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U.S.-Mexico Economic Ties

Panelists: Gerardo Esquivel, Professor of Economics, El Colegio de Mexico, Claudio X. Gonzalez, Chairman of the Board, Kimberly-Clark de Mexico, and Carla A. Hills, Chairman and Chief Executive Officer, Hills and Company International Consultants; Co-chair, CFR; Former U.S. Trade Representative
Moderator: Matthew Bishop, American Business Editor, The Economist
May 1, 2012
Council on Foreign Relations



MATTHEW BISHOP: I'm Matthew Bishop. I am the American business editor for The Economist magazine. And great to be here this morning for this second session of the summit on U.S.- Mexico relations, where we're going to focus on economic questions, U.S.-Mexican economic ties.

We've a terrific panel. On the far end we have Claudio Gonzalez, who's chairman of the board of Kimberly-Clark de Mexico; then Gerardo Esquivel, professor of economics at El Colegio de Mexico. And then, needing no introduction at all, immediately to my left is Carla Hills.

And this is -- as we've said earlier, this is an on-the-record meeting. It's being live-streamed to Washington. Please do completely turn off -- apparently you're not allowed to just put it on vibrate -- your cell phones, BlackBerrys and all wireless devices. And I'm going to talk for about 40 minutes, half an hour, with the panel and then we'll throw it open to questions and finish at 11:45.

The starting point, I'm going to start with an academic perspective with Gerardo. You know, we have these two presidential elections coming up this year. What is at stake in terms of the Mexican economy, in terms of what choices the Mexican public make at this election in July?

GERARDO ESQUIVEL: Well, first of all, we have to understand that Mexico right now is going -- it has stronger ties with the U.S. economy than ever. We have -- NAFTA. We have strengthened our ties with the U.S. economy. And wherever the U.S. economy goes, Mexico has been going the past few years. So whether that's good or bad depends on your perspective, and it also depends on where the U.S. economy goes.

So in terms of economics in the political situation, I think what we have at stake is it's not necessarily a -- the economic model or not necessarily the economic perspective on the Mexican economy. I think what is at stake is a -- basically whether we should be able to maintain, to improve the relations with the U.S. economy, and whether the U.S. -- the Mexican economy is able to sort of identify the challenges that have -- keep the Mexican economy from growing in the past few years.

Mexican economy has been growing in the past 20, 30 years at relatively moderate low rates. And the question is whether we can do something about that, whether we can actually change some domestic policies that I think, in my opinion, are holding the Mexican economy from growing at rates that the Mexican economy should be growing to satisfy the needs of the half of the population who lives in poverty.

So I think that's probably what is at stake in this Mexican election, whether we will be able to face these challenges, whether we will be able to identify what are the policy options that the Mexican economy -- or the Mexican authorities may have to modify and improve the economic perspective for the next -- for the future, for the near future; for the near future.

BISHOP: And, I mean, to be a bit more specific, I mean, is there -- are there any particular indications you're getting from the candidates so far as to, you know, what their different priorities would be -- I mean, particularly Peña Nieto?

ESQUIVEL: Well, I don't think we have quite the perspective from where the candidates are actually -- will actually -- planning to do if they win. The only thing I could say is that they're -- that the candidate from the PRI, from the PAN -- Enrique Pena Nieto and Josefina Vazquez Mota -- have clearly stated that they actually sort of will follow probably the same policies of the previous governments have implemented.

The leftist candidate, who even though he is more critical than has been done in the past, in my reading he is not actually trying to change the main structure of the economic system, or the policies. I don't think he's as radical as some people think he is, although I think he has a different diagnostic of the situation.

And I must say, by the way, which I mostly coincide, even though I don't necessarily agree with the policy that he's proposing, I think the diagnostic that the leftist candidate has is probably more precise in terms of what is holding the Mexican economy back from growing, while I feel the two candidates have probably, like, a more mainstream interpretation of what's going on in Mexico, and they sort of share the policies. And -- well, they have actually announced -- basically, it's like a continuation of the status quo in terms of economic policy, I think.

BISHOP: I mean, on that last point, and I'll move on to Claudio next, but I just want to -- you mentioned AMLO. I mean, last time he came very close to winning. This time, again, all my Mexican friends say he has no chance of winning. Is that -- is that right from your perspective?

ESQUIVEL: Well, yeah. He's way back in the polls so far; he's, like 20 (percent), 23 (percent), 25 percent of the intention of vote. So he has probably no chance to win there, or not really a real chance of winning if things continue as they have been in the past few months in terms of his political performance. So in that sense, I think if you see what the polls have been showing, is that Pena Nieto is probably the likeliest to win so far. So if nothing really important and heartbreaking occurs in the next days, then I would say I think that the situation in Mexico so far.

BISHOP: I was just curious that given, you know, as you say, AMLO has moderated his policy positions in a number of ways and -- you know, on the economy, and he came so close last time, and there is this general sense of disappointment with Calderon. It's just interesting that people are so confident that the polls are accurate.

But let's move to Claudio. I mean, what do you think is at stake economically in this presidential election?

CLAUDIO GONZALEZ: Well, I think something very important is taking place. Mexico is a breakwater right now. We either continue to grow at a mediocre rate or we break out and grow at 5 (percent) to 6 percent a year on a sustained basis. And what we've got to do to achieve this is we've got to make a decision that we want to grow to the full potential that the country has, and we've got to get rid of myths and we've got to get rid of ideological constraints and obstacles that we've had for this many years.

And I very strongly believe that Andres Manuel Lopez Obrador is not going to be the change agent. He is too deeply rooted in the past and particularly in the last century, and we're in the 21st century, not in the 20th century. And I think Enrique Peña Nieto understands this from the very first day that he announced for the candidacy after he left the governorship of the state of Mexico. He came out with a book that he did not write totally, but he endorsed totally, and one of the key areas that he's been talking about from day one is that there has to be change in the energy sector.

He also talks about quite a few other changes, but the striking one was the change in the energy sector, because this has been a taboo to be discussed in Mexico for many, many decades. And he's stuck to this line and up to now there's been very little backlash, except from Lopez Obrador, who doesn't believe in this. Vazquez Mota also believes in this direction.

And I think that if we articulate change in the energy sector, this is going to be a huge push forward to get to this 5 (percent) to 6 percent growth rate on a sustained basis, because it's going to be a big message. This is the -- this is the big untouchable. Carla will remember when we negotiated NAFTA back in the early '90s and she was the big driver in the U.S. to get NAFTA done; we couldn't have done it without her. And there were two things that were totally off the table. On the Mexican side it was energy; on the U.S. side it was immigration, and those were untouchables. And that was decided from day one, and that's what got everything else moving in the right direction.

Well, now, energy is finally going to be opened up in Mexico. I really believe that this is going to happen, and if it happens then I think we're on our way to really breaking out from this mediocre growth area that we've been stuck in -- 3 percent, 3.5 percent. This year we'll probably do 4 percent again; not bad, compared to what's going on in many parts of the world.

But the country has a lot more potential, and I think that both Peña Nieto and Vazquez Mota, who as of today represent close to 80 percent of the vote in the coming election, among the two of them, and when you add them up are very much in sync that the energy sector has got to be opened up, modernized, made more efficient and have private investment in the energy sector, like Petrobras in Brazil or Ecopetrol in Colombia. And I think this is a very, very big message and a very big change agent, and we're all for it. And Lopez Obrador is not on that page. Fortunately, he is not getting beyond 20 percent.

BISHOP: So we'll come back and talk about the energy sector a bit more.

But Carla, I mean, from your perspective, both the U.S. and the Mexican elections, you know, what -- to what extent is something significant going to come out of it for the Mexico-U.S. relations on the economy?

CARLA HILLS: I have no perfect crystal ball on who's going to win on either side of the border, but I do think that when the candidates become president then their responsibility becomes at their desk. And I agree with Claudio; I think Mexico and, indeed, the United States, would be benefited by Mexico's opening its energy sector.

I also agree that the United States has a broken system for immigration. Its visa system is absolutely broken. This hurts the United States. We do nobody a favor by keeping them out. We have a lot of bright youngsters who graduate from our top schools, at the top of their class. Can they stay? Could they work in the United States? No, they have to go home because they can't get the H1B visa.

We have 12.5 percent of our start-up businesses are from people who are not born in this country. They provide enormous jobs; they're usually -- start out at small- and medium-sized businesses that are responsible for jobs. And they contribute tax revenues. Now, this doesn't make any sense for either side of the border. So I think that although politically it's kind of tenuous before an election, you would hope that those given the responsibility to address the issues would step up to the plate after the election.

But something came up in the last program. We talked about needing to change institutions and how do we do that. No one wants to do it. Well, it takes the population to be educated to do it, whether it's to fix the United States' visa system, to open up the Mexican energy system, or to get us to address how we collaborate on border violence. And if every single employer were to educate his employee population as to what is at stake, what could be gained, you know, it would make a difference.

BISHOP: Regarding President Obama and Mitt Romney, are either of those -- is there any reason, from what you've -- conversations you've had with either of them or what you know of them to think that there might be any significant change in American policy on immigration, for example, with Mexico?

HILLS: Democracy comes from the people. And you have people in our Congress who have supported fixing our immigration system. I can't predict what President Obama will do, nor could I predict what Candidate Romney would do or whether someone else will enter the race. But if the American people recognize that actually our immigration from Mexico has gone to zero, that we are in sore need of getting some of the young people who came across the border and that -- how we could legalize the system --

I grew up in California, and we had a bursero program where workers would come in and go out. And it worked very, very well. It was taken away and that system that has replaced it has worked very, very badly. So surely if workers, employers, ranchers all worked together, you know, it does tend to change politicians' minds.

BISHOP: Let's talk a bit about energy reform in Mexico. Back to you, Claudio. I mean, because this has been around, obviously, forever, the re-election. There are promises made and so forth. I'm interested first in why you feel so optimistic this time around that something will actually happen, and how's -- but secondly, and how far do you feel that needs to go to be judged a success? And are we talking about privatization of PEMEX? Are we talking about, you know, introducing a lot more competition in the utility sector in general? How far do you -- how far do you see it needing to go?

GONZALEZ: That's a very good question. And I'm optimistic on this issue because the candidate that is most likely to win, according to polls up to now -- we still have two months to go and there's only one poll that counts, and that's on the first of July, which is the election day. But the indications are quite strong that there's a very high probability that he will win. And he's been very consistent on this issue from day one when he announced for his candidacy.

And I think the world is changing Mexico and North Korea are the only two states that do not have an open energy sector to private investment, and that's a heck of a neighborhood to be in, North Korea. (Laughter.) Even Cuba is permitting participation by the private sector in their energy sector.

So the world has changed. The world is changing. You've got the examples of Petrobras in Brazil, Ecopetrol in Colombia, doing very, very well with participation of the private sector in their energy sector. This does not mean that Mexico loses control of the oil resource. Just as Brazil has not lost it or Colombia has not lost it. And now this is accepted around the world too by the worldwide energy sector.

So we're only coming into doing what we have to do, and it's the 21st century and we're now ready to move. And as I say, Enrique Peña Nieto is probably the only candidate that can really get it done, because if he wins, he probably will have enough muscle in Congress to be able to do the things that have to be done. I think it'll be a partial opening to the private sector, but it should include the ability to float an issue of PEMEX on the stock exchange in order to get the type of discipline, rigor, transparency required to make PEMEX a very efficient and effective oil company.

Now, this is not going to happen overnight. There are a lot of things that have to be done, including tax reform, in the country in order to make up for possibly some of the revenues that will have to now come as taxes to the federal government, rather than the appropriation that takes place at this particular moment. But I think that there is a path to get there, and Peña Nieto has it quite clear in his mind as to what has to be done. And I think that it's going to -- it's going to happen and I think it's going to be a huge message to really get Mexico to get on the path to grow at its full potential and start getting rid of all of these myths and taboos and ideologies that have held us back for so many, many years.

Growth is the imperative in Mexico, and growth will bring with it the creation of jobs and the creation of wealth that will permit us to invest in many of the needs that the country has. And it's an absolute tragedy that we have this great potential and are not using it, and I think we're on the verge now of achieving it.

BISHOP: OK. Gerardo, do you share that optimism?

ESQUIVEL: No, not at all. (Laughter.) Sorry about that. And no, for two reasons.

GONZALEZ: That's why we were chosen to be on -- (laughter).

ESQUIVEL: Yeah. No, for two reasons. One is because one thing is what the candidates say when he's a candidate and the other thing is what the candidate really can do when he is president. Just remember that President Calderon -- (inaudible) -- employment, and employment is probably the one of the worst areas in which he has perform3ed in the past few years and he has done very badly in other areas.

So the reason is where -- the reason why I'm not that optimistic is because of the some -- political ties between the union, the union of PEMEX, the oil workers and the PRI. I think it will be very difficult, I think, for any president coming from the PRI to do anything against the union. And that's the sad thing why I think the -- he never did anything in that regard, precisely because -- (inaudible -- this calling. I mean, it's that the union leaders are -- have very, very strong ties with the party, are very powerful, and I think it will be very hard to negotiate with a candidate once he's elected, if that's the case. So for that reason I'm not that optimistic.

I think if one reads carefully what President -- what Candidate Pena Nieto has proposed in this book that he wrote is that he will open up the PEMEX to the participation of the private sector, but note that doesn't necessarily mean participation of the private sector in terms of all these extraction activities or some of the traditional -- what you should understand of opening up this -- the energy sector to the private participation.

It's just like he has mentioned about something that if people can buy shirts, for example, which is fine. I think that's good. I think that could help a little bit. But I think that's not necessarily what people think when people think about private sector participation in the energy sector, that's not what they necessarily think about. This is one reason why I'm not that optimistic.

And the second reason why I'm not that optimistic is that even if he does that, I don't think the energy sector is that important in Mexico as to be able to change the pattern of -- (inaudible) -- in the Mexican economy. I don't think that's the reason why Mexico is holding back in the past few years.

I think the energy sector is just a tiny sector which, yes, it really opens up in the case that might happen which, as I said I'm not that optimistic about that, will -- might have an impact, might attract some investment, private investment, foreign bank investment which will be very helpful for the economy, but I don't think that's the main problem of the Mexican economy.

Because what we see in the Mexican economy is a general, across different sectors, stagnation. And I think that has to do with something different, other than the -- what's going on in the energy sector. So I'm not that optimistic in the possibility of really opening up the sector to the private sector. and second, even if that happens, I don't think that's going to really change what's going on in the Mexican economy.

That might help the sector that might help the -- (inaudible) -- could get to participate in the sector, but I don't think that's enough as to change the pattern of -- (inaudible) -- in the Mexican economy because I think it's something deeper than that, and that's what I said that the diagnostic -- that I think -- (inaudible) -- is better in that regard. As I said, that doesn't necessarily mean that he's poised -- the most appropriate ones, but he has a different approach the other two candidates. The other two candidates think that some things like this, like opening up the energy sector -- completely change the pattern of -- (inaudible) -- in the economy. And I don' think that's the case.

BISHOP: That's very interesting. I've just been reading the -- this new blockbuster, "Why Nations Fail," by Daron Acemoglu and his co-author. And the amount, the extent to which Mexico gets bashed for being a model of all the things that cause nations to fail in terms of economic centralization and lack of competitive dynamism and so forth is very, very striking and Carlos Slim (sp) the person now identified as maybe the face of that.

And I guess with you avert a decision today from the regulators in Mexico as to whether they're going to pursue this billion-dollar fine against this mobile phone business. But I'm interested, you know -- there was this sign that maybe Calderon was going to get tougher on the oligarchs, if we can use that phrase -- probably won't be allowed back in to Mexico now for saying that. But, you know, to actually sort of open up that elite and put more dynamism into the economy. And it's really not happened, has it? And how could it happen?

GONZALEZ: No, it hasn't happened, but it's going to happen. And it's going to happen because things, as I say, are moving quite quickly, and the press of getting things done in the country, just the --

BISHOP: But do you think -- I mean, for example, I mean, this decision on fining Slim?? And his business. Do you see that as something that is a test case of whether this is --

GONZALEZ: It's a symbolic thing. What really is very important, I think, is the fact that there was a -- the supreme court in Mexico is every day becoming a stronger force, and the judicial part of the equation is starting to assert itself from the top down. And several decisions have been taken recently which have not been as big in the press, like this -- fining, this $1 billion fine.

But now the supreme court took a decision about six months ago where regulators now can regulate in Mexico. Previously, if a decision wanted to be taken by a regulator, the offended party, if you will, could have an amparo and get this totally stuck in the courts for years. Now the decision taken by the Supreme Court is that the regulator takes a decision and it becomes effective immediately and if the offended party doesn't agree with it, they have to go to court to try to change the decision. But the decision stands as of the moment that the regulator takes that decision.

You start to see happening prices of all telecommunication services are coming down and are coming down quite substantially in the country, and you're going to see America Movil and their results that already reflected in the first quarter that they're having to charge a lot lower tariffs. And so this was a major legal decision taken, and regulators can now regulate, whereas they were totally under the control of these other situations that you referred to.

So I think that quite a few things are going on that are pointing in the right direction and are going to get us to start moving in addition to this energy decision. Gerardo might be right that it isn't large enough with the size of the country today, even though it still represents around 10 percent of total GNP. But just the message that we are opening up and that we are welcoming private investment into the energy sector is going to be a huge driver.

(Cross talk.)

BISHOP: Gerardo, do you -- do you, -- just quickly, do you share that optimism on that area, or this even --


GONZALEZ: He obviously does not. (Laughter.)

ESQUIVEL: No, well I woul say partially -- I would say partially. I would say partially. I mean, I think that the regulator has now more power than he used to have, but it's clear we need a long way to in that regard. I think -- and that today the judicial system reform, because so many of these big friends of Pieta (ph) have been caught by the -- or have been fined by this antitrust commission in Mexico. They can eventually get rid of that, the -- postponing or legal practices to postpone the implementation of the decision. They actually can challenge the situation -- the decision. And the antitrust commission doesn't have the strong teeth to make -- to actually implement those measures.

So I think there has been some improvement, but I think the antitrust commission still needs another round of reforms to make it even stronger. And also that needs to -- we need to have also sort of specialized -- (inaudible) -- in competition issues and things like that so just to make -- to complement all the reforms that we have been implementing in the past -- in this area of competition, which is one of the most important ones.

That's really important, because that goes -- that goes -- for the economy and I think doing something there, it's much more important, it is to me, than reforming the energy sector.

GONZALEZ: I agree. I agree with --

BISHOP: However, I think one of the -- one of the things -- one of the things that we would -- develop more as NAFTA took effect would be the -- you know, there would be this sort of spread of competitive dynamics, you know, throughout the NAFTA area and that that would shake up an economy like Mexico's a lot more than it has done in some ways. I mean, how do you -- how far do you -- has it turned out like you thought it would in terms of driving reform?

HILLS: Oh, I believe that the NAFTA, which eliminated tariffs on industrial goods, eliminated all restrictions on agriculture between Mexico and the United States, has not been done in any major agreement before or since; has had a investment chapter to protect investment, protection of intellectual property, has provided certainty and there's no question Mexico's economy is 50 percent higher today than it was on the day the agreement went into force, notwithstanding a year later it had the peso prices.

And so too the United States has benefited. We have become much more integrated economically --

BISHOP: So what needs to happen to take it to the next level of integration, do you think?

HILLS: Well, there are some issues that need to be addressed. Number one, we could have greater tariff harmonization where we have small differences between Mexico and the United States, which create what the Canadians call the tyranny of small differences, so that we have to constantly fill out immigration papers. We have the High commission on Regulatory reform between Mexico and the United States. It wish it had met more frequently. It has come up with coordinated requirements; for example in telecommunications, so if you're tested in one country you don't have to repeat the process and the cost in another country. We've done so in a handful of electronic issues; we ought to speed up that process. That's another area where the business could push their respective governments to move more rapidly. I think we have been a bit slow on that.

And then, you know, the polls with respect to NAFTA, North American integration, Mexico in general, have not been positive in the United States. And that is really shocking when you think that Mexico is the United States' second largest export market. We export more goods to Mexico than to all the rest of Latin America. Indeed, we export more goods to Mexico than we export to Brazil, India, China and Russia combined.

And this is a very valuable market for an administration that has said they want to double exports in five years, create 2 million jobs. And where do you look to do it? I say look to your southern border. And how would you go about that? We could talk about how to integrate our two economies much more closely and make them much more efficient.

Our small- and medium-sized businesses, roughly 11 percent of their exports go to Mexico. They can't afford the red tape that has developed in connection with exporting that just decreases their efficiency and, hence, their job creation.

So there are a whole list of things that we could do, and we should surely include on that list educating Americans about the value of the economic integration between our two economies. I certainly would have Mexico join the trans-Pacific partnerships. Absolutely. That is not even a close call.

BISHOP: I was actually in Puerto Vallarta the other week for the World Economic Forum regional event, and it was very interesting how many Americans didn't turn up because they took the State Department's advice that it was a dangerous place to go. Well, I've never felt safer in my life, frankly, given the amount of security there was there. (Chuckles.)

But besides that, though, I mean, while I was there the Walmart story broke and it was an interesting discussion that we had in terms of how many major American companies have their biggest non-American business actually in Mexico, how they don't tend to talk about that very publicly, they talk about other BRIC economies as their great success stories.

And it led us into a discussion about, you now, to what extent was Walmart, Walmex's experience of corruption, if there's corruption, you know, typical? Is that a reason that people don't get very excited about their businesses in Mexico? And what ultimately will be the consequences of, I guess, of America quite vigorously pursuing maybe a foreign corrupt Practices Act move against Walmart whilst maybe the Mexican government doesn't seem to be taking any interest in the case whatsoever, and will that affect America's -- American businesses'' willingness to go further in Mexico?

And let's start with you, Claudio, on that --

GONZALEZ: Well, obviously, that is not a good story. And you don't want that to happen to your company and you don't want that to happen to your countries. And so that's not a good story.

But I can assure you that there are many companies in Mexico, large companies, very large companies like my company, that do not have to go through the Walmart experience. And we've been operating in Mexico for decades and have never faced anything of that nature. And so it can be done in Mexico.

I don't want to judge Walmart or The New York Times story. That time will give us more to judge going forward, but -- in Walmart there's a very, very valued customer of ours. And they've grown immensely and they've done many, many good things in the country, including help bring down inflation and bring modern merchandizing methods to a great part of the country and make it much more efficient logistically, et cetera.

So but still not a good story, but I can assure you that there are many companies that don't -- haven't faced the Walmart experience and have done business very successfully in Mexico. And I know of many companies that have done so.

So it's something that we've got to work on. I was very interested to see this weekend in the Wall Street Journal here at home in Jenkins one of their strongest commentators, well, start throwing stones at Walmart in Mexico, but look at the masons union here in New York City and the fact that they get paid off every day that someone builds something in this city. And Jenkins was very direct in his substantiation of his claim.

So, I mean, corruption is a human-nature situation. Yes, it occurs more in some areas than in others. We've got to drop it in Mexico, there's no question that institutional capability is a big thing that we've got to achieve in Mexico. Violence, drugs, gangs exist in the U.S., exist in New York City, exist in Boston, exist in Los Angeles, Chicago, in Europe, in Japan, everywhere.

But there is a method of controlling, of managing, and that's institutional capability, and we've got to achieve it in Mexico. We can't waste the crisis that we're going through right now in achieving it, but it's going to take time.

BISHOP: So just briefly, I mean, what -- I mean, have you as a foreign -- as an American business in Mexico, what's been your response to the Walmart case? Have you had to do -- have you changed any of your procedures or processes or anything else?

GONZALEZ: No. No. not at all. And we've been very integrity- and culturally oriented from day one and we continue to be so. And we think we contribute to that culture of integrity in the country by being one of those companies that sticks to it.

BISHOP: Right.

Gerardo, I mean, what do you think we should read into or learn from what's happened in Walmart in Mexico?

ESQUIVEL: Well, I think that the worst message that we can draw from this very bad experience -- and I agree with that -- with Claudio -- is that the only way to expand -- prepare, but to expand their business in Mexico is by corruption. I think that's the wrong method and I think that in that aspect I think that the Mexican government didn't react properly to the -- to the news in this aspect.

We need for to minimize the situation --

BISHOP: You think it didn't react properly?

ESQUIVEL: It didn't react to -- actually -- they actually responded like four or five days after that day it became public by the New York Time. And I think sort of minimize the situation, saying that it was just a municipal and a state problem, not a federal problem. And I think that if you see carefully what the federal government does with regard to Walmart has a lot of things to do, so it has to make clear that what the level of the corruption was and what the role of some of these -- (inaudible) -- was and to -- I think should have announced immediately that it has launched an investigation, something that it didn't do, as I said, like five or -- four or five days after that.

But yeah, I agree with Claudio in saying that that's not the way in which probably most private (firms ?) in Mexico expand. I think that the -- that's a very bad news for the Mexican situation, but it sort of confirms the prejudices that many people have about Mexico as being a place for corruption. Yes, there was corruption; of course, I think, as Claudio said, it's very human-nature problem. But I don't -- I think that in this case the way that at least what we so far know about the situation has more to do with practices by a firm in Mexico for -- probably for some reason they believe that that was the way to expand. I don't think that's necessarily the case, and that's of course not the case for many firms in Mexico, neither local nor foreign firms. So I think that we shouldn't get the wrong message from this -- from this situation.

But on the other hand, I'd really -- as I said, I regret the reaction from the Mexican government. I think that the reaction of the Mexican government should be try to clarify the situation, to launch an investigation and to see who is responsible for this. I mean, on the government side. And I think that there are many dimensions in which the Mexican government could have reacted that have to do with the articles commission as well, because Walmart actually displaced very big firms in Mexico in many Mexican markets so -- that have to do with that dimension, have to do with the financial, the national commission and the financial commission in Mexico, because Walmart also has a bank in Mexico since a few years ago. So a -- and so it should have launched a full investigation, I think, just to clarify what role a federal official in this situation was. And that I think would be a very important message for those who want to go and make difference in Mexico that there is a way to do it properly business in Mexico, and that this is an isolated case, an outlier and not the typical way in which this business proceeds in Mexico.

BISHOP: Carla, do you share that view, or do you think this might have chilling effect on corporate America's willingness to invest in Mexico?

HILLS: I think there are three lessons to be taken from the case, and we really don't know what the case is, so I'm reluctant to make any conclusions. But wherever there is an allegation of fraud, whether it's in Mexico or in the United States -- we had the Enron case; we've had our own share of challenges -- we should learn from them.

And if there is corruption in Mexico connected with this case, I hope that gives a push toward institution building and strengthen rule of law and the judiciary in Mexico. And if that requires the United States to use its powers under the Foreign Corrupt Practices Act, then that's what the act stands for, and we keep the system honest.

But, you know, let's not take one case and make that the whole tapestry. The fact is the World Bank found Mexico to be the best place for investment in Latin America. So there will be these ups and downs. There'll be downs in Mexico and there'll be down in the United States. And we should take the lesson to correct them so they become less frequent, but not to just gossip about them. And we don't know what the outcome of this particular case will be.

BISHOP: Great.

Well, let's turn to questions from members and guests. The gentleman in the middle there.

QUESTIONER: Hi. I'm Walter Milano from BCP. For Carla Hills, just to push you a little bit on the topic, you said that -- and rightfully so -- that Mexico is the destination, the biggest destination for U.S. exports, or -- it's the second-largest you said, or the largest?

HILLS: it's the second-largest destination.

QUESTIONER: But a lot of those exports aren't really final exports. In fact, they're destined for the maquila Sector, which are then re-exported back into the United States. And really what U.S. firms do is they take advantage of the differentials that we have in environmental and labor regulations with Mexico and then use it to do -- really provide a low value-added type of processing and then re-export it back to the United States.

So do you think that Mexico would be better off by then, you know, focusing much more investment to health and to education and to environmental issues and then be able to move much more faster up the development curve, therefore they don't have so many social problems at home?

Thank you.

HILLS: Actually, I think Mexico has moved on what I call social issues and has taken a page from Latin America's book to provide funds for families that are very poor, to pay them money so that they keep their children in school. And there are a range of social programs.

But there is a premise in your question that I would either correct or take issue with, and that is the suggestion that we are injured by reason of the fact that we buy a lot of goods from Mexico and that they are part of the final assembly of a final product. The fact is that we don't have a trade partner that benefits the United States as much as Mexico. It's our second-largest destination, $197 billion worth of exports last year.

But importantly, on imports that come from Mexico to the United States, they have 37 cents per dollar of U.S. value added. Now, ask yourself; what do other countries have? China is about 4 cents; Japan, which is a large trade partner of ours, is 2 cents. And what does Mexico do with the dollars it earns from U.S. trade?

Well, the statistics show that 50 cents of every dollar that they earn from trade with the United States is spent here in the United States on buying more goods. So it's what I call a virtuous circle. And to me, I would like to enhance that.

Yes, there are some barnacles on it. I want Mexico to enhance its rule of law. In fact, I'm a great advocate for having -- actually, I haven't talked to Claudio about this -- but having re-elections at the mayor, governor and presidential level, because that lets each of the elected officials talk over the heads of special interests and explain what is at issue. But I'm not a Mexican citizen.

But I can correct your premise on the trade and what the benefits are, because those are the statistics.

BISHOP: OK. And we have a gentleman in the middle with glasses.

QUESTIONER: Hi. Andy Husar, MorganStanley.

I'm just wondering what the panel thinks are the main drivers for growth for Mexico in the future and whether that future ideally requires diversification, further diversification beyond the U.S. as an economic partner.

BISHOP: Claudio, do you want to start?

GONZALEZ: Oh, absolutely. You're absolutely right; it does require diversification. The biggest driver is investment, investment, investment. And start the -- I mean, speed up the virtuous circle of creating more jobs. And this is -- this is the absolute key.

Carla's right. We're spending a lot on social issues, and we must, but the key thing is to create more jobs. And that's why growth at a 5 (percent) to 6 percent level, which the country is perfectly capable of doing if it gets rid of some of these myths and taboos and some of these obstacles that we've -- that we've got. If you can sustain that for 10, 15 years, you change the book totally on so many -- so many issues and -- that are hitting us right now. So diversification is key.

However, we run into some of the realities on diversification because we became a very efficient exporter of automobiles to Brazil. So what does Brazil do earlier this year? Closes its border and goes back to its protectionist book, which it practices in a very strong manner. And so they cut our exports back. Argentina is in the process of doing something similarly. Fortunately, we're starting to export a lot of automobiles to Europe and we also are inching into the Orient in this category.

But I see a lot more of this happening, and every day we've got more efficient exporters and even though the previous question inferred the fact that we're a maquiladora, yes, we do maquiladora, but that's been a phase and it's phasing out very, very quickly and a lot more value added is coming in. We're generating close to 100,000 engineers a year. That's one of the highest rates of engineering graduates in the world, and we're finding jobs for them in many of our industries.

And so this is a -- this is an evolving situation that's going in the right direction, and if we get the right kind of messages sent out by the new government, starting on the first of December, whether it's a he or a she, the key thing is that those messages are the right ones to get growth going at a much higher rate and off of the mediocre path. Someone might laugh at mediocrity being called 3.5 percent growth in Mexico; it is mediocre for Mexico.

BISHOP: Well, I mean, it's quite interesting to me. I mean, you look at the economy and two things leap out to me. I mean, one is there's the big companies in Mexico growing their profits at a significantly faster rate than, say, in Brazil, and yet in Brazil GDP is growing faster than the profits of the big companies, whereas in Mexico the profits of the big companies are growing faster than GDP.

The other is there seems to be really very little availability of finance, credit to small and medium enterprises in Mexico. And I wonder to what extent any diversification has to address those two -- strategy has to address those two problems. And I think Gerardo, what do you -- what do you think?

ESQUIVEL: Well, I agree with that. I agree with what you've said and I also agree with the fact that what we need, the main driver of growth in Mexican economy will be investment. Private investment, public investment, and investing in human capital.

But investing from the private sector requires what you were must mentioning; I mean, to have access to the private -- to credit from the banking sector. The banking, the credit to the private sector in Mexico is one of the lowest in the world. I mean, the only country that has a lower share of credit going to the private sector, the lower fraction of credit as related to the GDP going to the private sector is Mexico, Argentina, Venezuela and African countries. But Mexico is in that level of the development of the financial sector.

So in order to promote private investment, we also need to make reform in the financial sector. So just to grant access from these smaller private and medium-sized firms to get access to credit, because that's what explains actually this difference with Brazil. Mexico has a 20 percent banking rate to the private sector as a fraction of GDP, but in Brazil has like 50 percent and other countries have -- like Chile has 80 percent of banking trade to the private sector as a percent of GDP. So that's from the private sector, private investment.

We also need to invest -- (inaudible) -- human capital. Only one in four of kids of college age go actually to college. So that's a -- that's a really small share, compared to almost any country with the income level that Mexico has. So that's why I say we need also to invest in -- granting access to the young people in Mexico that -- who are actually not -- don't have neither jobs in many cases nor the opportunities to get an education.

So we need to invest in -- and in the end the driver of growth in Mexico will be this investment -- private public and -- (inaudible) -- capital, I think.

BISHOP: We have another question in the middle there.

QUESTIONER: Hi. Blake Heider (sp) from Citi Banamex. This question is to Carla but also Claudio and Gerardo. How do you sell the benefits of trade in a presidential election? (Laughter.)

BISHOP: Don't mention it, I guess.

HILLS: How do you sell the concept of trade?

QUESTIONER: (Off mic.)

HILLS: Well, the concept.

QUESTIONER: (Off mic) -- in a presidential -- in the rhetoric of an election. How do you sell --

BISHOP: You can throw immigration in as well. How do you sell the benefits of immigration in a -- (laughter.)

HILLS: Some administrations have been quite clear that they'd like to see free trade from the tip of Alaska down to the tip of Argentina. You may have heard that phrase before. Others have been more reluctant because their hardcore constituency is less enthusiastic. That means, who's going to fill the gap if there's no conversation about trade?

And for the first two years of the current administration, trade was really a bad five-letter word. In the 2010, January, the president announced he wanted to double exports, create 2 million jobs and that was the export initiative. And since then, they have approved the Korean, Colombian and Panama agreement and launched or carried out, tried to negotiate, the trans-Pacific partnerships. But this may be the first administration in your lifetime where this trade representative has not concluded a single trade agreement. First time.

So if the administration is not talking about the benefits of trade -- and we could have a lecture here today about how enormous they are -- we talk about investment, you have to open up the market and have free flow of goods and services before you invest. Well, then, employers ought to be doing it. And I'm talking about large employers like Claudio's company, but small employers. You probably have a newsletter that goes out to employees. You probably even have an inside kind of TV in the elevator that has headline news. Small- and medium-sized businesses have lunch together, they have -- all of them have W2s and paychecks that go out per month. There could be a notice in there saying, you know, 37 percent of our -- of our revenues this month came from international activities. Thank goodness we have trade.

And I'll tell you, it makes a difference, because when I was trying to help get approval of the North American Free Trade Agreement, a company that I talked to like this put out 12,000 postcards to their employees and said, "If you want to write to Congress about the NAFTA, you have a free postcard. Let me tell you what the percentage of our business would be to Canada and Mexico." All those postcards were used. NAFTA was passed.

BISHOP: And I think it's very interesting. I mean, if Mitt Romney was to come to you and say, well, Carla, you know, I've got -- we think back to 1992. You had the presidential candidate -- the vice president was actually making the case for trade. We have an administration that on the face of it spent the last four years ducking the issue. You know, should I make this one of my campaign themes,? Or how should I bring it up in the campaign, given that we know the benefits of trade are so fantastic? What would you say -- what would you say to him? Do you think that would be wise political strategy or do you think it would be a dangerous one for --

HILLS: I think it would be wise to sell it. And I think that there will be the fringe on the left who will probably oppose, but I think that, you know --

BISHOP: I mean, do you think it would actually be a -- I mean, is that a vulnerability for President Obama?

HILLS: You have to explain it. You'd have to explain that. With exports come jobs, with jobs come the establishment of small- and medium-sized businesses. Even this administration has picked up on its national export initiative, and so it's done a U-turn in terms of trade. It now wants to have trade opening.

Indeed, yesterday they talked about -- Ron Kirk, our current U.S. trade representative, talked about having a free trade agreement with the 10 ASEAN nations. Surprise. Well, they've learned that to get economic growth you need to open markets, and I would say not only markets for goods, services, investment, but also people. You also need to fix your immigration system. You do those things and our economy would take a great leap forward.

GONZALEZ (?): I agree.

BISHOP: OK, there's a lady in a red top -- (audio break.)

QUESTIONER: Thanks. I'm Alex -- (inaudible) -- with the New America Foundation.

In 2006 I saw Denise Dresser give a talk before the election, and she said that when people asked her what does Mexico need, she said very bluntly, we have to take on Carlos Slim, and if Calderon hasn't done that in six years, he'll be a failure. She was very blunt. She's a blunt person; this is what she said.

HILLS: Who is she?

QUESTIONER: Oh, Denise Dresser is an academic in --

HILLS: I didn't hear the name that you mentioned.

QUESTIONER: OK. So Denise Dresser at -- yeah.

So what possibility do you think that this might happen after this present election?

GONZALEZ: Well, Denise Dresser loves to have one-liners, and that's one of her favorite one-liners. Carlos Slim, no? And I wish we had a hundred Carlos Slims investing in Mexico.

But getting to your point, I think that the regulatory framework in Mexico has changed hugely, and even though Calderon has not taken a symbolic action as such, you're going to see America Movil's overall results reflecting very clearly this regulatory environment that has changed.

Maybe you can argue that it hasn't changed fast enough or strong enough, but the price of telecommunications in Mexico is coming down, and definitely coming down. Now, we've got a lot more work to do, but, you know, symbolic actions are symbolic actions. The key thing is that we're headed in the right direction, and I strongly believe the regulatory -- we are -- we've got the new competition law; we've got the new class action law; we've got the new APP legislation that has been passed.

These are -- these are messages that are going to pay off, going forward and, you know, Denise will still write an article saying we've got to take care of this person or that person, and it's not just one person. It's heading in the right direction to get the investment, investment, investment, jobs and jobs.

And to you, Matthew, before we break off, because I see that clock inexorably moving, you stated Brazil is growing more than Mexico. It is not. In the year 2011 Mexico grew more than Brazil, and in the year 2012 Mexico is going to grow more than Brazil.

BISHOP: Well, I think what I actually said was that the big company profits are growing faster in Mexico than the Mexican GDP, whereas in Brazil the GDP is growing faster than big company profits, which I think brings us back to the Slim question, which we had a very long piece on in The Economist quite recently, which maybe took a slightly different line to --

GONZALEZ: Maybe Mexico's GDP is being underestimated. And for one believe it is. But at any rate, take a look at some of those firms' profit growth going forward. And -- enough said.

BISHOP: OK. We've got a gentleman in the back there with the red tie.

QUESTIONER: Thank you. David Short with FedEx. And I'd like to ask, beyond opening up the energy sector to private investment, what specific reforms should the next administration in Mexico undertake so that the country can maximize its economic potential?

BISHOP: Good. Gerardo, do you want to --

ESQUIVEL: Yeah. I can talk about that.

Well, I think that the emphasis on reforms has been, you know, the wrong emphasis. I think what really needs to be done is to make a better diagnostic of the situation and to -- I think the main point -- (inaudible) -- like nothing's reformed, not in the labor reform, not in the fiscal reform, not even in energy reform, as I said.

I think the main problem right now is, as I said, has to do with the implementation of some specific policies such as changing the incentives that financial sectors now have in terms of whether it should do what it does all over the world, which is basically taking resources from savers and lend it to investors, which is what the Mexican financial system doesn't do.

They actually -- what they do is they consult with some savers and lend it to the government, which is the easiest way to go. And they do that at a very profitable rate, so that's why the Mexican banks are among the most profitable ones in the world. And so this is -- this is holding back growth, economic growth in Mexico, I think.

So -- and this has nothing to do with reforms. So I think the emphasis is reforms, and I think Mexico right now has a reform fatigue, as many countries in Latin America. So emphasizing some reforms, that is -- as I say, is the wrong message.

So instead of changing policies and changing the iagnostic in particular for some -- I think the -- I mentioned before public investment. Public investment right now is like 2 (percent) or 3 percent of GDP, excluding PEMEX, of course.

GONZALEZ: Oh, it's higher than that now.

ESQUIVEL: But just excluding PEMEX, it's at 3 (percent) or 4 percent probably now, which I think is a little bit --

(Cross talk.)

ESQUIVEL: -- but it's still way below from what we need. And in that sense, we have to invest a lot in building of infrastructure. Building infrastructure, which is key, as someone mentioned before, to promote the diversification of Mexican exports. So Mexican exports have right now concentrated on the U.S. market 80 percent of all -- (inaudible) -- go to U.S. market, and that's mostly because we sell basically by (land ?)

We are very uncompetitive in terms of selling goods to other countries when -- if by maritime ways, for example. That's why the only two countries with which Mexico has a surplus are the United States and Guatemala. And this is --

GONZALEZ: Oh, no, no. We had a surplus with Brazil last year.

ESQUIVEL: Well, only last year. (Laughter.)

GONZALEZ: And one with Argentina and with Peru and with Chile.

ESQUIVEL: But in general -- in general, that's the only country we have as a trade surplus.

(Cross talk.)

BISHOP: (Inaudible) -- your brief after -- all this. (Laughter.) The clock, as you say, is inexorably moving on.

I just wanted to finish, because I thought this question might have come up, but it hasn't done. And I know we had a long discussion of the war on drugs in the first session. But in Puerto Vallarta at the World Economic Forum we had the most interesting panel for me with a discussion of the war on drugs where the business, the representative on the panel said it was a, you know, a huge problem for the Mexican economy that there was a failure to admit how badly the war on drugs was going and how misguided it is as a policy.

And I had a very similar conversation and interview with Raul Salinas, where he was adamant that whilst there was no change in policy here that it would be very hard for Mexico to break out of its economic difficulties, you know, or to achieve its economic potential. And I wondered to what extent -- I'll start with you, Claudio. I mean, do you agree with that? Is that a consensus view privately amongst business leaders in Mexico with --

GONZALEZ: Well, there's a great paradox going on in Mexico. Yes, the war on drugs is a very nasty situation and one that we've got to work our way through by building up containment and then institutional capability and social inclusion -- jobs and educational opportunities. And each one of these areas is being worked on, but it takes time.

Yet again, you have a number of examples sitting here in this room, including myself, where our companies are not being impacted by the war on drugs. We're growing, we're investing, we're not being threatened. We have very few obstacles. You see $1.5 billion of legal merchandise going north or coming south every single day out of the year through that war-torn border, according to the media. And so how do you figure this happening? And it's growing at a double-digit rate. In the first quarter it grew at 10 percent.

So yes, if we didn't have the war on drugs maybe we could be growing much more at this particular moment, and we've got to get rid of that. There's no question. I was very heartened by Alejandro Hope's comments that maybe we'd peaked out and are coming down. Eric Olson was also hopeful in that direction.

But the key point is that the economy is continuing to move forward and you have many companies -- you've got Bimbo here, who does baking products throughout the country, and I'm not going to speak for Daniel -- but I'm going to quote him in the sense that he's got 50,000 little truck drivers out there visiting small shops throughout the country. And I'm sure he's got some incidents, but nothing that is stopping him from continuing to grow and to invest.

BISHOP: Gerardo?

ESQUIVEL: Yeah. I basically agree with what Claudio said. I don't think it's has really affected the general climate of investment in Mexico. I think that's a very localized impact probably along the border, probably in some small and medium firms. But it has not a real impact in terms of investment for -- (inaudible) -- for instance. So it's probably had some effect on tuition, for example, maybe. But other than that, I don't see any real huge impact of the situation in Mexico in terms of investment on employment generation and things like that.

BISHOP: So when Raul says, you know, speaks out in that way, he's not particularly --

GONZALEZ: Was it Raul or was it Carlos?

BISHOP: Raul, I think.

(Cross talk.)

BISHOP: Oh, maybe sorryy, Ricardo.

GONZALEZ: I have a hard time -- I have a hard time believing it was Raul -- (inaudible).

ESQUIVEL: Ricardo. I'm sorry. (Off mic.)

BISHOP: I was right about the Brazilian GDP, but I've blown -- (laughter).

When Ricardo Salinas speaks out, I mean, what's -- is not representing the business community as a whole, or --

GONZALEZ: What's that?

BISHOP: That view is not widely shared among the business leadership?

GONZALEZ: No. No, it isn't, and -- but again, we have to make progress on the crime front. We have to increase our institutional capability. And one of the things that I worry about is the fact that we're going to waste this crisis if Alejandro is right and things are starting to trend down. I mean, we've got to use this crisis to lift our institutional capability in the country to get more rule of law into our whole judicial process. And if we can do that, Mexico is going to be a much better country for it and one of the real growth stars of this century.

BISHOP: Carla, can you beat that for an optimistic ending to this --

HILLS: Oh, I agree with Claudio. I think that the institution building is extremely important, and particularly in rule of law. You can't have immunity to the extent that only 2 percent of cases brought to trial come to conviction, particularly when you know the problem that exists.

And clearly, these gentlemen from Mexico know the scene better than we north of the border, but no one would say that the drug problem is anything other than a cancer that needs to be cured. It -- investment goes on, life goes on, tourism goes on. I've been to Mexico several times in the past year.

GONZALEZ: That's great.

HILLS: But it would be far better for all of us were we to eradicate this problem. And I happen to believe that working together we can do a much better job, that our economies are tightly integrated, that if we would work collaboratively using the strengths on one side and the strengths on the other, I think we have a greater chance of eradicating this cancer.

BISHOP: Great. Well, I think it's been a very stimulating discussion. I think we covered a lot of ground. I hope Claudio's optimism about change is -- and regulator reform and so forth is well grounded. And we'll look forward to the new president implementing that agenda.

I will retire to brush up on my Salinases -- (laughter) -- but I'd like to thank the panel. And we're having a 15-minute break before resuming -- (applause.)







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