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Media Conference Call: The Real War in Mexico

Speaker: Shannon K. O'Neil, Senior Fellow, Council on Foreign Relations
Presider: James F. Hoge Jr., Editor in Chief, Foreign Affairs
July 1, 2009
Council on Foreign Relations

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JAMES F. HOGE JR.: Thank you very much. I'm the editor of Foreign Affairs here at the Council on Foreign Relations, and with me this morning for this call is Shannon O'Neil, who is the Douglas Dillon fellow for Latin American Studies at the Council on Foreign Relations. And she is also director of the CFR Task Force on U.S.-Latin American Relations.

In the July-August issue of Foreign Affairs, now out, Shannon has an article that is entitled -- and the title, I think, gives you a hint of the direction she takes in dealing with this subject -- it's called "The Real War in Mexico: How Democracy Can Defeat the Drug Cartels."

So Shannon, we might start by you fleshing out that, as I say, indicative headline, thesis that you are taking in your piece.

SHANNON O'NEIL: Sure. Well, good morning. It's a real pleasure to be here.

You know, the title does focus on what I think is actually the real issue there. You look at Mexico and, you know, one thing that's quite uncommon is, since Obama was elected, Mexico's actually been one of the highest priorities on the foreign-policy list, which is quite something new for this country. And that has been in large part because of the violence and because of the increased notice and recognition of what's going on in terms of drug organizations and drug trafficking in Mexico.

You know, it started last November, December, when the Joint Command Forces' (sic) joint environment report came out and said that -- paired Mexico and Pakistan as the two states susceptible to a rapid and sudden collapse, i.e. a failed state happening. And then, with the exiting Bush administration officials, many in their last interviews pointed to Mexico, saying: Look, Mexico could be worse than Iran; it could be worse than Iraq for the United States going forward.

So this has been the focus. And then we've also seen a huge increase in deaths, particularly along the border, where they've been concentrated. And so the United States has been increasingly worried about this. And this is not something to sneeze at. This is an incredibly important issue. But what I argue and what I think is quite important is that we put this in a larger perspective. And what's really changed in Mexico over the last 10 or 15 years is not necessarily this violence, but what has changed is Mexico has become a full-fledged democracy.

But it's an emerging democracy. And so it still has authoritarian legacies. It's still quite fragile. And so the challenge Mexico has is to strengthen this and deepen democracy. And if it can deepen democracy with the United States' help and also on its own, then some of the issues on security side that we worry so much about and frankly the Mexicans worry so much about will be aided as well.

But these things go together. Strengthening democracy, which means, you know, not just competitive elections but it means creating really a strong and independent judicial branch, the third branch of government, as well as law enforcement more largely -- these will matter as much as anything else in terms of improving the security situation in Mexico on the border and, frankly, in the United States.

HOGE: So in short form, Mexico has got some problems, but you don't see it as a failed state?

O'NEIL: No, Mexico is not a failed state. Mexico collects taxes. It runs schools. It runs large social programs. It holds free and fair elections -- another one coming up in just a couple weeks there in Mexico. It's seen as legitimate in the eyes of its citizens and the international community. It is not a failed state.

But Mexico has serious problems. While its presence all over the nation there -- and it has, you know, municipal facilities, it runs public services -- its problem is not the presence but what type of government is there.

And what has been happening and is quite difficult for Mexico and its citizens is, the government there is not necessarily accountable to voters.

Mexico's main problem is, it's real Achilles' heel is, corruption. And this corruption then leads these local governments that are there to work against often the needs and desires of the citizens and to work for vested interests.

Sometimes those vested interests are interest groups. And sometimes those vested interests are, you know, more illicit groups, nefarious groups like drug trafficking organizations.

HOGE: Now, you mention, as really a key to understanding where Mexico is and where it's trying to go and what we need to do, that there's been quite a demographic change in Mexico since NAFTA, which has led to a real expansion of the economy and has led to the creation or at least the expansion of the middle class, which is now, what, about one-third of the population, 30 million strong.

And I gather that the middle class, as well as others but particularly the middle class, is in favor of what Calderon is trying to do, which is to really crack down on the drug cartels, despite the fact that means short-term violence.

O'NEIL: Really the unsung story of Mexico is this growth of the middle class. People still in the United States, I believe, see Mexico as an area of, you know, or country of, you know, uber-wealthy and desperately poor; that it's an unequal country. And it's not that it is an incredibly equal country yet.

But what we have seen in the last 15 years -- due to NAFTA and general economic opening, due to migration to the United States and the billions of dollars of remittances that have gone back, to families in Mexico, and due to generally stable if unspectacular growth over the last 10 or 15 years, in Mexico -- we've seen this rise of the middle class. And it's now about 30 million strong so, as you say, 25 to 30 percent of the population. And it is quite important.

On an economic basis, this is where much of Mexico's growth will come from, long-term economic growth, as these families and citizens become consumers, greater consumers, as they start up their own businesses, as they contribute to the growing economy.

But they also, probably as or more importantly, have made a real political shift in Mexico.

HOGE: Right.

O'NEIL: This middle class has changed the political dynamic in Mexico.

You know, first and foremost, it is this group of people that voted out the PRI and brought in definitively democracy in Mexico in 2000, voting for Vicente Fox as president. This is also the group that in the end backed Calderon in the 2006 elections; that turned the election, which, as most people know, was a very close election -- turned it to Calderon and brought him into office.

And looking at this group, when you look at polling data, this group, as well as others, but particularly the middle-class group, they are the one -- they're pushing Calderon for things like rule of law, accountability and security. It's the top issue for them.

And when you look at polls, they say that they want -- the vast majority of them say they want Calderon to take on the drug cartels, even if it increases violence and even if they think he can't win.

HOGE: Right.

O'NEIL: So it's interesting. We have midterm elections coming up. And you know, Mexico's going through the worst economic crisis definitely since 1995, with the peso crisis, probably since the Great Depression. But the PAN, the political party of the president, is actually going to do fairly well. It's going to lose a little bit but not lose a lot. And how serious the economic situation -- you know, you would think it would lose much more. But I would argue that it's not, that it's really holding its own, because of what he's -- what Calderon's doing on the security side and the support you get from this growing middle class for exactly those initiatives.

HOGE: Yeah, and it's kind of ironic. Mexico has been one of the most globalizing states south of our border, and that has been one of the keys to its economic expansion, but it's now what's hurting it. It -- in sense of the economy, it looks like recovery's going to be very slow. I've seen estimates that they probably are not going to have any growth at least through 2010. So it -- if it's a fragile democracy, it's going to be under even more strain in the next -- coming years.

O'NEIL: You know, this is true. It's going to be quite difficult.

While I do think Mexico's growing middle class is the bright spot, both economically and politically, for Mexico, this recession that they're going through, which, you know, people put a fall of anywhere between 6 and 8 percent now for this year and a very slow bounce back, as you mentioned, for next year --

HOGE: Right.

O'NEIL: -- this is really going to stress the middle class, right? This is going to hit this group particularly. And where it goes and how that affects politics is sort of up for grabs.

HOGE: But let's take a shot at that, because the election is June 5th, which is right around the corner. It's a midterm election. The congress is pretty split right now. Is it going to stay fragmented? What do you think?

O'NEIL: You know, I do think it will stay fairly fragmented. All the evidence shows that the PRI, the old ruling party, will probably gain somewhat but won't gain, on its own, an absolute majority. So it'll be the first minority in Congress, have the plurality but not the majority.

So that means that the PAN will still be there. They'll probably be the second-largest party; and that the PRD, which is the leftist party, will actually lose quite a lot of ground from the 2006 election. They'll go back to sort of historically having 15 to 18 percent of the seats, but not 30 percent, which is what they had over the last three years now, or last 2-1/2 years.

So what this means is, you know, Mexico's going to face a lot of economic issues, some real serious problems. And they're going to need to make some serious reforms, particularly, first off, a fiscal reform to try to deal with the losses of revenue that they have -- not just from, you know, taxes because the economy's slowing down, but also because of oil.

Oil is a huge part of the federal budget --

HOGE: Right.

O'NEIL: -- as well as the GDP of Mexico. It's falling, and we've seen oil prices fall, which is quite difficult, but it's also falling in terms of production, Mexico's serious production problems.

And then the third leg of this is remittances, and those also, given Mexico's ties to the United States, have been falling somewhat. And that hits, you know, this sort of especially lower middle class, people who have been brought up from poverty because of this money coming back.

So there are some real serious issues. And how this new congress, given no one will have a majority, deals with it is, you know, what we'll see.

You know, there is this next year where we could perhaps see agreements between the PAN and the PRI, the two big parties, to get some things through, perhaps starting with a fiscal reform. But the other problem is, a year from now we'll be two years before the next presidential election, and, as we've seen in our own country, everyone starts campaigning in earnest, and we won't -- I wouldn't expect anything to happen past that time in terms of legislative reform.

HOGE: So the structural reforms which they need in their economy, the labor market, energy, and so on are likely, at best, to be deferred, it sounds like.

O'NEIL: I think that's true. There is a window of opportunity in the next nine to 12 months where we could see the two parties come together in the Congress, the two leading parties, in part because much needs to be done -- but, as we know, politicians don't always do things when they need to be done -- (chuckles) -- but also in part because both the PAN and the PRI, their leading candidates want to be seen as presidential as they go into the race for president.

So there may be room for agreement between the leaders of those parties to get something done, as long as both have some way to make a claim on it -- and particularly that the PRI can claim benefits from some sort of reform as they try to position themselves for the 2012 presidential race.

HOGE: Let's change to the drug problem. You've got some interesting history here, which -- and it's sort of ironic -- which is that the coming of a more open political system actually undercut what had been a stable if infamous collaboration between the long-standing PRI Party and the drug business.

And then with the Fox election in 2000, the drug cartels were suddenly independent, and they have created independent militias. They have expanded their markets to take in kidnappings, smuggling in human beings, all sorts of stuff. Is that still a controllable problem? Calderon's answer seem to be that -- as much as possible, take away the war on drugs from state and local officials and police forces, because they've been so thoroughly corrupted over the years, and to bank on a very massive introduction of federal troops. How is that going, and is this the right approach?

O'NEIL: You know, this is -- what is interesting -- and as you say, it's sort of the dark side of democratization --

HOGE: Yeah.

O'NEIL: -- you know, before, under the PRI, there was sort of an ongoing equilibrium that was a low-violence equilibrium, though increasing traffic of drugs, due to changes in the way drug markets worked and a real shift of gravity towards Mexico from Colombia, due to Plan Colombia and other efforts down there.

And so while the PRI had a political monopoly, they could guarantee that with particular drug dealers that they had agreements with and that made payments to the PRI, that, you know, they could control the police forces, they could control the judicial system and allow this traffic to go on for the foreseeable future.

You know, once they lost their political monopoly, they lost their ability to enforce at least their side of this unwritten contract.

HOGE: Right.

O'NEIL: And so drug dealers had then to negotiate with the next person in the new government to decide, you know, would they be able to continue their business without violence.

You know, at the same time, other entrepreneurs in this in illicit business would come in and try to make a different offer to sort of gain new territory. So this has led to, in large part, the increase of violence we've seen since 2000, since the opposition government, the PAN, came in.

HOGE: You know, one thing that strikes me about it -- and Calderon, has -- I think the figure is up to about 45,000 federal troops are being moved into places where the drug business is really heavy. But in miniature, it's a bit analogous to the larger problem of drug trafficking. When you crack down on Mexico, Peru and Bolivia get into the act, and new distribution systems are set up.

What seems to be happening in Mexico is, when they send in federal troops to one province and begin to get some control over the problem, the drug people move to another province. And so it's kind of like a chess game, isn't it?

O'NEIL: It is. You know, they often talk about it as a whack-a-mole game. You hit it on one side, and it comes up in another place. And that could be by provinces or, as you mentioned, by countries.

You know, the real question for Calderon: What he's trying to do is establish a new equilibrium. It's not the low-violence but high- traffic one. It's a low-violence, low-traffic one. And really for him in Mexico, their ideal is just, let's push it out of Mexico. That's their self-interest, and they're trying to move it out of there.

Now, the way to stop this moving from one province to another, one city to another, within Mexico, in the long-term, is really to strengthen the law enforcement agencies; that you have on the ground police forces, courts, other investigative units that are somewhat independent and representative of the people and not the drug traffickers; that they're not corrupted.

You know, that is a big challenge. It's been done in countries like the United States, when we took on the mafia. And now, you know, we have organized crime in the United States. But it's really a law- enforcement problem, not a threat to the entire system.

But Mexico isn't there yet. And that's what he is trying to do, with Mexico's funds but also with the Merida Initiative and other funds from the United States.

HOGE: But being a realist, I think, what you said was that the best we can expect particularly if something isn't done, on the other side of this problem -- the demand and the huge U.S. market -- is that there will be a persistent but hopefully manageable law- enforcement problem, not an elimination of the drug trade.

O'NEIL: That's really the best we can hope for in this case, is that it turns to a law enforcement problem. And if that happens in Mexico, Mexico succeeds in all of this, then we need to start looking where it's going to go next, because these drug trafficking organizations -- really organized crime organizations in general, because as you mentioned, they do lots of different things -- they're going to start looking for other spots that are more conducive to their business.

And so they'll start looking at Central America in particular. They'll start looking at the Caribbean again. They've gone down more to Bolivia and Peru and other places.

And you know, if anything, the news of what's happening in Honduras has shown us, over the last couple years or last -- sorry -- couple days here, is that institutions down there are very weak. And so it's open season down there for these types of organizations, to infiltrate and corrupt what exists there already.

It'll be much easier for them there than it has even been in Mexico.

HOGE: This brings us to the U.S. role in all of this, in two ways: complicity, if you will, and then what remedially we might do.

Let's tackle the complicitness (sic) problem first, which I think is more evident in Mexico than, let's say, in Colombia, where we've devoted far more money and equipment and whatnot else to help the Colombian national government to try and bring the size of the problem down.

But in Mexico we've got -- just to tick off a couple things, we are a major arms supplier to the drug trade -- not the government, but it comes from the United States. We have allowed a tremendous amount of money laundering and billions of dollars going back to the drug trade. And we've done very little -- or we've spent much less on demand reduction in the United States for drugs than we have on interdiction and eradication efforts.

Do you see any change in this basic posture? Or are we encumbered by certain kinds of laws and whatever?

O'NEIL: You know, there are difficulties, and all through these areas that you mention. But I do think that some progress can be made on them. And frankly, if we're going to ask the Mexicans and others throughout the hemisphere and the world to take on their side of it, we need to deal with these issues.

So on the guns side, there's a couple things that could be done. First, there was a report that was released last week that showed, really, the utter ineffectiveness of cooperation on gun trade and gun trafficking in the United States. The ICE and the ATF, you know, not only don't work together but often work in counterproductive ways.

Other issues there: We really aren't focusing on how we deal with this problem on our own side of the border, and we need to get our own house in order on that side.

You know, this has nothing to do with just increasing resources, which we should also do in terms of going after guns, but just in -- organizational side, there's a lot we could do. If you wanted to go farther on that side, you know, people have talked about trying to craft a really effective assault ban (sic) weapon --

HOGE: Yeah.

O'NEIL: -- looking at restricting these guns both -- in their sale in the United States. And one thing that would come not legislatively but from the executive branch is enforcing, again, a ban on importing assault weapons in the United States.

And many of the assault weapons that end up in Mexico -- some are created and manufactured here, but many are imported to the United States and then find their way down there. So there's things we could do on the guns.

HOGE: Yeah. Well -- but it sounds like what we can do will have to be by presidential order, but how about the Congress? Do you sense any realistic change in our posture on gun control coming from the Congress?

O'NEIL: I mean, as you know as well as I, this is an incredibly difficult issue in the Congress --

HOGE: Yeah.

O'NEIL: -- because of the power of the NRA and other groups. And while many of the things that would be useful for the United States and for Mexico in this area, in terms of arms trafficking, are very, very difficult to get past Congress, (get even to the floor ?) --

HOGE: Now how about money laundering? What I read is that they collect billions of dollars in small amounts of money, load up cars and trucks and take it back south. It seems to me like that ought to be more interdictory than it has been.

O'NEIL: You know, this is an area where we really should be focusing. I mean, guns get focus in the press because it's sexier and it's a big topic.

HOGE: Right.

O'NEIL: But the money behind it -- the money is what buys the guns. It buys the politicians and corrupts the system. And it's the reason the drug traffickers are in the business in the first place, to make this money. So this is somewhere where we could put much, much more effort than we have.

You know, in the wake of 9/11, we developed interagency task forces to look at terrorist money, and we got quite sophisticated, successful in following this and interdicting it. And something similar that would look at this drug trafficking money is one way to go that could be successful in the United States.

HOGE: Janet Napolitano, who's the relatively new U.S. secretary of Homeland Security and is also a former governor of a border state, is probably more attuned to this problem than some of her predecessors. What indications have we gotten so far of what she wants to do? There's the immigration problem, as well as the drug problem.

O'NEIL: You know, she has looked at immigration, and that is on the table. She has looked particularly at the Southwest border.

And there's a new initiative that came out a few weeks ago, looking at sort of a comprehensive development and thinking about how to look at the border. And so there's more resources for the border.

There is now more focus on not just what's coming north, across the border, but what's going south. And so that is something quite new, from previous administrations and Homeland Security mandates, to look for these guns and money going south.

Now, it's a difficult issue. How do you cover a 2,000-mile border? But that is happening more. We're also seeing -- it started under the last administration but looks that it will continue under Napolitano, as head of DHS -- more cross-border cooperation with particular Mexican units on the other side.

Because you know, when it comes down to it -- guns, money, drugs, all of this -- we do much better when we actually have intelligence about where this is, rather than just looking for a needle in a haystack. So that's another effort that will continue and is being ramped up, under DHS now.

HOGE: Now, let me double back to democracy, which you say is really the long-term key here. And part of that of course is the continued growth and prosperity of the emerging middle class.

Our aid budget, I believe, the last figure I saw was about $5 million in 2009. That's nothing. What should we be doing? What kind of aid can we bring -- for infrastructure, schools, business development and so on -- that we're not doing?

O'NEIL: You know, both for democracy and the security situation, we need to look beyond just the border and look beyond these sort of spurts of violence and think about Mexico and the United States relation more broadly.

And you know, Mexico is the third largest trading partner for the United States. But it's the second largest destination for U.S. exports. So it's incredibly important for exports. In fact, 22 states out of the 50 states; it's the first or second largest destination for their exports.

So you know, we're tied on this economic side. And frankly how the economics does in Mexico feeds back into democracy, into security. So if economically Mexico is thriving, we're going to have a more stable government. And we're going to have a better security situation, because people have alternatives to going into illicit economies.

So in thinking about the U.S. role -- how we can make Mexico more prosperous, how we can make it more competitive worldwide -- that only not benefits us, because we export to them, and it provides jobs to our workers, in sort of this direct economic relation, but it benefits us too in the security and democracy side, in that we're interested in promoting democracy around the world.

Well, here's our neighbor and they're struggling to get there.

So reaching out, whether it's improving border infrastructure, whether it's, you know, deepening NAFTA and solving some of the remaining trade disputes that we have there, whether it's improving things like education, these sort of long-term issues that USAID often focuses on around the world -- those are all things that we should be doing with our neighbor, but we're not now.

HOGE: You know, spending money on interdiction and eradications has always been sexier, politically and with the public, than spending money on demand reduction or on development aid, which is, you know, a slow fuse.

It reminds me of a story. When Senator Moynihan -- the late Senator Moynihan was running for office once and I was running a newspaper in New York, he came in and he wanted to talk about the drug situation. And he said, look, we need to spend an awful lot more. We need clinics; we need to spend a lot more on reducing the demand at this end.

And he gave this example, and he said, if today -- this is about 15 years ago; I don't think it's changed much -- if somebody walked in off the streets of New York to one of the clinics and said, "I've seen the light; I need some help, but I want to get off drugs," the clinic would say, "That's wonderful, and we want to help you; we've got a waiting list, so why don't you come back in three months?" -- which, of course, doesn't work if you're an addict.

Any improvement -- is there any way to get a greater recognition going in this country that demand reduction is really at the heart of what we can do to be helpful?

O'NEIL: You know, that situation, as far as I know, has not changed, unfortunately.

HOGE: Right.

O'NEIL: And, you know, you have added to that that in, you know, particularly sales of cocaine, but also meth and heroin and other of these drugs that are so addictive, the usage -- it's really about 5 or 10 percent of the population that consumes the vast majority of these drugs. So it's not casual users; it's really this hardcore group. So if you could get at these addicts and reduce them a bit, you would reduce demand quite substantially.

Now, we've seen, particularly under the Obama administration, Secretary of State Clinton and others start talking about demand and that this is a joint problem because of U.S. demand. But at least so far in the upcoming budget for the upcoming year, we haven't seen an increase in resources for the public-health side of these things, frankly; for the, you know, rehabilitation clinics and other types of prevention efforts that would be necessary to really get beyond the rhetoric and get to policy that addresses demand.

HOGE: Where there is treatment, are there some fairly accurate statistics on how successful it is? I mean, I know in alcohol treatment, very fine clinics, if you will, think they've got a success rate if they get a 35 percent to 40 percent, at most, success with people that don't fall back into the pattern. What's the track record on drugs?

O'NEIL: You know, the track record isn't much better than that.

HOGE: Yeah.

O'NEIL: But, you know, if you could get 30 percent, even 20 percent --

HOGE: That's a lot.

O'NEIL: -- of them off the streets, that would be a big percent of the demand.

HOGE: That's right.

Let's -- well, before we turn to the audience, I want to ask you one more question. Honduras just had a little upset here this week, and they for the first time in quite some time had a military coup in the Western Hemisphere. And at the same time -- you and I were talking about this before we started this call -- there are some news reports about the fact that Bolivia and Peru are -- the drug trade is gearing up there. It's a classic example of moving to where interdiction is not that oppressive.

Is this going to be the tale for drugs for the next few years, that wherever we crack down, they're going to pop up somewhere else? And where -- where do you think it might be?

O'NEIL: Sure. Well, this has been the tale for drugs for probably the last 40 years.

HOGE: Right.

O'NEIL: So I don't expect -- (laughs) -- anything much different over the next five years.

But -- but this is what we probably will see. With the Merida Initiative, with the billions of dollars that the Mexican government is putting into Mexico -- which it really has become the center of the drug trade; not just, you know, the transit, which it always was, but we've seen -- there's a Department of Justice report that said, actually, within the United States, the largest organized crime threat are Mexican drug-trafficking organizations, that they're present in 230 cities in the United States today. So they've moved up to the retail side. They've also moved down into the source countries -- into Bolivia, Peru, other countries -- and are managing both ends of this tale.

So as the United States and Mexico press in Mexico, they are going to move elsewhere. And we've already seen, actually, evidence that they're moving into, particularly, Central America -- into Guatemala, into Honduras, into other countries down there -- in part because the institutional infrastructure there is quite weak. It's quite easy. There's areas of those country that are, you know, not uninhabited but uninhabited by the state, where the state presence is quite weak --

HOGE: Right.

O'NEIL: -- and the government itself is just very weak and easily bought, particularly at the local level. So we're seeing that already. And I think it's quite worrisome that success in one place will lead to, you know, increased failure in other places most likely.

HOGE: Listen, before we turn to our callers, might describe a little bit about the Merida Initiative, because it is relatively new. If I've got it right, it's about 1.4 billion (dollars) that we're pledging over three years. What's the money to be spent on? And is that anywhere near enough?

O'NEIL: You know, it is, it's about 1.4 billion (dollars) over three years. About 700 million (dollars) has already been approved by Congress, so the rest is -- will come looking into the future. It's a mix of hardware -- so helicopters and speedboats and scanners and other types of equipment -- and what --

HOGE: Is that where the majority of the money is going to go?

O'NEIL: It is where the majority of the money is going to go.

HOGE: So interdiction.

(Cross talk.)

O'NEIL: Exactly. And you know, toys -- (laughs) -- which are important.

HOGE: Sure.

O'NEIL: And then software as they call it, which is really more training -- both for police forces, for military, for judicial systems, for courts and lawyers and judges -- because there's a judicial reform in Mexico. So we're moving from a written system to an oral trial system. There's money there.

There's money for setting up forensic laboratories and training on the investigative side. So there is a mix of both, though particularly this first money is weighted towards the hardware, towards the helicopters and guns.

Now, what's interesting is, you know, there has been about 350 million, each of the last two years, allocated. You know, in Colombia, we're still allocating 500 to 600 million a year. So you know, not quite double what we're allocating to Mexico. And then you look more broadly. Look at, you know, what we may be promising to Pakistan, which goes up into the billions.

Mexico still seems like an afterthought, in terms of the resources that we're providing, for the security situation there, compared to these other hot spots around the globe.

HOGE: Yeah.

Let's go to our callers and take some questions.

OPERATOR: At this time, we will open the floor for questions. If you would like to ask a question, please press the star key, followed by the one key, on your touchtone phone now.

Questions will be taken in the order which they are received. If at any time you would like to remove yourself, from the questioning queue, press star-two. Again if you would like to ask a question, press the star key, followed by the one key, on your touchtone phone now.

HOGE: Let me ask a couple other questions, while we're waiting to see if some of the audience wants to participate.

Tourism is a big business, a big part of the economy for Mexico. What's happening to that, Shannon? I would assume with the drug violence that there is an effect of some significance.

O'NEIL: You know, there is some effect. What's interesting in 2008 actually, when the violence was increasing, tourism was also increasing. So it held fairly steady through that year.

But as the U.S. media and, as I mentioned, these different, you know, administrative officials -- this report comes out and really highlights the violence -- we've seen some decrease.

We've also seen some decrease frankly because of the economic situation. Fewer Americans, and Americans are the vast majority of tourists to Mexico, you know, fewer Americans are taking that vacation, given their own economic woes.

HOGE: That's right. We're going to Central Park instead of Central America.

O'NEIL: Exactly! And then, you know, we top it off with the perfect storm of swine flu hitting back in late April or -- you know, and that, too, has cut deeply into the tourism budget there. So, you know, with oil prices difficult for Mexico, remittances down, tourism, which is another of their big industries, has declined. But I can say, if you look on the Internet or elsewhere, there are some great deals if you want to go to Mexico on a nice vacation.

HOGE: We mentioned earlier what happened in Honduras, and it's relatively fresh. A president was taken in his pajamas out of office in the middle of the night by a military. It's been universally disapproved of, if you will, not only by the United States but by everybody else in the hemisphere. How do you think this is going to get resolved?

O'NEIL: You know, it is a question. The previous president, or the president, Zelaya, is planning on going back to Honduras tomorrow. Many there, particularly the new president, have said that he'll be, you know, met by the police and sent off to jail on charges of, you know, corruption and many other things, as well as, you know, breaking the law himself.

There are some back-room dealings going on trying to find some sort of solution. And, you know, I think for the international community the best outcome, or the one that is most acceptable, would be that this President Zelaya goes back, he finishes his term, which is up, actually, in January, so, you know, just several months from now --

HOGE: But why was there -- coup in the first place? I mean, this president was himself doing some rather strange things, unacceptable things, right?

O'NEIL: He was. You know, he wanted to hold a nonbinding referendum basically asking for a new constitution, a constituent assembly. Now, both the congress and the supreme court decided that the methods that he were (sic) using were unconstitutional and so barred the referendum. And then he said, well, I'm going to go ahead with it anyway. And when the head of the military refused to give him the ballots to go ahead with this, you know, deemed-unconstitutional referendum, he fired the head of the military.

So it's not as if this president is particularly constitutional or supportive of Honduras's institutions. But the -- what's brought together unanimously the international community against this coup is the military aspect of it. If congress in Honduras had decided to impeach the president, had moved forward on those steps, I think it would have been a much different story. But given that the military stepped in, that's what's changed the balance there in Honduras.

HOGE: Yeah. But you think there is a chance of some sort that he'll be allowed back in to finish the term and --

O'NEIL: You know, I think there'll be some chance he'll be allowed back in, perhaps to finish the term. Now, that doesn't say that he won't be impeached during those last few months in office --

HOGE: Right.

O'NEIL: -- by the congress. But, you know, that would be the way we do things in a set democracy, or the way democratic rules play themselves out.

HOGE: You know, you mentioned earlier -- to go back to what I think is the most interesting part of your piece, which is that it's really -- long term, it's the democratization of Mexico that we should be focusing on and assisting, because that's what's going to not only ultimately make the drug problem manageable, but it's what's going to make Mexico a vibrant state and a much better neighbor for us. But you pointed out that Calderon, the current president, won a very, very close race, and you say that the middle class is essentially behind him, even if the current campaign produces a lot of violence. And how successful it will be is an open issue.

How long can one go that way?

Because you also say in the piece that the biggest risk we need to worry about is that the violence today could undermine democracy tomorrow in Mexico. Do you want to elaborate on that a bit?

O'NEIL: You know, this is the big question. People from the beginning, when he went out with the military and violence started increasing as he confronted these criminal organizations head on, the question's been, how long will the support last? And you know, there's a lot of doomsayers who say, as soon as, you know, violence starts up, the support will decline.

Now, so far, after two-and-a-half years, that hasn't happened. But you can see that happening. The people would get tired of it and want some sort of equilibrium to come together.

Now, it's interesting actually. There's a poll that was done quite recently in Mexico that shows strong support for the military in communities and what the military is doing. And in fact, those places where the military has already been were actually more in favor of the military coming in than those where the military hadn't been. So the fact that people see the military on the streets, it looks to be so far as sort of a comforting thing for them rather than a problem.

HOGE: Well, long ago, the public lost any trust in the local police, right?

O'NEIL: Exactly.

HOGE: And local judges, and --

O'NEIL: So there is this support -- you know, hope that something will change there.

And, you know, the middle class is not a panacea. This is not going to, you know, change everything. But the one thing that you see with the rise of the middle class, you know, for the very wealthy, they can get around the rules of the system -- right? -- that the said rules often work for them.

For the very poor, they have usually different priorities. You know, they're worried about feeding themselves and their family and, you know, having a home. For this middle class, they don't benefit so much from the breaking of the rules and they're not as worried about sort of the basic necessities. So that they are more likely to champion things like accountability, transparency, rule of law and public security, since they can't afford their own private armies or security guards as such. So there's the hope, right, that they, particularly through democratic processes, will push politicians to work on these -- to try to revise the police, the try to improve the court system and those things.

But you know, Mexico is really at a crossroads right now. It could go that path of strengthening democracy or it could go into a different path. So what's the new equilibrium going to be?

And the path that is less attractive for Mexico and for the United States in particular is one where they go back to some sort of accommodation with these organized criminal groups and that, you know, they control local police forces, they control local court systems, maybe local and even state governments.

HOGE: And that's not good news for us, is it?

O'NEIL: It's not good news for us. And then, you know, we'll be dealing with these problems for the foreseeable future if these organizations have protected end states in Mexico, particularly along our border.

HOGE: Now, we have the election coming up. What if any sort of advantage are political opponents of the Calderon government taking in terms of his all-out war against the drug cartels and the violence that it's producing and the questions about how successful it can be? Is this becoming a political issue?

O'NEIL: You know, it is becoming a political issue, but mostly because Calderon and the PAN political party have made it the issue of the campaign. And so they're -- they are running on almost a wholly security platform, saying, "Look, we are trying to make you safer. Do you want to go back to those other guys who, you know, let this problem fester?"

So they're really running on, "I'm a strong president; I'm the security president. Let me continue to make life better for all of you." So what -- what's quite interesting is, given how severe the economic crisis is right now in Mexico, you know, usually, you would imagine incumbents would be voted out with the economic crisis.

HOGE: Right.

O'NEIL: And also the ruling party at midterm elections usually loses some ground. And the PAN will lose some ground, but much less than one would think, given how pocketbook issues go. But I do think it's because the security side has really become the big issue, but pushed from the PAN side, from the ruling party's side in a way that's worked out positively for them.

HOGE: You know, it's only a year, year-and-a-half ago the immigration issue was a red-hot political issue in this country with an awful lot of demagoguing of it. It has calmed down some, but it's going to come back up. And I'm just wondering, one thing that Napolitano has done is she's announced with the Mexican foreign secretary, Patricia Espinosa, a new high-level joint working group to make immigration safer and more orderly. What different paths do you think they're going to try and go down?

O'NEIL: You know, one thing that this government, the Calderon government, has done in working with the United States is just that, working with the United States. And so while immigration was often something that Mexico said, "Well, you know, our citizens have the right to leave our country, and we're not going to do anything about it," there has been a recognition from the Mexican side that we need to be involved in managing the border, whether it's security issues but also the flow of people across this border.

HOGE: Right.

O'NEIL: And, you know, frankly, the immigration and illegal immigration is more and more tied to these organized crime units because it's a very profitable business now. The cost to get someone across the border has risen as U.S. hardening of the border has occurred since 9/11.

And you know, the penalties in the United States are much lower if you're trafficking in people than if you're trafficking in drugs. So this has become a crime issue as well.

I see the Calderon government continuing to work with the U.S. government. Calderon and Mexico want some sort of immigration reform. You know, Mexican immigrants are the largest immigrant group now in the United States. They represent about a third of all foreigners in the United States. This is a huge part of our foreign population. But they recognize that this is going to be something both governments are going to have to work together. It's not just something that the U.S. government will have to solve. So I see ongoing cooperation there on the border.

HOGE: But what is the attitude south of the border on the issue of the strengthened border that we are putting up? I don't know if we're finished putting up walls and fences and whatnot. But --

O'NEIL: We're getting near the end, I think. We're reaching our, you know, 700 miles soon.

It's very negative. It's uniformly negative. The idea that building a wall is the way to solve this problem with, you know, a peaceful neighbor that really works with you on all sorts of issues is seen as ineffectual and offensive to the Mexicans.

HOGE: Just on the narrow grounds of the flow of immigration, has this fortified border made a difference?

O'NEIL: You know, people argue either way. It looks, though, that the decline in immigrants coming to the United States from Mexico -- which has happened over the last six months to a year -- has much, much more to do with the decline of the U.S. economy than it has to do with any sort of border enforcement.

And that is particularly the areas where Mexican migrants would come. -- service industries and construction in particular -- have declined rapidly, and so there are fewer jobs and there's fewer people coming up. That is really the driving force, is the economic supply and demand rather than what's going on on the border in terms of fences.

HOGE: You know, one of the sort of summary lines I take from your piece is that we have a tradition here of thinking of Mexico, as you say, as being very rich and very poor at the same time, and not much in the middle, but also as being a place to be -- that gets our attention when there's an immediate crisis, but that we have a rather diminished view of Mexico as a strategic partner, despite the size of the trade we do, despite the immigration flows, despite the adjacency of it.

Anybody in this country, in the political world, in the political class, so to speak, that is championing the idea that we have to -- as a psychological base for the relationship, we have to get a different sense of Mexico, as a strategic partner, not just as a crisis to be dealt with from time to time? Any names come to mind?

O'NEIL: You know, this is starting to happen. In part it's starting to happen because, as we saw in the last election, Mexican- American votes were increasingly important.

HOGE: Yes.

O'NEIL: So we are starting to see that. We've -- you know, we've seen it for a long time -- relatively long time from border representatives, those in the House, those in the Senate, governors from border states. They understood this. And you know, even George Bush, when he came into office in 2000 (sic) as a border governor, said, you know, Mexico is our most important relationship; this is what I'm going to focus on. And that was his first foreign visit, actually, was to Mexico, not to, traditionally, Canada.

HOGE: Right.

O'NEIL: So this is coming in to the political scene.

You know, there are a lot of issues too where we can work with the Mexicans. And as we've seen the changes over the last couple years in terms of U.S. -- the U.S. role in the world and our search for friends on various issues, as well as a move from a G-7 or G-8 world to a G-20 world, you know, Mexico could be strategically very important for us. They're part of the G-20. They share our interest in open markets, in, you know, sort of market-based democracy. They share our interest of this government in climate change. This is a real issue and conviction of President Calderon. So there's a lot of areas in these multilateral forums where, you know, Mexico could be a very strong ally for the things the United States is trying to push. And so it behooves us to turn to them when we're searching for friends.

HOGE: Any questions that are on hold?

OPERATOR: Our first question comes from Pedro da Costa with Reuters.

QUESTIONER: Hi. I have a question, Shannon. Pedro da Costa from Reuters here. My question is, could you speak to the -- we're concerned about the economy, and given that Mexico's growth rate is supposed to be one of the weakest for major Latin American economies this year, what does that say about its economic model and its close ties to the U.S.? And does -- do those links become a curse, rather than -- you know, when they were once a blessing?

O'NEIL: You know -- right. As you say, you know, Mexico is going to get hit the hardest in this recession, in part because it's not diversified in terms of its exports.

I mean, exports make up a huge percentage of its GDP. And you know, 80-85 percent of those come to the United States and not diversified more broadly.

So that is a big weakness. But you know, the other weakness is --

HOGE: What are the primary exports from Mexico?

O'NEIL: The primary exports are automotive parts, white goods. Oil is a primary export. People are the primary export. But those sort of manufacturing goods are the main parts that -- overall. And then they do export some textiles and other things. But it's really sort of those manufacturing industries. And particularly automotives, as we all know, have been hit incredibly hard. So it's a big part of it.

HOGE: But to the question, is there any rethinking going on, in Mexico, about their ties to us and if that's the right way to go forward?

O'NEIL: I mean, that's part of it. I don't see their out or their long-term strategy being best-served by trying to, you know, break ties with the United States. Some diversification would be useful. But you know, Mexico's real competitive advantage is its closeness to the United States.

What holds it back there though are other things that they haven't done. While they've opened up their markets, you know, and are one of the most, you know, open, globalized economies, they haven't dealt with the micro-level reform. So you know, they have some of the most expensive electricity and telecommunication rates, in the world, because they have monopolies still there.

They have decrepit infrastructure they haven't invested which, you know, even though China is, you know, thousands and thousands of miles away, because of the difficulties of border infrastructure and infrastructure in the country, sometimes it's cheaper to send things from China, especially if it doesn't have to be just-in-time delivery, than to get it up from Mexico which is, you know, just a couple hundred miles away.

So there's real issues, sort of structural issues in their economy and these micro-regulatory issues that they need to deal with, to pick up growth, you know, in 2010-2011, when the economy starts going up. Otherwise we're going to see them return most likely to sort of this stable but unspectacular growth of, you know, 2 to 3 percent, which frankly isn't enough for them to climb the ranks.

QUESTIONER: But to just follow up, they wouldn't have -- having those reforms -- having undertaken those reforms wouldn't necessarily have helped them weather this recession, or would it have?

O'NEIL: You know, it would have helped in some senses.

QUESTIONER: Yeah.

O'NEIL: It wouldn't have helped them because they're tied to the United States, but it would help them definitely bounce back more quickly --

QUESTIONER: Yeah.

O'NEIL: -- because more people would be interested in investing there because it's more competitive.

QUESTIONER: Okay.

O'NEIL: Right. That's the FDI side of things, depends not just on violence we were talking about, but competitiveness in terms of doing business. And Mexico has remained in the middle of the pack and unfortunately fallen in the last year in terms of, you know, these World Bank competitiveness indexes, because of some of these, you know, parts of the economy that are still held by monopolies.

QUESTIONER: Okay. Thank you.

HOGE: You know, since the original revolution in Mexico, they've been proprietarily nationalistic about their oil industry, including foreign investments that might have helped make it more competitive. Has there been any change in that?

O'NEIL: You know, there was a reform last fall that, you know -- to PEMEX's state-owned oil company and the regulations over oil. And everyone talks about this being a "reform light." There were some changes. It made PEMEX a little bit more open, brought in independent voices on the board of PEMEX, allowed PEMEX to keep some of the money that they have for more investment, and allowed some subcontracting with private providers. But it didn't -- fundamentally, it didn't change the rules of the game, which is that it's a state-owned enterprise where foreign investment can't come in and share the risk.

HOGE: Right.

O'NEIL: I mean, what it did do, though -- I'll say the silver lining of the reform was, it opened up the discussion of oil reform. You know, the two main tenets of the Mexican Revolution were, you know, the oil is the patrimony of the government and of the people, and that no reelection would occur. And so getting the reform on the agenda, having everyone talk about it, and in the end having all three parties from the right, center and left vote for what was a sort of very light reform at least opened up the discussion.

So the next time you come around, when production is declining, when money is not coming to the treasury as it has in the past, we may see more serious discussions that can go further.

HOGE: Very good. Do we have any more questions?

OPERATOR: Again, if you would like to ask a question, press the star key, followed by the 1 key, on your touch-tone phone now. (Pause.)

We have no further questions at this time.

HOGE: Well, we're pretty much out of time anyway. But Sharon (sic), you have any last thoughts, something we didn't cover?

O'NEIL: You know, I think we got through a lot of it. You know, I would say this, that Mexico is going to face incredibly serious problems, be them (sic) economic problems, security problems, with their government, some political problems. But I think we can be sort of glass-half-full about this. There are a lot of actually good things happening in Mexico: the rise of a middle class, people pushing for greater transparency, accountability and representativeness of their governments, which in the end will serve both of our countries better.

HOGE: Well, that's a very nice summary. It was a terrific report. And thank you very much, Shannon.

O'NEIL: Thank you all.

HOGE: We are adjourned!

OPERATOR: Thank you, ladies and gentlemen. This call has ended.

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