government. That’s a step forward. The next president, if he wants to undertake a crusade against corruption can make another huge step forward. The only one talking about that is Lopez Obrador. Can he eliminate it? Of course not. Nobody can. And he really doesn’t care about it at the lower bureaucratic levels. What he cares about is eliminating corruption in state subcontracting, which the numbers are estimated at about 20 to 30 percent of any state contract that is lopped on top of it and that pays off various people at various points. If you can cut that in half, you can dramatically increase fiscal revenues—(laughter)—or rather, dramatically reduce spending, and you can direct that to other things. It’s a process of stepping forward.

And one of the recommendations I make in the report is that Mexico ought to think about undertaking a crusade against—an anti-crime, anti-corruption crusade because there is a sense also in Mexico that corruption in the police force is an inevitability and there’s little-to-nothing you can do about it. And until you change that attitude in the public, you’re going to have trouble dealing with the problem.

So I guess the answer to the question is yes, one president can make a big difference; can’t fix the problem.

MS. SWEIG: Jeff. QUESTION: Jeff Pryce, Steptoe & Johnson. Two questions. One is with regard to the relationship with the United States and foreign policy and economics. I mean, assuming that any—Lopez Obrador or anybody is going to want to have decent relations with the United States, and yet have a constituency on the left, which he’s going to have to placate, to what degree do you think he’s going to have to play the hand he has by trading off, say, warmness to Castro to placate his own left in order to get away with either domestic economic policies which are not popular, or more cooperation with the United States, and how do you think he’s going to play the cards that he has in that regard?

And the second, I think the biggest issues is probably going to be NAFTA, as far as the economic issues, in 2008. I wonder if you could say more about how the various candidates are going to approach the run-up to liberalization in that area?

MS. STARR: In terms of placating the left, there’s no question that Lopez Obrador is going to have to placate sectors within his party that are extreme left, and there are many who actively support Hugo Chavez.

And Mexico’s relationship obviously with Castro is a historic one. What Lopez Obrador will do, I’m convinced, is that he will normalize relations with both countries, and basically say Mexico has no need to be fighting with anybody, left or right. So he’ll normalize relations and be done with it. That’s all he will do. That’s the carrot he’s going to give to the left, and he’s not going to do anymore than that.

My sense also is, certainly at least in the first—I think he’s going to have an enormous honeymoon with the left in Mexico because very much unlike the PAN, the PRD is a much more—as much as it’s full of all these tribes and people talk about disputes within the PRD, the modern PRD is very, very much like the old PRI, and so that they are willing to be disciplined by a strong leader. And my sense is that they will fall in line behind Lopez Obrador in the short term, and if he’s successful, they’ll stay there.

So my sense is if in fact he’s successful, he’s not going to have to throw a lot of bones their way, and he will throw ones their way that have a minimal negative impact on his relationship with the United States and with the business community in Mexico.

MS. SWEIG: Trade.

MS. STARR: Ah, trade. I knew there was another question. NAFTA. It does not matter who’s elected president, Mexico will request the United States negotiate the issue of opening up Mexico’s southern corn and bean market. And it has to do more than anything else with the sociopolitical consequences of—what they fear are sociopolitical consequences in southern Mexico of farmers who cannot sustain themselves any longer.

The Fox government actually approached the United States about two, three weeks ago, and specifically requested this. And the United States government said no. And that absolute “no” I think had to do with the fact that this was a lame duck president who was asking for a huge change in policy that would help his candidate in the election. So the United States said no. So I don’t think the “no” was a definitive no, I think it was a “no, not now.” And I think the United States is going to come around to the recognition that it has to do this for Mexico. Mexico is going to sell it as a migration thing.

Sidney and I were talking beforehand, and Sidney is convinced that—and he knows much more about this than I—that these farmers are mostly subsistence farmers, and so it probably won’t have a major effect on migration. But there are enormous concerns about the sociopolitical effect that it could have. And so Mexico is just going to ask for more time. It’s done nothing to adjust for this between 1994 and today, and so it needs to get moving, and that’s going to be the quid pro quo; you guys have to start helping these farmers adjust to the real world.

Beyond that, Calderon won’t touch NAFTA obviously. Lopez Obrador, what he would like to do with NAFTA is finagle it a lot more. He wants to use the flexibility that exists within the treaty to be able to better protect the Mexican economy. His argument is that Mexico has always done more than was required in the free trade treaties it has signed. Now he wants Mexico not only not to do more, but he is likely to skirt the edge of what is acceptable. And if that means we have to go to dispute resolution, fine. That takes time, and meanwhile, I can have this sector protected. And if you rule against me, okay, I’ll just do what the United States does. I’ll protect it in a different way, and we’ll start all over again. That’s what you could expect from Lopez Obrador.

MS. SWEIG: Great. Okay. That’s an excellent answer.

Doris Meissner.

QUESTION: Thanks. Pamela, on the question of the economy and improving the economy, you’ve pointed out the different approaches that you think these candidates would take, even though they would have the same goal. Against the backdrop of what happened in the Fox administration and everything else that you know about Mexico and that we know about Mexico, which of the candidates has a better chance of making bigger gains with the economy?

MS. STARR: My sense is that if Felipe Calderon is elected what you will see are marginal gains, marginal advances in Mexico. It’s going to be—and that’s because he will face an opposition congress, which either president will have to deal with—the issue of a divided congress. But the problem Calderon will have is that most of the opposition is going to be arrayed to his left, so it’s going to make it harder for him to do the sort of the market-based policy solutions he wants to carry forward.

Secondly, since he comes from Fox’s party, since he is known as a free market liberal, he doesn’t—he won’t have the credibility to be able to tell the left and the congress, “I just want to do this little change to the constitution to allow for more private investment in PEMEX. It’s just a little one, and I won’t do anything beyond that.” They’re going to look at it and say, “No. This is the first step to privatization. We don’t trust you.” So it’s going to be hard for him to overcome that hurdle. And the third hurdle that he’s going to have trouble overcoming is the fact that most of his policy proposals require legislation. So he’s going to have to go to the congress for most things.

He’s also in a better politician than Fox. He would come into power in a Mexico with six years of experience working at Democratic politics. So I think he will be much more effective than Fox, but again, I don’t think we’re going to see dramatic improvements with him. I always joke about the fact that my job will be much easier if he’s elected because there’s not going to be a lot of big changes, big surprises.

The case of Lopez Obrador, I think one of two things is going to happen. Either he’s going to be enormously successful, which means he can build a coalition in the congress with the vestiges of the PRI that’s good enough to be able to move through his budgetary proposals, and he’s able to implement the other policies he proposes actually generate the solutions he thinks they will, and then Mexico will make a big leap forward. Or the flip is, the PRI won’t work with him, the naysayers are going to be right, and Mexico will probably fall further back.

And what I mean by that is, that Lopez Obrador is promoting above all else—he’s saying: What should we do for fiscal reform? What we need to do is dramatically reduce loopholes in the tax code, specifically exemptions which are directed toward mostly large businesses—medium to large businesses and the economic elite. He wants to eliminate those. He wants to eliminate—dramatically cut corruption in subcontracting. The question is, how much money is that going to generate? We don’t know. Nobody has a clue. There are all kinds of numbers floating around out there, but nobody really knows. So if it doesn’t generate a lot of money, how is it going enable investment in human and capital infrastructure, which is his core strategy?

Same thing in PEMEX. The strategy for PEMEX is—the reason PEMEX is in so much difficulty is because it’s been totally mismanaged as a firm, which is true and everybody agrees on that. So what he’s saying is our first option should be to make it run more efficiently. A distant second option, if you need to go there, is private investment, but he doesn’t even talk about that. That’s sort of the—his economic team talks about it. He does not. And it’s the same strategy: Run it more efficiently. Renegotiate the subcontracts. Break the union. And put in a decent management and make the firm more autonomous of the federal government. And that should generate the capital we need to be able to invest in exploration, find new sources of petroleum and produce it. But will this strategy work? And if it doesn’t work, where does he go next?

So my sense is that Mexico has the greatest chance of making a big leap forward with Lopez Obrador, but Calderon’s less risky, and that’s, I would argue, is the same attitude that – the same concern that independent voters have: Do I take the risk or do I not take the risk?

MS. SWEIG: We’ve got Bob Herzstein, then Nicholas Rey, Joe Duffey, and Dianna.

QUESTION: Just before I get to my question, a quick—I’d appreciate a quick follow-up on that comment you just made about making PEMEX more autonomous from the federal government. Would he include in that leaving some of the PEMEX earnings in PEMEX rather than—

MS. STARR: Oh, that’s the purpose. That is the entire purpose.

QUESTION: So he would do that, which means he then has to find an alternative capital—

MS. STARR: That’s the problem.

QUESTION:—source for the federal government.

MS. STARR: That’s exactly it. (Laughs.)

QUESTION: Best of luck to him. My question is, I’d appreciate a little clarification of a comment you made about the U.S. having to stand back and let Mexico solve its problems and keep quiet. I personally had thought we got over that chip-on-the-shoulder attitude with NAFTA, and certainly in recent years, we’ve seen an awful lot of consultation and cooperation on major issues.

After you commented on that, you said the U.S. would have to pay for law enforcement reform. How do you square those two comments if we’re going to keep quiet and pay quietly without getting any understandably about what they money’s going to be used for?

MS. STARR: In terms of the United States keeping quiet, what I meant by that is not the executive branch. The executive branch is very good at keeping quiet. They’ve figured that out. The problem is the Congress, and Mexico, because it’s been a country that has been under an authoritarian for so long—

QUESTION: And Lou Dobbs.

MS. STARR: Yeah, Lou Dobbs. (Laughter.) Yes, exactly. It’s been under an authoritarian system for so long Mexicans have difficulty appreciating that the Republicans in the Congress don’t speak for the White House, and even Mexicans who understand that structure of U.S. politics still don’t quite internalize it. And so the problem, I would argue, is within the Congress, where you get rogue congressmen who will come out and say that, you know, Mexico’s got to privatize PEMEX, and if they don’t do that, we’re not going to give them a cent.

And those voices make the front page of the newspaper in Mexico, referred to as the “ U.S. government”. So that’s what—more than anything else what I’m referring to.

But also the United States also tends to—you have Lou Dobbs, you have economic advisers who go down who are constantly suggesting to Mexico what you should do.

It’s hard to have, obviously, an open, democratic society be quiet. But the more quiet we can be, the better it is in terms of moving Mexico forward.

With regard to police assistance, to avoid political fallout in Mexico it should not be highly publicized. And it could also be something that I have mentioned elsewhere. You could potentially do sort of a NAFTA assistance program, where most of the money comes from the United States, but the actual police who are doing the training are Canadian. And that would be much easier for Mexico to accept.

MS. SWEIG: Nick?

QUESTION: Having followed Mexico for 35 years, I’ve bored Pam with these questions before. But in those 35 years, there’s a five- to seven-year cycle, in my experience, of beginning with reasonable economic policies and building and building and building until there is an economic crisis with a pressure cooker that blows. And I have as dates ‘76, ‘82, ‘87, ‘95. When’s the next one? And what’s going to do it, or have things changed?

MS. SWEIG: It’s a good question.

MS. STARR: All of those crises were exchange rate crises.

QUESTION: Yes, sir. Yes, ma’am.

MS. STARR: Mexico’s not going to have another one of those, at least not in the next administration. The reason I say that is because, first, Mexico has a flexible exchange rate so you don’t have the need to protect it.

Second, the Bank of Mexico is totally independent. And its responsibility is to protect the exchange rate, the value of the Mexican currency, and to do that by fighting inflation. And since inflation is one of the key things that undermine a fixed exchange rate, the main forces that were there driving crises in the past are not there anymore.

But there’s also the other main force, which is the fiscal deficit. You had those crises because the government overspent, that generated inflation, and that undermined the value of the currency.

There—

QUESTION: And they borrowed like mad.

MS. STARR: Well, there’s the borrowing. We’ll get to that in a moment. (Chuckles.) That’s the second point. First point is just on the fiscal front here.

All of the candidates are agreed on the need for macroeconomic stability, and all three parties approved unanimously a piece of legislation last spring which requires a balanced budget in Mexico. There are a few little caveats, but the bottom line is, it requires a balanced budget.

I keep telling my friends in the PAN in Mexico it’s like you just got to internalize the Marine motto: Know your enemy. You cannot defeat your enemy if you don’t know your enemy. And they go on and on, and they truly believe that Lopez Obrador is going to generate macroeconomic instability in Mexico. He’s going to be a spendthrift, create inflation and all these crazy things. And they couldn’t be more wrong.

Lopez Obrador has clearly internalized the fact that inflation hurts his people, the poor. He doesn’t want to hurt his people. He wants to help them. And he’s fully internalized that it’s the poor who are damaged the most, and he understands that fiscal deficits and the threat of them are the things that generate inflation. So he’s not going there. If, for whatever reason, he cannot generate the revenues to finance his huge list of economic programs, he will reduce how much he spends on those programs, at least in the near term.

And in terms of the debt, Mexico’s foreign debt is declining. Mexico just announced yesterday that it’s making an advance payment on $7 billion of debt to the IDB and the World Bank. And this Bank of Mexico and Hacienda together have enormously effectively managed the debt. Mexico has no foreign debt coming due until 2008.

QUESTION: And they’ve got good reserves.

MS. STARR: And they have enormous reserves. Exactly. So—

(Cross talk.)

QUESTION: (Off mike)—answer to the loser: “Come and run the United States.” (Laughter.)

MS. STARR: Okay. I’m sorry, Nick. I didn’t hear you.

QUESTION: “Come run the U.S.”—

MS. STARR: Come run the—(laughs).

QUESTION: (Off mike)—answer for the loser: “Come run the United States in 2008.” (Laughter.)

MS. STARR: The—all you need is Gil Diaz just—wait—I mean—it’s the—Francisco Gil Diaz is the current treasury secretary. Just bring him up.

QUESTION: (Laughs.)

MS. SWEIG: Joe and then Diana Negroponte. And we have a little bit under 10 minutes, so this ought to give us enough time to wrap up.

QUESTION: I thought one of the most interesting things that happened in Washington last week—I’m not sure it was one of the more significant ones—is that Luis Moreno kicked off his term at the Inter-American Development Bank with a three-day program about sort of reshaping investment in the economies of Latin America. It was very well researched. I don’t know how many of you participated or saw it—very well-thought-through and researched, not kind of blaming the U.S. It was a well-put-together thing.

I ask whether it is significant, but I also ask whether it isn’t—I mean, I think—I assume what he has in mind is a template for the middle-left economic reform in Latin America.

(Chuckling.) But it would involve a change of mind on Wall Street and in certain other places. So is it realistic?

MS. STARR: I’m sorry. What is the proposal? I missed that part. (Laughs.)

QUESTION: Well, it has to do with—he talks about dead capital. They talk about—his first speaker was the cardinal from Honduras.

QUESTION: It was followed by Carlos Smith, so—

QUESTION: Well, that’s right. (Laughter.) And again, Hernandez de Soto—both of whom said things they never would have been able to say in any other meeting in Washington because they both referred to the morality of Karl Marx—certain morality of Karl Marx’s vision that you couldn’t have anyplace else.

But no, it was a suggestion that the—that of what—(inaudible)—was investment for the majority, was an investment of the—(inaudible)—investment needs—education, housing—

MS. STARR: Mm-hmm. It’s about democratic access to the market, how you capitalize remittances—

MS. SWEIG: Oh. De Soto’s classic thing. Okay.

(Cross talk.)

MS. STARR: De Soto’s line about title and microfinance—

QUESTION: Is it realistic? Is it something that could become—

MS. STARR: It’s Lopez Obrador’s policy.

QUESTION: It is, or you say—

MS. STARR: That is his strategy. I mean, that’s his—the slogan for his campaign is—basically, it translates “For the betterment of everyone but the poor first.” His argument is that you cannot have a competitive economy unless you have participants in the economy, and you can’t participate unless you have money.

So what he wants to do is help the poor specifically to reduce inequality, and then he wants to eliminate the privileges of the economic elite, and he includes in that the leadership of the labor unions. So it’s—the idea is that in order to have an effectively operating market economy, you have to have more income equality and more competition, which is, in effect—yeah, one of—for me, when I hear that and when—actually, when my clients on Wall Street hear that, it’s, like, “So, what’s the problem?” The problem is we’re not sure he can do it. (Laughs.) So the general—but the general proposal there, it’s exactly what these people were talking about, and Wall Street’s not concerned.

QUESTION: But it doesn’t bring the return on the investment—

MS. STARR: No, Wall Street—those who are invested in CEMEX, Telmex, FEMSA, any of the big monopolies—yeah, they’re concerned and they may sell their stocks. But those who invested in Mexican government bonds? It’s great.

MS. SWEIG: (Inaudible name.)

QUESTION: Migration from Central America and Southern Cone—what evidence of a serious intent to engage with it and stem it?

MS. STARR: Mexico cannot control its southern border. So although Fox and Felipe Calderon both say we’re with you there, we’ll work with you, we’ll help you control the borders, but Mexico cannot police its borders. And getting U.S. assistance to help Mexico police its southern border is a very, very touchy subject in Mexico.

Mexico cannot police its northern border because Mexicans have the constitutional right to migrate. So the one very positive thing I can say about the southern border is that the market’s working there in the sense that what I’ve heard from people who’ve been on the border is that the human smuggling cartels will not accept any client who looks even slightly Middle Eastern, because they don’t want to blow their business. That doesn’t help us with, you know, Chinese and South Asian and Central American.

Again, the problem there, the solution is to be found at home.

Mexico is not in a position to be able to fully control—let me put it another way. If the United States cannot fully control its southern border, what makes us think that Mexico can control either one of its borders? It has much fewer resources, both capital and technological. So.

MS. SWEIG: All right. Doris wants to chime in, and then I’ve got one final issue to raise with you, and then we’re going to wrap up.

QUESTION: I just wanted to make a quick footnote because I think it’s a really important point. You said that Mexico can’t police its northern border because of the constitutional right of people to migrate. My understanding—

MS. STARR: Politically cannot. Politically cannot.

QUESTION: Politically, okay. Because my understanding is that their constitution says migrate through authorized, legal exit points. Yeah, they’re very clever about this. But if you—when you press them, the constitution suggests—

MS. STARR: It depends, because there’s also an article that gives Mexican citizens complete freedom of movement.

QUESTION: I think you need to go back on that. And it really is an important point—

MS. STARR: I’ll double-check it.

QUESTION:—terms of the future, because I think we could envision a future, a lot of other things being equal, where it in fact there could be cooperation.

MS. STARR: But did mean by that—I mean politically. And I mentioned the constitutional amendment just to emphasize how important it is, how ingrained it is in Mexicans’ minds their right to migrate.

QUESTION: Exactly. But this is something that over the longer term has potential, I think.

MS. STARR: That’s great.

MS. SWEIG: Enrique Krauze has an article in the New Republic called “Tropical Messiah,” which is about Lopez Obrador. And it happens that Krauze is coming to our office in New York to speak on a panel we’re doing next Monday on Latin America overall.

And, you know, your description of the potential for Lopez Obrador to adopt the kind of poor-oriented, inequality-oriented, democratic market-access-oriented policies, and Wall Street’s relative calm about that is—you know, is placating and it’s even exciting, I want to say. So on Monday we’re going to hear Enrique talk about his authoritarian, populist, megalomaniacal personality and what that might mean for Mexico. I guess I’d like you to just sort of say what you think that might mean for Mexico, if Enrique is correct.

MS. STARR: No, it’s a great question/comment, because it—I may have left the impression that I think Lopez Obrador is the best for Mexico and there are no risks involved, other than the potential that his policies might not work. There is another very, very big risk, which is the fact that he indeed has messianic qualities. Lopez Obrador is convinced that he is the only person out there who can save Mexico, that can really move Mexico forward economically into the future, because his solution is “the right one” and all the other ones are wrong. And there are clear elements in his personality of that.

And the big concern I have about that, actually, and it’s something that will concern investors and the United States in the medium- to longer-term is the rule of law. All of us who follow Mexico know that Mexicans have a particular relationship with the rule of law, which is laws are suggestions, they’re not laws that you must adhere to all the time. And it comes out of—it has a long history going back to the colonial period in Mexico.

When you mix this Mexican characteristic with a Lopez Obrador, what you get is somebody who knows which are the laws and the institutions which should be promoted and which are the ones that can be ignored. That’s not to say that he ignores laws all the time or even most of the time, but his behavior as mayor of Mexico City makes it clear that he does have a particular way of interpreting the law and legal rulings. And I think that the combination of these two elements of his nature, are going to make for an “interesting” six years, if he’s elected, in the Chinese sense of the word. I think there are going to be a lot of unexpected surprises that come from either his messianic character, his tendency to—which is associated with it—not respond well to aggressive criticism, because of course he’s right, so how can you criticize him; his lack of—I don’t want to say lack of respect for the rule of law, that’s a bit strong—but his tepid respect, his opportunistic respect for the rule of law, and his tendency to talk before he thinks—all of those things I think could create problems for Mexico, particularly given the fact that Mexican markets are already very concerned about him.

MS. SWEIG: Well, we’ll come back together after the election and revisit all of this.

I want to thank all of you and thank Pam for this fantastic discussion. And stay tuned. And we’ve just got a few more days to wait. And thanks very much. And congratulations, Pam.

Have a good day. (Applause.)

 

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