New President of Mexico: What Changes Will Follow?

New President of Mexico: What Changes Will Follow?

Edgard Garrido/Reuters
from Member Conference Calls

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On July 1, Andrés Manuel López Obrador won Mexico’s presidential election with an overwhelming victory. Shannon K. O’Neil discusses the result of the election and its implications for Mexico’s domestic politics, economy, and relationship with the United States.

Speaker

Shannon K. O'Neil

Vice President, Deputy Director of Studies, and Nelson and David Rockefeller Senior Fellow for Latin America Studies, Council on Foreign Relations

Presider

Carla Anne Robbins

Adjunct Senior Fellow, Council on Foreign Relations; Clinical Professor of National Security Studies, Marxe School of Public and International Relations, Baruch College

ROBBINS: Hi. It’s Carla Robbins. I’m an adjunct senior fellow at the Council and the Marxe faculty director at Baruch College’s Marxe School of Public and International Affairs, and a longtime journalist.

And we’re very lucky to have with us today Shannon K. O’Neil, who is vice president and deputy director of studies, and the Nelson and David Rockefeller senior fellow for Latin America studies at the Council.

So, Shannon, not surprising, but still a pretty stunning outcome in the Mexican elections. Just a reminder for everyone that this conversation is on the record. AMLO—Andrés Manuel López Obrador—has been described as a leftist firebrand, a populist, a social conservative, the next Hugo Chavez, and the next Donald Trump. So this protean nature may well be why he won a landslide 53 percent of the vote in a four-person race, but it also makes it really hard to figure out who he is. So you’ve met him. You’ve talked to him. We also have—he’s got a track record as the mayor of Mexico City. So can we start with a little bit of insight based on what you’ve seen up close and what we’ve seen from his past in government?

O’NEIL: Yeah. Well, good morning, Carla. Good morning, everyone. Thanks for joining us here.

You know, this is the big question, is who will he be when he governs—will he be a pragmatist or will he be a populist? And I think the short answer is no on those.

But let’s go back to you question: What has we seen before when he was governing? And he was mayor of Mexico City in the early 2000s, so the most populous region of Mexico or a huge city to govern, with the caveat to remember that, you know, governing—while the headquarters for the mayor of Mexico City is not very far from the headquarters of the president of the country, that is a huge leap to go from governing a city of eighteen million people or so to governing a country of 120 plus million people.

But what we saw when he was mayor was a mix. We saw him as fairly pragmatic with working with the business community, particularly to revitalize downtown Mexico, the old city center. We saw him expand the social safety net there. He expanded pensions for elderly people, for those who didn’t have it. He expanded some benefits for mothers and others. Policies at the time were critiqued by the other parties, but then many of those parties rolled out those kinds of policies across the states following him, so imitating him or emulating him. We saw him maintain a fairly balanced budget, though he didn’t really have control over the purse strings since so much of the budgets of the states and as well as the capital city in Mexico come directly with transfers from the federal government, so he didn’t really have a lot of leeway there in terms of being able to go outside of the bounds there.

But we also saw him operate in a fairly opaque manner. So he was quite resistant to setting up a transparency commission at the time. All of the government contracts or many of the government contracts, including the contracts for what they call the Segundo Piso, the “Second Floor”—which is a highway that was built over the main highway to provide more space and transit for cars—those contracts—who got them, how much they paid for them, how they were designed—those are still sealed and unable to—for people to go in and actually look at, even with freedom of information act and the like. So he leaned toward the opaque, not allowing people in to see how the sausage was made.

And he was also known in his Cabinet meetings for not listening to outsider expert advice. He would come in and he knew what he wanted, he knew what he wanted a particular ministry to do, and he didn’t really listen to a lot of feedback or incorporate a lot of feedback into the kind of policies.

So that, I think, provides a little bit of this back and forth. He can be quite pragmatic, but he can be also a bit autocratic in the way that he gets things done. And so it provides a little bit of insight, but also leaves a lot of questions as to what he will do now in a much higher office and in a much broader responsibility than he had in there.

ROBBINS: So he campaigned on ending corruption, bringing down crime and violence, wealth redistribution or certainly broadening the social safety net, some of which he did when he was mayor. You talked about this opacity and particularly the sealed records for big projects. On the other hand, he has a reputation for being clean. Is he clean?

O’NEIL: You know, it’s—I’ve had different people tell me different things. One person told me, you know, there’s a difference between being austere, which he is, and being honest. Others feel that he is—he is quite clean. I think there is—there is more agreement that many of those surrounding him are less clean than he himself is. There have been numerous scandals with some of—his former chief of staff, of others within his inner circle have had—have had challenges and even been on videotape receiving bags of cash and like. So I think there’s a question here.

But this was a big part of his campaign. At almost every stop he talked about the corruption, which, rightly so, Mexico has seen scandal after scandal, high-profile scandals crossing the front pages during this last administration; governors from all sorts of states from all different parties—mostly from the PRI, frankly, but also from the—from the other parties as well. So this is something that really appealed to Mexican voters.

I do think the challenge is that when you asked or when people asked him to go a bit deeper and say, OK, how are you going to take on corruption, all you got was promises and platitudes, that the fact that he personally was not corrupt, that that would filter down through this broader system. And that seems a bit hard to believe.

We’ve also seen in the last couple of weeks some cautionary aspects in that while he plans on taking on corruption with his enemies, there’s a question about those who are close to him. And one of the most high-profile cases in the last couple of days, or last week or so, has been a woman who’s a senator who it was found out that she was charging everything from her mascara and makeup, to jewelry, to her grandchildren’s toys and others to the taxpayer, to—you know, through the Senate. And he not only didn’t denounce her, he stood next to her and said that, you know, she was part of the team, and that this was all political propaganda to try to tarnish his image and tarnish the image of Morena. So that suggests that he may pick and choose where he decides to go after corruption.

ROBBINS: And so, in addition to fighting corruption, he has made very strong commitments for expanding the social safety net. He’s also talked about industrial policy. There’s been some suggestions that he’s going to restore the power of the state-owned oil industry. What do you think are probably the biggest economic deliverables which he’s going to be under pressure to produce? And what do you think the likelihood is that he can actually produce them?

O’NEIL: Well, the expectations are incredibly high on what he will deliver. And he—interestingly, on election night, on Sunday night, he gave two speeches. So first he was at the Hilton Hotel, which is right near the downtown, and that was the speech I would say that was designed for the international press and particularly the international business and investment community. And so that one he was very—quite market friendly, he was very inclusive, he talked about the independence of the central bank being important, and private investment, and working with business and others to make Mexico great, to bring prosperity to Mexico.

He then got into a car and drove not too many blocks away down to the Zócalo, to the main square, and there his supporters were waiting for him. And in that speech he was a bit different. He talked again—he reiterated the things you just said: that he will provide pensions for the elderly; that he’ll provide opportunities for young people, scholarships and apprenticeships and those things; and he will expand the safety net for those who have been left behind in Mexico. And there are many that have been left behind in Mexico. This is an incredibly important issue, and one that Mexican voters voted on and they elected him on.

But the question is, how do you pay for it? And here, I think, is where the real challenge will be between those two speeches. In the one and on the campaign trail he promised many times not to raise taxes and not to increase Mexico’s debt. But in the other—and also on the campaign trail—he’s promised a lot of benefits, and he’s promised also to invest in infrastructure, which Mexico desperately needs but you have to find the money to do it.

Something I do think we will start seeing a switch is in the way the government thinks about its role in the economy. And for the last twenty-five years I would say, or even before, but definitely during the NAFTA years, the idea or the guiding philosophy, I would say, was one of a small state and one that was facilitating trade and markets. Now, it didn’t always live up to those promises. Mexico had and still has the challenges of oligopolies, of monopolies that are just beginning to fragment a bit with the reforms of the last few years. But I see him bringing back a much more active role for the government in the economy, so choosing national champions, choosing particular industries for the state to invest in that will lead to or he hopes will lead to economic development. And the two that he’s talked most about is the agricultural sector—so bringing back that small farmer and providing support that will allow them to—allow subsistence farming to come back—and then also in the energy sector. And so, while not negating the private-sector contracts that have been put out there, probably slowing that whole process and making sure that Pemex or other state-owned enterprises really play the vital role going forward. And those are challenges because that will take money if you want to increase production, if you want to increase efficiency and the like, which given his other priorities he may or may not have.

ROBBINS: So you mentioned NAFTA, and he’s been sort of all over the lot on NAFTA, although more recently has been more positive about it. He did have a conversation yesterday with our López Obrador, known as President Trump, and they came out of it with some—each with their own narrative about how it went, although they were both, you know, cautiously positive about it. Do you want to talk a little bit about what we know about that conversation, and what you expect about NAFTA and more generally about the relationship between the United States and Mexico under this new president?

O’NEIL: Sure. I mean, we’ve seen the first initial forays between the two men be quite positive. President Trump, even before the Electoral Institute called the elections, sent out his congratulations by tweet. And then they had a phone call yesterday, which by both accounts was quite polite and positive. AMLO said he put forward this big plan for working together in integration and economic development. Trump didn’t deny that, but I imagine he was a bit nonplussed by the details of that or sort of the direction of that. But it was overall quite positive.

But, you know, as we’ve seen in other places around the world, Trump often begins—well, not always, but at times does begin positively with other presidents or new presidents-elect. And the real question in where that relationship goes comes down to the policy details and what—how the United States works or doesn’t work with that particular country on various issues. And here is where I do think there are going to be very big challenges between the U.S. and Mexico relationship, as we’ve seen already during these first, you know, eighteen-plus months, that it’s been an incredibly tense time between the two nations.

And I don’t—I don’t expect that to change, in part because there are difficult issues between the two countries; and, two, because many of those issues are ones that Trump is using to rally his domestic political base. So even if Mexico would bend over backwards to deal with these issues—as they have, frankly, on issues like Central American migration, where they have spent hundreds of millions if not billions of dollars to slow or stop the flow of Central American migrants coming through Mexico to the U.S. border; and to security, where Mexico, too, has spent billions and billions of dollars trying to improve security and stop the flow of drugs through its country.

And then back to the issue of NAFTA, which you bring up. And that issue, there AMLO has said he will support NAFTA, that he will support the modernization of NAFTA in a negotiation. But like his predecessor, Peña Nieto, his administration wasn’t able to get to a deal with the Trump administration, and it seems particularly because the United States is not willing to compromise on issues that at least so far have been no-goes for both Canada and Mexico. And so, unless the United States is going to change its negotiating position, it’s hard to see why an AMLO or how an AMLO administration and his negotiators would be able to reach a deal.

O’NEIL: So I want to turn this over to the—to the members for questions. But can we just end up talking about the size of—the magnitude of his victory and what that means for potential checks and balances? You’ve talked about how secretive he can be. He has a reputation for lashing out at the press and lashing out at critics. And Mexico also has this—you know, a very, very long history of a very powerful executive. You know, they get one term and they are near gods. You know, is the fact that he had such a large victory, that the other parties seem so beaten back, is this guy going to have any checks on his power? Or is it going to be, you know, all AMLO all the time in Mexico?

O’NEIL: You know, many of the democratic checks, as you say, won’t exist. In part, he got an overwhelming majority, both his own vote but also with his coalition partners, so he will have a majority in both the house and the Senate. So he will be able to legislate the changes that he sees fit.

We have also seen in general Mexico, but particularly under the Peña administration, we have seen that administration erode some of the democratic norms and rules that might have held AMLO in check. So he already has a path, a door open to continue down that way if he so chose. So we’ve seen, for instance, the Peña administration appoint people to the Supreme Court or to other agencies that have in the laws very strict guidelines of the types of people that are allowed to go in there, with the qualifications they need to have or other things like residency in Mexico, and Peña blew through many of those, forcing people who didn’t fit within those qualifications, did not reach them. And so that opens up the space there too, I think, for subsequent administrations, including this one coming up with AMLO, to do the same. So I do worry about those checks and balances.

I mean, one of the biggest checks may be—on AMLO may be the global financial markets. So the bond market, the currency market, others, if he goes out of the bounds of, you know, acceptance among those markets, we may see them react in ways that will constrain the president. But I think those, too, those checks are somewhat limited, in large part because Mexico, even though we’ve seen the debt-to-GDP increase substantially under Peña—it went from somewhere around 33 percent to 46 percent today, so we saw a huge increase the markets did nothing to slow that increase under Peña—it still has a pretty low debt-to-GDP ratio compared to other emerging markets—compared to Brazil, Argentina, or many others around the world. So I do think he will have some financial wiggle room there.

So a short answer is he has this big mandate. He won across the states. There’s only one state where he didn’t win, the state of Guanajuato. Every other—thirty or the thirty-one states he won a majority, so he really has a big mandate.

I think the biggest checks, frankly, will be the capacity to deliver. When you look at his Cabinet, the people that he has put forth, almost no one has government experience. And I think that people also will come into the assistant secretary level, the sort of next rung or two down, those deputies; many of them, too, won’t have government experience. So it will take some time to just get up and running and figure out how to use the levers of power and to move the bureaucracy in the ways he wants. So I think that may, frankly, be the biggest check in the first year.

And then the last thing I want to say is not only may the bond markets or the financial markets be a check but what happens in the United States and particularly the U.S. economy is often a check on Mexico. And particularly if the United States would slow down or go into a recession, that reverberates very strongly in Mexico. So he may be dealing with I don’t want to say an economic crisis, but perhaps a recession in Mexico, which may limit some of his options or at least make these tradeoffs between the increased spending that he wants to do and the pragmatism that he’s promised—or economic sort of fiscal guidance that he’s promised, it may make that tradeoff even more difficult for him.

ROBBINS: Well, with that optimistic insight—(laughter)—let’s turn it over to the members. So, operator, if you could explain the process again.

OPERATOR: Thank you. At this time we will open the floor for questions.

(Gives queuing instructions.)

Our first question comes from Blair Tale (ph) with EconVue (sp).

Q: Hi. Yes, good morning. Thank you for that presentation.

My question is about China. In order for AMLO to meet the demands—the financial demands of these entitlements programs that he’s promising, it doesn’t seem to me he’ll have much money left over for infrastructure. And will he turn to China? Has he in the past? What’s his relationship with China? Do you see that becoming a strong force in the Mexican—China becoming a strong force in the Mexican economy going forward?

O’NEIL: Great. Thanks, Blair (sp).

Yes, you know, he has talked on the campaign trail, actually, of turning to China for infrastructure. And particularly he has a plan to build refineries in Mexico. He thinks Mexico should be more energy self-sufficient; so shouldn’t be importing refined gasoline and other products from the United States, should do it themselves. So he’s talked about that.

And then he’s also talked about turning to China for—he has a plan to create a cross-land sort of a corridor that goes across the south of Mexico in a narrow part that he sees as rivaling the Panama Canal, so you could move goods across this sort of port-rail-highway connection. That would bring also economic development to the south, which he cares a lot about. And he’s thought about China in that sense.

So those are just two examples of where he does see China as this potential pot of money that could go into infrastructure. And there I think he would be willing to work with anyone. He’s also interested in the United States coming in, but China is seen as a player that is—that is entering.

We’ve seen over the last few years China actually trying to enter, and so they have been involved there. The somewhat infamous train between Mexico City and Queretaro, a city that’s a few hours away, that failed, China was part of the consortium. It failed, brought down by the weight of corruption allegations in the consortium that was bidding for it. We’ve also seen China as one of the big players in what they call the Red Compartida, a mobile infrastructure backbone that they’re forming to increase spectrum and mobile access across the country to rural areas that don’t have access and also increase the bandwidth for many companies that want to participate. And China is part of the consortium through what’s a U.S.-Mexico-China fund investing in that. So we’ve started to see China interested in Mexico.

My impression in Mexico and Latin America more broadly when China is coming in is that there is at bottom a commercial or an economic interest. They may take a lower rate of return, perhaps, than a private equity investor or others, but in the end there is a real economic bottom line for the state-owned enterprises that are coming from China to invest abroad. So there will be, obviously, some tradeoff. It’s not just free money that’s coming.

But I do see this administration interested in reaching out to the country just because they do have—as you mentioned, they have these huge infrastructure plans. They want to increase spending, almost double it as a percentage of GDP. And to find that money, it’s an attractive—it’s an attractive source of money today.

ROBBINS: Thanks. Next question?

OPERATOR: Thank you. Next question comes from Rick Niu with Starr.

Q: Good morning. Thank you for the insightful remarks.

The question has to do with the politics within Mexico. Do you see AMLO a one-term president or at the very beginning of a potentially deeply-rooted and longstanding political movement in the country? And as a follow up to that, do you see that this marks the very beginning of maybe similar political movements in other Latin American countries?

O’NEIL: So Mexico, since its revolution now almost a hundred years ago, has instituted just one term. There’s no reelection of the president of Mexico. We now have just recently reelection of senators and deputies, congressmen and -women, but not at the—at the top level. And I don’t see that changing. I think that is such an ingrained part of their culture and their history and their politics that I don’t think that is changing.

What I do think AMLO has, as much as an economic project that we’ve observed right here, is he has a political project. He wants to create a party. He started just four years ago his own party. It’s called Morena. He wants to make that—you know, not to put too much in a comparison—he wants to make it into the new PRI. The PRI was the party that ruled Mexico for seventy-plus years. It dominated every aspect of government, all these different levels. He wants to recreate that kind of mechanism—a party that is a big tent, that manages politics within it rather than through the democratic institutions, and to have his party that he controls and perhaps his family controls—he has sons that are involved in the—in the family business as well—to have that party continue. So even though he will have to step down six years from now, I do think he fancies himself a bit the power behind the throne, that he would be able to continue his legacy and his influence and his policies through this party that would—that would dominate Mexico’s politics in the years to come. So I think that is how it would—he hopes it manifests itself.

Now, there’s reasons why that may or may not happen. And we’ll see—you know, he has a lot of expectations coming in, and if he’s not able to fulfill those for the various reasons we’ve talked about, you know, does this party expand and build, or do you see perhaps more fragmentation within the political system. But I do think there is a—he has a distinct political project here. But it’s a different project than, say, things that are—have been happening in Venezuela or other places. I think Mexico’s a very different place than Venezuela. It’s not—we’re not seeing a copying there; we’re seeing a very Mexican response to things and following Mexico’s history of having a dominant party that really spans the ideological spectrum.

In regards to Latin America more broadly, you know, what I do see today in Latin America is voters frustrated with bad governance. And that means all sorts of things. That means corruption scandals. That means sky-high levels of violence. That means limited growth or exclusive growth, high levels of inequality. In various countries different things are priorities. But I do see voters going to the ballot box frustrated with poor governance and trying to find candidates who at least sound as they’re going to take on those issues. And in Mexico it was López Obrador. In Brazil coming up—we have elections in October—you know, it may or may not be—right now we see a far-right and a far-left candidate battling it out, and they’re both trying to claim that mantle. So I think that—if I had to think about a trend that’s broader, I think it’s that trend rather than something that’s being copied, say, from López Obrador to others. I think Jair Bolsonaro, who’s a Brazilian candidate, he’s a very different character and has a bit of a different political project or economic project than, say, what’s happening in Mexico.

ROBBINS: Great. Next question.

OPERATOR: Thank you. Our next question comes from Linda Miller with Wellesley College.

Q: Hello. Hi. Can you hear me?

ROBBINS: Yes, we can. Go ahead.

Q: All right. Number one, hello to Carla Robbins, my former student.

ROBBINS: Hey, Professor.

Q: I’m glad to hear you. (Laughter.)

And my question—absolutely superb briefing, as always—we hear a lot about President Trump walking back in his history. Could you say a little something about AMLO? Does he have such a history? And what might it mean if, in fact, you have found traces thereof?

O’NEIL: Hi, Linda. What do you mean by walking back?

Q: You know the clichés about Trump is, is that he puts forward ideas that he knows are extreme and then, when people are or are not looking, he decides, oh well, that was yesterday, today is today. And I’m just curious to know—I don’t know if you know enough about AMLO’s history—you certainly know a lot more than most of us—that we could see a similar pattern.

O’NEIL: Sure. Well, thank you, Linda, for that question. That’s great.

I actually see them as very different on this point. When you look at AMLO, this is his third time or was his third time campaigning for the presidency. He started eighteen years ago. And since 2006 and 2012 and then in 2018, he had the same message. He has not veered from that message, right, whether it served him well or whether it served him poorly.

Now, this time around, arguably he had a better I would say communications strategy. He had more surrogates out there to appease different groups or to put forth a vision that—to speak to different groups in ways that he—I don’t think he did in the past. But his underlying message—and if you look at his speeches—has been very consistent along the way.

So I don’t think he has—he is a dealmaker. He can be a pragmatist, and we’ve seen that when he was mayor. But he doesn’t do it in the way that Trump does, where you put extreme positions out and then you expect to walk back some percentage. I think he is more of a—he sits at a table and let’s see what we can get done here. But it’s not this braggadocio or this conflictive way of doing it, necessarily.

Though he has been known when people are negotiating with him in the past to fill the Zócalo, fill the main plaza, with farmers or with workers or with others to leverage or to show his influence and power. And we saw that in 2006. He came within a whisker of winning the election. He says he actually won and he lost to fraud. And he filled the Reforma, which is the man avenue in Mexico City, with his supporters for many weeks. So he does, you know, at times carry that proverbial heavy stick or that big stick, but it’s a different negotiating—I think it’s a very different negotiating tactic than Trump takes.

Now, the question is, given he has been so consistent about the things he wants to do, what happens now that he’s going to hold the purse strings, that he’s going to hold the levers of power? He’s going to have a huge mandate, including control over the Congress. Is he going to be able to deliver on these promises? And I think that’s where the challenge will come. It’s not that he put out some very extreme positions and expect him to walk back; I think it’s that he’s held these positions and now he needs to deliver, and he really doesn’t have anyone else to chide for his failures.

Though I do think if we’re going to look forward, if it doesn’t work out, if people are feeling disappointed, I could see him going after different groups in society, either what he’s called during the campaign this mafia power—you know, the old establishment, the politicians that are trying to hold back Mexicans—or the private sector, and saying that they are the ones who are holding you back. So I could see some conflict there. But it’s going to be very different, I think, than the way Trump does these things.

OPERATOR: Thank you. Our next question comes from Roger Wallace with Mexico Institute at Woodrow Wilson Center.

Q: Good morning. I wanted to circle back to the question of resources and where the new administration is going to get the funding for the social programs. One of the things I’ve heard is that their team has been considering the idea of recentralizing the budgetary process with the states, and that rather than having a decentralized system that the president-elect will gather up all those purse strings back into Los Pinos. And that’s a fairly significant pot of money that he could be able to deploy at his own—as he sees fit. Shannon, have you heard anything along those lines?

O’NEIL: Sure. Hi, Roger. Nice to hear from you. (Chuckles.)

I have, yes. So I think the recentralization overall will be difficult, but I could see pulling back some of that. What I have heard is the idea of recentralizing and centralizing the allocation process. So, instead of all the payments offices and the contracting offices and all of those things happening at a very decentralized level between ministries and between states and between local governments and the like, bringing that all back together, so trying to find some efficiencies of scale and savings by making all of that contracting process and payment processes much more digital, but also much more centralized. So that’s one area that they do look for savings.

The other area that they’ve talked about where they’re going to find savings is they’re going to stop the corrupt practices that have happened. And they see billions, if not tens of billions of dollars there seeping out, and the idea is that that would be recaptured by the state. Now, we all know that’s a hard thing to do, but perhaps some of this—you know, if it is more transparent budgeting and contracting and payments processes might make that a bit less.

One of the other things that there have been rumors about, though we have not seen any real announcements, is looking at Mexico’s pension system. And so we have within the pension system there, there is—there are some public pensions for public-sector workers, but really you have there a sort of system of 401(k)s that come out of a mandatory payroll system, so the AFOREs. And these are managed by banks—or managed by financial entities, I should say—and those are invested in all sorts of assets, and they have percentages that they’re allowed to be invested in particular things that the government decides. And so there have been some people talking about could you or would you change a bit the asset allocation, the parameters for asset allocation among the AFOREs so that they would invest in more domestic infrastructure and those sorts of things, or encourage if not mandate that they—that they invest in the—in these new projects that are coming forward. And so those would be—would be—(inaudible)—money.

And in fact, actually, the finance minister—designated finance minister actually went yesterday and talked to the business community, and talked a bit about pension reform, though he said it would be for later on in the term; it wouldn’t be a first priority. But this is a real question.

I mean, the other aspect here is that oil prices are going up. And, you know, Roger, you probably look at this more closely, given where you live, than I do, but if we see an increase in those prices, you know, that goes—does feed somewhat into the Mexico’s—Mexico’s treasury. Now, it does much less than it does in the past because Mexico’s production has been declining and it’s still in decline. And overall in the economy, Mexico is now a net importer of energy. But if production is going up—if those prices are going up, there is—there will be some, though an attenuated, inflow into the treasury that then the new government can allocate.

OPERATOR: Thank you. Our next question comes from Graciana del Castillo with Ralph Bunche Institute.

Q: Thank you. I was surprised that nobody mentioned the issues that brought such a landslide, and one of them was the rate of growth. I mean, Mexico has been doing all kinds of economic reforms since the Tequila Crisis, and it has grown only 2.4 percent, which in per capita terms it’s only 1.2 percent. So, obviously, that’s very inadequate, and Mexico has kept the poverty line—50 percent of the population is below the poverty line, and a large percentage is just above. For those who are concerned with how AMLO is going to finance the expenditure he’s suggesting to make the economy more inclusive, I recommend that you read the National Plan starting on page 130, I think, where he really explains where he’s going to cut current expenditure. For instance, during the last government, the last year of Fox and the first two years of the next government, personal expenditure increased by 90 percent, so that—without any reason. Peña Nieto 2016 budget both agriculture expenditure and health was underbudgeted—well underbudgeted—but Peña Nieto’s expenditure in the presidency was 85 percent above what was budgeted. So there is a very large gap between what is approved and how it’s being executed.

So he explained line by line in the budget how he’s going to cut current expenditure to increase investment that is the lowest that it has been since the end of the Second World War. So I think anybody concerned about how he’s going to pay—to pay for it, it’s very well explained. And I think that’s what made the difference between AMLO today and what it was in the previous two elections, where he didn’t have a plan on how he was going to finance his policies.

So I’m much more enthusiastic about the performance in the future than Shannon is. And I hope I’m right because Mexico really needs it. The crisis they are going through, not only economic but political and security, is overwhelming, and they need a change.

ROBBINS: Thank you.

O’NEIL: Well, I agree with you. I hope—I hope you are right because I agree with you. And I think Mexico has an incredible potential in so many ways that has been unfulfilled, and that is the reason why we saw this wave for AMLO, I think for many justifiable reasons—for the bad performance and poor governance of this last administration, but of those that followed before.

You know, I have to say when I read that plan—and I have gone through that plan—I think many of those aspects are very important and they would be areas for savings, but then other things that AMLO and Morena have done during the last several months suggest that—lead in a different direction.

So, for instance, yes, we have a huge increase in spending on—on current spending, both salaries and benefits and the like. But when you break it down between those that are at the higher levels, which he said he was going to cut those salaries, and those that are at the lower levels—which presumably he won’t cut those salaries because those are people who actually are not in the middle or upper classes; they’re, you know, more of a working-level class—are you going to fire those workers? It’s very hard to do so. You’re not going to be able to get the savings out of cutting the Cabinet secretaries because there just aren’t enough of them to really gain traction.

And then in other areas, where he said for instance he’s going to roll back the education reform, he may return control over the salaries to the teachers. I mean, we saw and estimated somewhere between 100(,000) and 130,000 what they called “ghost teachers,” salaries that were being drawn where there weren’t even people there. So, you know, if you go back and you give the control over that registry, which the education reform removed—if you give it back, then you might have a hundred thousand more people supposedly coming unto the world and there will be salaries that will be paid. So I worry that some of the ways that he’s talking are somewhat contradictory, even though it looks very clear there.

The other example I’ll just put out there is one of the areas where Mexico spends a lot of money—the government of Mexico spends a lot of money is on publicity that they put into newspapers or through the media. And so they pay a lot for public—the equivalent of public service announcements, but basically it’s a way of giving money and perhaps encouraging newspapers and other media outlets to provide favorable coverage. And, you know, the slang term they say in Mexico, it’s called the law de chayote, because chayote was this idea that, you know, back in the old days the PRI used to actually hand envelopes of cash to reporters to write the things that they wanted them to write. And so this is a law that civil society groups and others were trying to get rid of, this huge publicity budget. That’s a huge amount of expense and that, you know, I would say subverts some of the freedom of speech or the press out there. And Morena voted with the PRI to keep this budget back in April in the lower house.

So I hear you that that plan looks—there’s great things in that plan. And if that is what happens, I think that is great. But I worry about some of these other steps that would undermine that plan, frankly, and the way he lays it out.

And then I wanted to say something, actually, about economic growth in Mexico, because yes, the overall rate of growth has been somewhere between 2 and 2 ½ percent for a couple of decades, which has not been enough to really—to let Mexico break through and reach prosperity. And there’s lots of reasons we could talk about why that is or isn’t the case. But one thing you see in Mexico is a very divided Mexico.

And so if you look at the northern states, if you look at the states that are linked to the global markets, that are linked to free trade, many through NAFTA, that have much more modern—these are states that are growing at 5, 6, 7, some of them 10, 11, 12 percent a year. These are states where productivity within the corporations is growing 5 or 6 percent a year. These are states that have much better human development indicators. So people live longer. People are healthier. Infant mortality is lower. Education rates are higher. Transparency is higher. The number of formal businesses—those that register with the government—all of that’s higher. Benefits are paid, then, to those people in terms of social security and the like. These are states that are actually growing in some places at Asian tiger rates. And what’s happening is many of Mexico’s southern states are not only stagnating; they’re in decline. So you see poverty rates in states like Chiapas in 75, 80 percent of the population, while in Monterrey—in Nuevo Leon, the state where Monterrey is, it’s 14 percent. It’s closer to rates in the United States.

So I do think really Mexico’s challenge is the overall rates, I think, cover up this deep divergence between a northern and a prosperous Mexico that is seeing—it has its challenges. It has huge challenges with violence and other things, but is on a—on a much better track, and it is growing in ways that are pretty impressive, almost Asian tiger rates, right, then a south that has been left behind. And that, for this next administration: How do you cross that divide? How do you weave together what are becoming two very, very different Mexican experiences as a citizen?

OPERATOR: Thank you. Our next question comes from Willene Johnson with Komaza, Inc.

Q: Thank you, Shannon, both for your insights this morning and for the recent article in Foreign Affairs.

But I’d like to raise an issue that points to some tension/contradiction. In Foreign Affairs you mentioned that López Obrador is unlikely to upend NAFTA, yet this morning, both in the comment you just made about the lagging south and the comment about the need to or López Obrador’s desire to revive small-holder agriculture, it seems to me that there may be a contradiction. And I’d just like you to clarify, isn’t it necessary to change NAFTA to protect agriculture from American agro industry that’s been selling corn and other products in Mexico? And if that’s the case, who are the actors who are likely to help him to get to the solution that he needs, which is not just to stop the inflow but to actually transform production in the southern states? Who are the states governors, or are there federal actors? Who’s going to help to revive agriculture in Mexico and transform agriculture in the south?

O’NEIL: Sure. No, it’s a good question.

You know, this is something that comes up quite often because people talk a lot about NAFTA and the, you know, decimation of Mexican farmers in the time period that NAFTA was passed and the following years. And there were some effects by NAFTA, most definitely, but it was also a time when Mexico’s economy was transitioning from a more agricultural-based economy to one that was based on manufacturing and services. So if you look at the U.S. trajectory, you know, when we look back—and I won’t get the numbers exactly right, but if you look back in the 1910s and 1920s, almost 25 percent of our workforce was in agriculture. And then you fast forward a few decades and it does down pretty dramatically to 10, 12 percent, and then today it’s less than 2 percent. So as your economy transforms, that is part of the process.

The other thing is the United States sells yellow corn into Mexico. It doesn’t sell white corn, and subsistence farmers grow white corn. So these—and these are different because yellow corn is for cattle feed and white corn is for tortillas and human consumption. So it’s actually the undermining of the small farmer is not necessarily because of U.S. corn coming in because they don’t sell the same products. There are other products there—wheat and other things—that has never been a huge part of Mexican agriculture, but there are—but there are some that probably lost some of their estate.

And you know what NAFTA did also do in many ways was increase Mexico’s overall agricultural economy. But it wasn’t in subsistence farming. It wasn’t in beans and chicken and pork. It was in avocadoes and tomatoes and other sorts of products—strawberries and other things that are coming north. So Mexico has an agricultural surplus, actually, or at least in—often an agricultural surplus with the United States, but it’s in those other products. So we’ve seen a shift in products, that NAFTA has made those things more competitive here in the United States, and made corn and other things more competitive—yellow corn more competitive in Mexico.

The other thing that has happened in Mexico—and this is in sort of light of what you’re asking—is we here in the United States, we know we have the Farm Bill and other things. We support our farmers and producers in various ways. And Mexico, too, has had support from the government for various farmers. Now, the agency that does most of the giving on that side has been notoriously corrupt. And, in fact, a few years ago I saw a list of the farmers who are getting subsidies, and a whole lot of them have the same last names as the politicians in the states where the money is going. A few famous narcotraffickers are on the list, getting support for I guess the crops that they are growing. And so I think that entails that there is—these supports could be done better.

But I think there is also just a fundamental question about what you want for your economy in the long run, and is subsistence farming the best way to bring prosperity to your people. And, you know, here in the United States we started off, Jefferson, it was going to be a nation of small farmers and that’s the way it was going to be. And we have changed our economy now, and today we have very few small farmers. I grew up on a farm in Ohio, so I’m very aware of this. It’s become an agrobusiness and it’s very efficient, and people who are in farming, actually many of them, you know, are able to lead, you know, middle-class lives, some of them. But it is an agribusiness. It’s no longer subsistence farming. And I think the question is, for Mexico as we look forward to Mexico for ten years, twenty years, thirty years from now: Do you want to keep people on small pieces of land? Do you want to keep subsistence farming? Or are we moving or should they move to an agribusiness model? Is that the place to go, particularly if you plan on competing with the rest of the world?

Now, when you look at AMLO’s plans, that is not the—that is not the vision that he has. He has a vision of food self-sufficiency, and he’s talked a lot about that. And so, for basic products—animals, sort of pork and chicken, and beans, and rice, and corn—he does believe in the very small plot of land subsistence farming. But how you maintain those people and can he maintain them in a globalized world is a question.

Now, last point, just on NAFTA. López Obrador, I think he is—he’s fine with NAFTA. He’s not against NAFTA. But he has a very—he sees economic development and growth coming from domestic policies and from things like subsistence farming, from the things that you’re going to do at home, from this self-sufficiency. So he doesn’t anchor his economic paradigm for Mexico in in the international or in NAFTA the way this current administration has, but administrations have since Salinas in the early 1990s. So I think there, yes, he’ll be at the table. His negotiators will be at the table. But he doesn’t care as much, frankly, as the Peña administration does. So if we start seeing some pushing and shoving at the table or the lack of compromise from the United States, I don’t see him as willing to buckle under because he just doesn’t think it’s as important as some of his predecessors have in terms of the way he envisions the economy.

Now, I—the data I provided you with how well the north is doing vis-à-vis the south, I do think NAFTA has mattered a lot. And so as I look at the economic data over the last couple of decades, the areas of Mexico that are growing are the ones that are tied to NAFTA and through NAFTA to the world. And so I see that as the path out. But he has—he and his team have a very different vision. So we will see how those policies meld and then eventually what happens to NAFTA.

But I do—one other—the last thing I’ll say is there are going to be some conflicts, I think, at that table because the areas where the United States does well, the selling of agriculture into Mexico—Mexico buys somewhere between eighteen and twenty billion dollars’ worth of agricultural goods from the United States every year. It’s one of the biggest buyers and consumers of our products. There may be some tensions there, but there won’t be as many head-on tensions as we think. For instance, with this corn issue, there’s a difference between yellow and white corn so it’s not quite as conflictual as, perhaps, it looks on the outside.

OPERATOR: Thank you. Next question comes from Hagar Chemali with Greenwich Media Strategies.

Q: Hi. Thank you. Thanks so much for doing this call.

I wanted to ask if you could elaborate a bit more on AMLO’s plans for countering drug trafficking and countering illicit finance in Mexico. Obviously, the past administration had a very close relationship with the U.S.—all U.S. administrations, the DEA, and the Treasury Department, and the FBI. And so I wanted to ask if you could elaborate on that and what you expect under the new Mexican administration.

O’NEIL: Well, that is the big question, right? Will this cooperation on security—will it continue or will we see it change? Some of those changes may come, frankly, from the north. We’ve seen President Trump and his administration talk at various times about cutting back support through the Merida Initiative and cutting back some of the work. So it might—you might see it come from that side. But I do think the real question is what does the López Obrador government plan on doing. And the short answer is I don’t think we know.

Violence is one of the big issues. It was at every campaign stop. It was corruption and violence, these are the two things that he plans on taking on. But the way he talked about it was if we reduce inequality, if we provide jobs for young people, then the violence will dissipate if not disappear. Now, that is a—that’s an aspiration. I’m not sure we have a lot of on-the-ground examples from other countries in the world where that alone worked. But—in fact, I don’t think we have any examples where that alone worked, but—you’re going to need a different kind of strategy as well. But that is an issue, and the United States up until now has been a partner on particularly providing intelligence and other things to take down some of these groups.

Just for a little history, just to think about this first year of AMLO, when we look back at the first year of Peña Nieto, this cooperation with the United States and Mexico really began under Calderon. It ramped up during that six-year period. And when Peña and his team came in, they also sort of froze the whole thing. They stopped and paused and tried to figure out what was happening because it hadn’t happened before that the United States and Mexico had worked so closely on security issues. And so there was a pause for nine months, almost a year in that security cooperation before it began again with some evolution in the way that it worked and the priorities and the like, but picked back up again.

And so one scenario is something quite similar happens with López Obrador; that the first year there’s a pause, they figure out, you know, what people have been doing, why they have been doing, if it’s useful or not for the priorities that the government has, and then they decide to continue it, perhaps with some modifications. And given AMLO’s promises and I think sincere desire to lower violence—because this affects people’s day-to-day lives in all ways, shapes, and forms—I could see the U.S. cooperation on the security issue being very helpful for him in his agenda, and particularly when it’s reformed or evolved in a way that he and his advisors feel comfortable. But I do think because it’s such an important issue for the government, we will probably—we will see a pause. What we’ll see is a feel each other out and find ways that they can work together. But I think there’s a decent chance that that cooperation will go on, but it may—it may morph a bit from where it is today.

ROBBINS: Thanks. We are coming very close to the end. I think we probably have time for one more question.

OPERATOR: Thank you. Our final question comes from David Mears (sp) with the University of California San Diego.

Q: Hi, Shannon. I wonder if we’re going to see very early on a tension between the people that AMLO has on his fiscal and economic side and the people on the social side, including—I mean, I see the energy minister, the potential energy minister, is much more on the social side. The idea that Mexico’s got to have 80 percent domestic content in the oil contracts just doesn’t make any sense at all in terms of Mexico’s capacity as well as the cost of that. And building these refineries, refineries are very expensive in and of themselves, and then Pemex and the unions are so corrupt that in the past when they’ve thought about building new refineries or improving the current refineries the cost overruns have looked to be prohibitive. So do you see a break, a fight within his Cabinet? And in that fight, who do you think might win?

O’NEIL: Thanks, David.

You know, I—we were—Carla and I were joking before we started off—I may misattribute it, but I think it was James Carville had some sort of line that, you know, during the campaign the knives are out for your opponents and during the transition the knives are out for each other. And—(laughs)—the idea there is I do think there are lots of factions within the AMLO campaign, and these have been exacerbated or augmented by the fact that this time around he has a much bigger political tent than he did in the past. He has the Workers’ Party from the left as part of his coalition. He has the PES, the Partido Encuentro Social, from the—from the right, a very conservative Evangelical group. He has this mishmash of people. And even among his advisors he has that as well. So he has the technocratic intellectual types that seem to be maybe centering around the finance minister. He has—he has his kind of old-school Morena political operatives that are also there and, you know, wanting control, both remain as a party but also, you know, to be involved in the government itself. You have people like Marcelo Ebrard, the former mayor of Mexico City, who is also part of it and has, you know, a coquetry of people that are sort of part of his group, and maybe one other, kind of.

So there are these factions that are going to be vying for influence within ministries and with the new president. And how this plays out—and I think you lay out the tension very—you know, very aptly in that you have some very classically trained economists who are progressive economists, but also see the need for balanced budgets and the need to—as we were talking before with the National Plan, the need for efficiencies and that’s how you’re going to save money. And then all of a sudden you put a refinery in there and, David, as you know that blows billions of dollars. (Laughs.) Ask the Brazilians about the cost of refineries, right, and what that does to your budget. So I do think there are going to be big challenges.

So you have the expectations of the population, which are immense, and then you’re going to have very different priorities within the teams both in terms of which policies get implemented if we can only do so many, and then also, frankly, which—where power vis-à-vis these various people and bureaucracies lie as well. And money is a way of translating or a way of showing your influence in a—in a bureaucratic setting.

So I don’t have any answers for you about who’s going to win these battles, but I definitely think we are going to see—that we’re going to see some of this conflict—definitely behind the scenes, and it may pour out into the open in terms of what kinds of things get funded or don’t get funded.

ROBBINS: Well, thank you, Shannon. And thank you to all the members for great questions. And we apologize to those of you we couldn’t get to. I suspect we’ll be doing more of these as this all unfolds. There’s a long transition before this happens, so the knives will be out for a while. And thank you all very much for doing this today.

O’NEIL: Thank you all for joining us.

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