A Conversation with Felipe Calderón

President Calderón discusses recent developments in Mexico, bilateral relations with the United States, and the country's role on the international stage.

CARLA A. HILLS: Welcome to this Council on Foreign Relations meeting. We are so very honored to have the president of Mexico, Felipe Calderon. And before we get started, let me say that this meeting is on the record, and it is being telecommunicated to New York by video conference. So we beg you, turn off all wireless devices -- phones, BlackBerrys -- not to vibrate but off, really off. And as it is customary to preserve the maximum time for our conversation with the president, my introduction will be undiplomatically short.

You have the president's resume in your papers that were given to you as you entered the hall, so let me simply say that President Calderon, the youngest of five boys, earned a bachelor's degree in law, master's degree in economics and a master's degree in public administration at the John Kennedy School up at Harvard University.

He became a supporter of the party for -- the National Action Party, PAN, early on, becoming the president of the youth organization. In the late '90s he became its president. And before the 2006 election, as president of Mexico, he had served as a deputy in Mexico's federal chamber of deputies and as secretary of energy.

He will leave office in December, remembered as the president who built the most universities, 96; the 16,000 kilometers of highways; a bridge that connects Mexico's two costs, providing faster access and therefore more efficient trade; and the passage of the first employment act, which provides incentives for companies to hire people just entering the workforce.

He also faced the daunting challenge of the violence spawned by the drug cartels that left 50,000 people dead. A poll taken just this past August showed his approval rating above 64 percent. We are so honored to have the President of Mexico here with us. And, Mr. President, we welcome you to this podium and look forward to your remarks. (Applause.)

PRESIDENT FELIPE CALDERON: Good morning. Carla, thank you for your words. Well, it's an honor to be here today at the Council on Foreign Relations. For more than 90 years, this institution has been at the forefront of analysis to understand the challenges and foreign policy choices facing the United States and the world.

Six years ago, at my first -- (inaudible) -- address, I told the Mexican people that it was possible to transform Mexico. I said that we could transform Mexico into a more prosperous nation with a dynamic and competitive economy. I said that we could be a fair society with more opportunities for everyone.

I was convinced, as I am now, that we could transform Mexico into a safer nation with a strong rule of law. I can tell you today that we have made great strides and have put Mexico on track to making this vision a reality. I would like to share some reflections on how we have transformed Mexico into a stronger nation and a better neighbor.

Let me start by talking about the transformation of the Mexican economy. As you know, we had to confront the worst global economic crisis in living memory. Mexico was particularly vulnerable to this shock because of our ties to the American economy and the consumption in this country which was -- which was the epicenter of the crisis three years ago.

Fortunately, we took the necessary measures to prevent this crisis from becoming a major catastrophe. In doing so, we were guided by three basic concepts: financial discipline, economic freedom and increased competitiveness. And this strategy has paid off to the country.

First, Mexico has preserved sound economic fundamentals. Many countries put in place counter-cyclical measures to protect their economies from the shock waves or the financial turmoil, and we did as well. In Mexico, we implemented counter-cyclical measures to save jobs and keep our industries afloat.

For instance, we created specific programs to save jobs in export-oriented industries. We reached an agreement with the unions and the companies in the sense that as long the worker accept to earn one-third less on his salary, and the company accept to pay one-third of his salary, the government -- the federal government accepted to pay the other third part of his salary, and in that way, we save more than half a million jobs right in the middle of the crisis in export-oriented industries. We increased government transfer to the poorest and established a temporary jobs program. In doing so, we created another half a million temporary works for the people.

And of course, all this cost a lot of money. Our public deficit rates levels of almost 4 percent of GDP in 2010, and we understood that today's deficit are tomorrow's taxes, and the market always punish fiscal lack of responsibility. That is why expanding public deficit to stimulate economy is a one-shot deal, and we understood that. Once you do it, you have to take measures to rebuild your financial equilibriums. The big mistake made by many economies during the crisis was to forget that you can use public deficit -- (inaudible) -- once, but if you try to use it on a regular basis, you will face, sooner or later, tremendous problems to finance -- (inaudible) -- and that's exactly what is happening with several economies in Europe right now.

That is why we put in place an exit strategy to regain a fiscal balance quickly, and this strategy included several painful measures: for instance, increasing tax revenues, reducing public expenditures, promoting the structural reforms and an aggressive deregulation program. We also shut down a very inefficient energy company, Luz y Fuerza del Centro, which saved the government more than $5 billion a year in subsidies. And thanks to fiscal discipline, public debt is at a historically low level, and our foreign reserves are above $160 billion, more than twice the amount of our total foreign debt, and we have maintained the lowest inflation levels of the past seven decades.

Another important factor behind Mexico's stability is our financial sector. While in the U.S. the crisis started in the financial markets and in the banking sectors, Mexico, the financial sector was not part of the problem, but part of the solution. Thanks to the improvements in regulations, Mexican banks have a capitalization index of 16 percent, almost double that the recommendation of Basel, and well above the countries such as China, England or even the U.S.

Second, we maintain our strong commitment to free trade. This is easier said than done. A lot of you remember at every G-20 summit, one of the useful paragraphs in the final declaration always say that all countries pledge to refrain from adopting protectionist measures. All the countries used to say, we reject protectionism. And time and again, 15 out of the 20 members put such measures into effect in the following days. Only Mexico -- only Mexico started to reduce tariffs right in the middle of the crisis. Mexico, on the contrary, has reduced tariffs from 12 percent 4 percent on average and entered into new free trade agreements, such as the Alliance of the Pacific with Colombia, Chile and Peru. And a few months ago, Mexico joined the Trans-Pacific Partnership, TPP, negotiations. This will give Mexican trade the biggest boost since NAFTA came into effect.

Third, we work hard to increase our competitiveness. Despite the crisis, we boosted investment in infrastructure. To give you an idea, the 20,000 kilometers of road we have built and repaired are more or less equal to the distance between the North and South Poles. We also doubled our bet in our own people by building -- 96 was the figure last year -- today is 140 new public universities. And today more than 113,000 engineers graduate each year in Mexico, a higher figure than in Germany, Canada or Brazil.

And what are the results of these strategies? Today Mexico exports more manufacturing goods than all the countries of Latin America and the Caribbean combined, including Brazil. Mexico now accounts for almost 13 percent of U.S. imports of manufactured goods, and in 2005, Mexico's share was below 10 percent. Ten years ago about 90 percent of the country's export went to the U.S. And last year that figure fell to 76 percent.

When I took office six years ago, Mexico was the ninth-largest car exporter to the world, and today we are the fourth-largest car exporter. Mexico is now the second-largest importer of American products in the world, and we buy more U.S. goods than the rest of Latin America combined, more than Japan and China together. Indeed, this deep transformation of the Mexican economy is of critical importance to the economic success of the United States as well.

But if you -- if we want to guarantee our mutual prosperity in the long run, we need to do more. We need to maintain North American competitive edge over other regions, and the key to get there is more integration, not less. NAFTA was a very important step, but our economies must work to deepen our ties fuller and build on this foundation.

A second deep transformation that is occurring in Mexico: that we are becoming a middle-class nation. Of course, this does not mean that we have ended poverty once and for all. But it means is that the average Mexican families now has a much better quality of life than it did a decade ago. According to the scholars Rubio and De la Calle, in the last years Mexican families have improved their access to housing, cars, durable goods such as home appliances and computers, health and education services and entertainment, all of which are staples of the global middle class.

Let me -- let me give you, for example, how public policies have helped to these ends. First, universal health coverage. For my government, access to health services for everyone is a fundamental human right, why we made an unprecedented commitment to improve health care that has resulted in a historical achievement: universal health coverage. And doing so, we have built more than 1,000 new hospitals or clinics and rebuilt more than 2,000 more.

Second, expanded education opportunities. Today, for the first time, every child in Mexico can attend elementary school, and we have expanded university enrollment from 24 (percent) to 34 percent of young people at superior -- at superior level.

Third, the stronger social programs. We have in place strong support network programs, which include conditional cash transfer to help the poorest families, Oportunidades -- (inaudible) -- for the elderly in poor communities, Setenta y Mas, and day care centers in urban areas for working mothers attended by other mothers in town.

And fourth, more home ownership. Home ownership is a yardstick of economic performance and of the strength of the middle class. Thanks to a combination of a stable economy, a solid financial system and government-supported programs, in the last six years, more than 5 million Mexican families were able to buy their own house at record figures.

The improvement of living conditions in Mexico is having a positive effect in the continent. For instance, according to a Pew Hispanic Center analysis, net migration from Mexico to the U.S. has steadily decreased in recent years, and finally reached zero in 2010, and probably became a net output from the U.S. in 2011. Of course, can be explained by the increase in border security and the economic downturn in the United States, but there is a strong argument that better opportunity for Mexico have also been a key factor for this phenomenon. So by first time ever, net migration to the U.S. is zero on average.

However, we must not forget that migration is a natural phenomenon for two countries that has been going -- has been going on for as long as the United States and Mexico have existed and will continue to happen naturally. Our economies are clearly complementary. As a labor-intensive economy, we have the ability to supply a capital-intensive economy such as the U.S. with qualified and hardworking Mexican workers. This is why I believe that an agenda for the future should continue to focus, on ensuring that migration takes place in a legal, secure and orderly way, but that the U.S. economy is to strengthen, and Mexicans do not have to die while trying to get a job. (Inaudible) -- from the values we share as neighbors and partners to find solutions to these common problems, and help the many workers who today live in the shadows of the society.

And I want to take this opportunity to recognize, once again, President Obama's decision begin to give some young immigrants the opportunity to continue contributing to the strength and vitality of the United States. It's a positive move for both countries that I applaud.

And now I want to talk to you about the third fundamental change initiated due to my time in office: the struggle to consolidate the rule of law in Mexico. I know this is an issue that has captured headlines in the United States and around the world, and it has been one of the main challenges my administration has had to face. Over the years, criminal organization grew in power until they became stronger than the local authorities in several places in some parts of the country, and even before my term started, violence and crime were major concerns across many cities in Mexico. But we decided to face the problem head-on, with the full force of the state. We implemented a comprehensive strategy with three main components.

First, to confront the violent criminal organizations and to support overwhelmed local governments, we deployed the federal police and the armed forces, giving the states and municipalities time and room for maneuver in order to rebuild and strengthen their law enforcement agencies, especially police corps at local level.

Second, and more important, we have strengthened the federal police by increasing the size of the force from 6(,000) to 36,000 officers. They are also better trained, better debriefed and better paid. We are helping the states to do the same. And we are vetting any top officers in federal police and passing through a very important and particular set of tests for new members. And we are moving to a more transparent and efficient judicial system based on oral and open trials, just like the one you have here in the United States.

Third, we are investing heavily in education and health to tackle the social causes of crime, opening rehabilitation centers for addicts and rebuilding public spaces like parks, soccer fields and community centers.

I have to say that Mexico has not been alone in this security effort. We have found in the Obama administration a spirit of renewed cooperation to face common problems under the principle of shared responsibilities. But there is no doubt that much more must be done, particularly when I -- when it comes to monitoring the financial operations of criminals' organizations in the U.S. and reducing American demand for drugs.

We need to have a coordinated on both initiatives to get to the root of this problem -- (inaudible) -- increasing demand for illegal drugs in the U.S. As long as this market continues growing, money will keep flowing to the pocket of the criminal. Of course, the best way will be to reduce illicit drug demand in the U.S. But frankly speaking, that is not possible. All alternative solutions must be considered to curb the massive profits of criminal organizations. That includes market alternatives that prevent drug trafficking from causing so much violence and death.

There is another problem that has become vital for the security of Mexico and many other nations: halting the uncontrolled sale of assault weapons to criminal organizations. Unlimited access to assault weapons in the U.S. is a key factor in the current strength of criminal organizations. You can see a clear correlation between the moment in which the assault weapons ban expire here in the U.S. in 2004, and that is exactly the moment in which the violence in Mexico started to grow.

And it is clear that the more weapons to have available, more violence of homicide you will have in any part of the world. You can see the same phenomenon, whether in Africa or Central America, during civil wars and other phenomenons (ph). And that is exactly what is happening in Mexico as well. During my term, we have seized more than 150,000 guns and weapons. And more than 80 percent of them were sold in an American gun shop. And there is nine gun shop in the border with Mexico -- (inaudible) -- Wal-Mart in that city.

For Mexico it is absolutely unfair -- unfair and offensive that so many lives have lost because of the -- of this business or proceed to (swell ?) the profits of the arms industry. It is possible to think in a regulation that what established here in the U.S. in the '90s, the Assault Weapons Ban, is a problem that has to be addressed if you want to build a safer North America.

And finally, I would like to talk about a profound transformation in our role in the world. Mexico is no longer a spectator in global affairs. We are becoming a nation committed to actively participating in the solutions of global challenges. For instance, the COP-16 meeting that Mexico hosted in 2010 was a milestone in the global fight against climate change. The agreements reached in Cancun were an important step towards more effective international climate finance mechanism such as the Green Climate Fund, a Mexican proposal (tying ?) resources to adaptation and mitigation measures around the world.

We are also -- we are also the first country in Latin America to chair the G-20 meeting in June. During the leaders' meeting in Los Cabos this year, we reached important agreements such as the capital injections of over $455 billion to the International Monetary Fund. Moreover, the Los Cabos action plan for growth established commitments to deal with the eurozone crisis and to strengthen sustainable economic growth.

Dear friends, ladies and gentlemen, Mexicans are working to build a better nation, stronger and safer country where the rule of law prevails, as well as more competitive economy and fairer society. If Mexico continues on this path of transformation in the future, it is on the threshold of becoming the prosperous nation our citizens wish for and deserve.

This day and age, however, no nation can succeed without the support of its strategic partners. The more Mexico and the United States cooperate, the more we can build a future our people rightfully demand. Both the U.S. and Mexico, with our new presidential terms this year, if both our economies are well on the road to health, the window of opportunity to strengthen the bilateral relationship, the upcoming administrations in Mexico have a solid foundation on which to build a stronger future, and I wish my successor all the best.

If I look at how far we have come, I have never been more confident that Mexico and the United States will continue deepening our integration and strengthening our strategic partnership as we face up the challenges of the 21st century.

It has been a pleasure to stay here, and of course I will attend all your questions. Thank you very much. (Applause.)

HILLS: Mr. President, we thank you for those very fine and fulsome remarks. I would like to ask you, in view of your interest in open trade and what you've accomplished, what do you see as the prospects for United States, Mexico and Canada in the Trans-Pacific Partnership?

CALDERON: Well, the point is we must to understand how important is that for our people and our economies. And if we can get this agreement, we will connect our economies to the most prosperous region in the world at least in two decades. That is the idea.

My concern is that there are a lot of protectionist spirits, I can say that, in local politics -- the same as, I suppose, in the United States and Mexico. So a lot of people believe that more protected you are the more prosperity you will have. I mean, it's exactly the other way around.

But for any politician, it's easier to talk about protection and talk about borders and barriers than to talk about real freedom, which you and your constituents will compete. And that is a serious concern. And the problem is the protectionism, the gulf that appears exactly in the middle of the crisis.

So what can be the chance to move forward in the TPP? I have -- one problem that I'm seeing that the day for a real advance in this process was delayed one more year. So but I listen in the APEC meeting if there will be an agreement this year, which was exactly what we were expecting. And it's necessary to regain momentum in local societies to reach the goal we are looking for.

And probably the political campaign hurts Mexico, but especially the presidential campaign here will be a temporary obstacle for TPP. But once the Americans decide this important question, I hope that we can move together, common efforts in order to get the TPP probably next year. And that measure will open big opportunities for our trade economy.

HILLS: You mentioned that the North American Free Trade Agreement was fine and that we should build on it. A lot of people have thought that the three governments could do more to create cohesion and competitiveness in the Western hemisphere. Is that possible or are there disputes between us -- like maybe the tomato dispute -- that hold us back from accomplishing what we might aspire to for creating new opportunities?

CALDERON: It will be a permanent battle, if I can say that. And first, let me congratulate you, personally, for this tremendous achievement which has a historical dimension, the NAFTA, several years ago. And I think it is possible and it is necessary to build upon the NAFTA. In particular, we need to do several things at the same time.

One, we need to improve the infrastructure at the border. So there is a lot of bottleneck on both sides. I mean, if we are able to rearrange to increase the competitiveness of the border itself then the infrastructure will be great. Second, we should understand that the NAFTA will provide a lot of opportunities, not only for Mexican workers and providers but also for American workers and providers.

Actually, there is serious research in which we can demonstrate the real benefits in terms of jobs and personal income for any one of the states here. So we need to explain to the people what are those benefits. But again, the problem that free trade will face at any time, and in particular in electoral times, is protectionism. And that is the case of the tomato.

So it seems like this election is so competitive and the idea is that the tomato could vote and could pick the president -- (laughter) -- and then look like -- incredible that I can say that, no? (Laughter.) But let me tell you that Mexican tomato is very good for American consumers -- (laughter) -- are cheaper. And if you are looking for how to improve the economy, you need to open the border to the Mexican tomato, not the other way around. (Laughter.) But if the tomatoes are going to select the next president, I think this country is in problems. (Laughter.)

HILLS: Let me ask this last question before I go to the audience. We want to keep protections down. And unfortunately, they are going up. You mentioned, though, the unfortunate nature of the tomato problem. What are the prospects of opening energy so that the United States and Mexico could collaborate on developing on a really necessary asset for our economies?

CALDERON: Well, that's a important question.

I think that today there is a wind of opportunity to open a little bit, at least, the energy sector in Mexico. And I say this understanding that it's absolutely necessary because today we have a new challenge and a new opportunity as well.

Let me talk, for instance, about Pemex or any public company or owned-state company. Its managers are looking for the way in which they can get more benefits with less resources, like any other company, probably. But in this particular case -- (inaudible) -- the technology moving ahead, and now technology are -- it's allowing us to get natural gas in particular, shale gas, a very cheap way, the price of natural gas in the North American region going down dramatically.

And that is good for industry because it means cheaper energy for any industry (in any ?) economy. You -- probably you can remember that 15 or 10 years ago the price of natural gas was a serious obstacle for the economy. I remember when I was secretary of energy, the price of natural gas was, like, 12 (dollars) or $15, and today the price, probably 2 (dollars) or $3. So that is an amazing opportunity for the region.

That means that Mexico could be even more competitive, because now we have a very high competitiveness in manufacturing sector. We have very well-trained workers. We have more infrastructure. We have free trade with the United States and with other nations. It's a lot of (assets ?) of a very competitive aspect. Plus today we will have cheaper natural gas. So we have everything to win. That is the opportunity.

But the problem is for Pemex managers with very few public resources who'll decide what will be the most profitable activity for the company. You need -- you need to decide either to invest natural gas with very short marginal revenues and with a lot of risk because you need a lot of technology and massive investment, or to invest in oil, which you could cost probably 20 (dollars), $30 per barrel, and you can (sell ?) that barrel at more than $100. Clearly, Pemex could go towards the oil, even in the very deep Gulf of Mexico.

By the way, we discovered last month a new (research ?), a new field, deepwater -- the Gulf of Mexico. It's the first time Mexico had such kind of discover, at least in 40 years. And if we compare the forecast of that, that discover could imply to double our -- (inaudible) -- in a very short time. But let me go back to natural gas.

So we need to think how can we open the natural gas sector in order to promote massive investment, and with that we can get more job creation, more energy efficiency, more natural gas at very low prices, which means more competitiveness for industry, cheaper electricity for people and a lot of benefits. But in order to do so, we need to change the legal framework of this matter.

Now, why I am saying that there is a window of opportunity? Because I do believe on that, President-elect Mr. Pena believes that it is necessary to reform the energy sector as well. Look, you have these political willness to do something -- energy sector, there is a window of opportunity. So what is going to happen? On my side, there is all the political willness that is required.

HILLS: Well, we'll go to the audience. I know that there are questions here. And I would ask, if you're called upon, to please state your name and affiliation and wait for the microphone to come to you.

On the aisle there, Richard. Is there a mic there?

QUESTIONER: Thank you. Richard Downey from the Center for Hemispheric Defense Studies. Mr. President, thank you for your remarks, and thank you for being here with us at the Council on Foreign Relations. One of the hallmarks of your administration was, in my view, the very courageous decision to confront organized crime. And you talked a little bit about the strategy, the comprehensive strategy to do that. President-elect Enrique Pena Nieto has talked about making changes to your strategy. Have you talked to him, or perhaps has your team talked to his transition team, about how to make continuity and not lose many of the gains that you've made during your six years in office, the way ahead? Thank you.

CALDERON: Thank you. Now, first let me express my gratitude because you framed the question exactly in the way you did. So it -- we are fighting organized crime, which is not exactly the same that -- "war on drugs" is the expression coined here in the United States several decades ago. And it's absolutely -- not absolutely, but it's different. So our aim is rule of law. So we have not some kind of obsession against drugs itself. It's rule of law which must prevail in the country, and according to that, we need to enforce the law; we need to fight organized crime. And organized crime is linked with several criminal activities -- of course, drugs, but not only and probably not mainly drugs, but also human traffic and also weapons traffic and also -- (inaudible) -- and kidnapping and a lot of very dark activities.

Second, I respect the decision of president-elect on any matters, including the strategy for security in the country. Now, let me tell you that I was following all of the electoral campaign. A lot of candidates talked about -- they were framing the expression in this way: We'll continue the effort, we will continue the strategy, but we will make some changes -- (audio break) -- and any candidate go exactly the same in another way. When any candidate would ask, what could be those changes, at least myself, I could not see clearly what were going to be those differences.

So from my understanding -- for instance, one expression is we will use more intelligence and less force. That is correct, but what is what is exactly what we are doing, we are improving the information and intelligence capacity of the public agencies. Actually, we build probably the state of the art center for intelligence for federal police right now. We are using -- I told a rumor, a conversation I had with President Bush when we were talking about the -- we were framing the Merida Initiative at the very beginning of my administration. I was trying to explain exactly that. We need more intelligence, so we need any kind of instruments and technology in order to be able to prosecute criminals and prevent crime.

Trying to explain that, I told President Bush, well, have you ever seen this TV show "24" with Jack Bauer and so on? (Laughter.) Because I want all the instruments of this guy. (Laughter.) And that is exactly what we are doing. So it's quite interesting to see the center of Federal Police -- several centers we are building, and the same with the Army, and the same with the PDR. So we are improving intelligence.

Actually, we are sharing intelligence with the U.S. more than ever. That could be one change, but exactly in the same track with this. Other could be -- what else? We will be more preventive than the -- reactive -- (inaudible) -- but in any case, you need to be very active in any field, no? And I make some kind of a contrast, or I use some task force I come in from health services, no? Of course, we understand that even in health services, you need to be -- to be more preventive, and we are applying a little programs in order to reduce the obesity in child, for instance, and the people. But once you have -- (inaudible) -- with diabetes, you need to apply him a very reactive treatment. Otherwise, we will -- he will die, no? But that is exactly what is happening in Mexico.

Of course we need -- and actually, we did a lot of universities. Building 140 new public universities from greenfield is not exactly only a question of education. It's a question of opportunities for young people. And I understand that the day in which Mexico reach full coverage for any young people in the country, we could solve a lot of the security problem. So you need to be preventive, yes, and that is the reason why we are creating education opportunities for young people.

But at the same time, you need to face the criminals in the street. You cannot allow that the criminals take the control of one city, to substitute the authority, because there is this -- the criminals, the organized crime is doing some kind of a takeover of the authority in one city. They reach to a town or even a city, they threat or bribe the local authority, including police corps, so they become the new authority there. So they start to apply their own law, they started to collect their own taxes, and they started to use public force. Actually, there is not other public force than they public force.

So in that sense, it's a challenge to the state. Now, you are federal government. Are you going to wait in which you can build all the universities in that town, and can you wait several years until (all the kids back ?) to those universities? How many years is going to take that, and what is going to happen with the people during those 10 or 20 or 30 years? So you need to defend the families. There is no option to act. And that is the problem, I think, that Mexico suffered a lot, because this lack of action of the government allow the criminals to take over a lot of regions.

And it's not limited -- that is not only a question that the government started fighting the criminals and that then the violence went up. Of course there is a relationship, yes. But frankly speaking, I do believe that the violence will be there even without the action of the government. Why? Because we are now in the face of a new criminal phenomenon. In the past, last century, what was the core business of the criminals? Narco-traffic. Even -- that is the -- what the words mean. Traffic -- the U.S., and that's it.

And it's a problem of calculus, if I can say that. It's only one dimension. If you think in a line crossing from the Pacific sea to the American border, it's one line, one highway and one point -- single point in the border. But what happen in the last two decades? The criminals who start to think in another business additional to narco-traffic, which is drug -- the retail drug -- retailing in Mexico, which is different why?

How many people do you need in order to cross one ton on cocaine -- of cocaine to United States? I don't know, 10 people? Twenty? Maybe 50? Maybe 100? OK. But how many people do you need in order to distribute 1 million bags of one gram of cocaine, which is the same ton of cocaine? You will need hundreds or maybe thousand of people -- a lot of people distributing. It's absolutely different business.

And upon that, you need to think that in the old business, if I can say that, they only need to care about one line towards the United States. But if they are starting to go into the retailing business, they need to cover the whole territory. That's like any retailing. Think about Coca-Cola -- (inaudible) or think about PepsiCo. It's exactly the same. They are trying to cover a territory. And in order to cover a territory, they started to clash, to shock one each other. And this disputing over territory is the origin of violence; it's not the action of the government itself.

In other words, when our economies have started to grow -- for instance -- (inaudible) -- Mexican income per capita went up from $2,000 a year to more than $10,000 a year today. And that implies that Mexican market has started to be a very important consumption market for vehicles, for households, for whatever, including drugs. So they started to see our society as a market as well. And then they started to diversify their activity from only exporting, if I can say that, to distributing. And in this change, they started to fight each other for the territories.

And that clash, that battle explains 80 percent of the violence, probably, because it's a battle between the Zetas against the Pacifico; or now the Zetas split up, so now it's the Zetas against they -- their old allies, which is the Gulfo. And they are clashing each other. And today probably there is another fight inside the Zetas itself. So the problem is this expansion.

Now, the question was very simple -- (chuckles) -- but I'm sorry for my answer. (Laughter.) I use -- I use the opportunity only. But let me tell you, I do believe that next administration -- at least exactly what they are saying -- they are going to continue the effort. And I think they have the right and the duty, I suppose, to analyze another alternatives.

Now, let me be honest. You really want to think about a real -- another alternative? I cannot see any one different from to think about the regulation of drugs in the global market, starting here in the U.S. That is reason why I say if we are not able or you are not able to reduce the demand for drugs in a dramatic way, you need to think in different alternatives. And you have the duty to analyze any other alternatives in order to stop the flow of money towards the hands of the criminals. And that implies to analyze even market alternatives for that, because if you want to talk about the real different way to do these things, that is the only one.

Or the other is to return the power to the criminals, to say, I won't fight with them anymore. Please be my guest. Take -- you like this government? Please take this government. You like that city? It's nice, so -- (laughter) -- I like it so much, but take it; I won't fight. You cannot say that like a government, because it's the first duty -- the first duty of any government is to preserve the right of the security of the families. And that is very top duty. Believe me, I know that. But you must do that.

HILLS: Yes, please. Microphone.

QUESTIONER: (In Spanish.) My name is Christopher Broughton; I work with the Millennium Challenge Corporation. I have a related question, and that is the movement of arms and bulk cash to Mexico from the United States. What has your administration done to strengthen Mexico's own border security to prevent these illegal flows? Thank you.

CALDERON: Well, talking about weapons, we are assisting a lot, no? One hundred and fifty thousand guns and weapons in five years is a lot. And we are establishing some kind of controls on the highways. We are working really hard on that field.

Talking about stemming illegal cash, that's more difficult for us. For instance, we were estimating that three years ago -- two years ago, only in the banking sector we detected, like -- we could be, like, 14 billion (dollars) -- 14 billions (dollars) a year, which it was dollars that we needed to send back to the United States coming from the banking system. And we had not cleared the sources of those dollars, no?

So that made us to take a lot of measures. For instance, we forbidden a lot of cash transfers in dollars in Mexico. And of course, I got a lot of reject, especially in border towns. I need to imply a lot of political -- (inaudible) -- for my own party, but it was necessary. And we are reducing dramatically the kind of not well-explained dollars in the banking system probably towards 4 billion (dollars) -- 4 billion (dollars) a year today, so we are reducing that part.

The other, I presented to the Congress a bill in order to regulate laundry money. Well, probably that was, like, two or three years ago. (Inaudible.) We are waiting one chamber of the other.

QUESTIONER: (Inaudible) -- the Senate?

CALDERON: Today it's in the Senate. Probably tomorrow will be again in the Chamber of Deputies, and after tomorrow will be again in the Senate, but we are expecting an approval from the -- well, secretly what I hope, and there is a new session and a new legislation in the Congress. Actually I really appreciate that there are four senators here with me today from different political parties. And I think that there is a very good chance that we can finally an approval on this very important law in order to fight laundry money.

There are a lot of interests against the law. For instance, we are asking to the people, you cannot pay in cash. For instance, when you buy a house, you need to pay by a check, which is obvious of my understanding, a lot of things, but some people don't like that. (Chuckles.) But you have to -- (inaudible).

HILLS: I think we have time for one more question. Let me come to this side of the room. Yes, please, the -- wait for the mic.

QUESTIONER: Margaret Daly Hayes of Evidence Based Research. Thank you very much, Mr. President, for your very encouraging remarks about progress in Mexico. You are very proud of opening a large number of universities. Can you talk a bit about what Mexico is doing, needs to do, to expand and improve primary and secondary education in order to enhance competitiveness? Thank you.

CALDERON: That is very, very important, but let me talk about what we did. We reached an agreement with a very important player, which is the union of teachers. Union of teachers is a small organization with probably 1.5 million members in the country. (Laughter.) And we reached an agreement in order to improve the quality of the education. There are several measures that we agreed and that were -- those were first, in the past, a post of teacher was decided by a finger point, either the union or the governor. Today for any post of teacher, any position of teacher, it's decided by a contest between teachers. So today you want to get a position as teacher, you need to compete with other teachers in order to select the best of them. And that is a (structural ?) reforming education.

Of course, it's a long way to do that, but there is almost 100,000 new teachers appointed in that way -- and does imply a very painful process. For instance, we saw several strikes of teachers in several states, but we -- (inaudible) -- and it's a good one.

Second, we are establishing an -- (inaudible) -- waiting process for students and for teachers as well. And of course, there are a lot of -- a lot of resistance for that. But finally, we got special exams in order to analyze the level of the teacher. And we are explaining, it's not a questions of remove that teacher; it's a question of we need to see your weakness in order to help you to improve your capacities as teacher.

Third, we improve the infrastructure in the schools. It's not a matter of federal government, by the way, because let me tell you, education, as (health ?), it's a matter of local level of government since the '90s. However, we understood that local government, probably they have not enough money or they have another priority different from improve the quality of the schools, elementary schools. So we started to rebuild, you know, the window, the basketball field, the bathrooms for girls and so on. And in that sense we have rebuilt 50,000 elementary schools, very small public works, but we are doing so.

Fourth, we are establishing a new system of payments to the teachers because we are introducing economic incentives. So if you are teacher, the more your student improve, the more salary you earn. So in that sense, we are paying in terms of the quality. (Inaudible) -- a very small piece of the salary, but it's improving.

And finally, we reached last year another very important reform in which so-called Carrera Magisterial was mainly oriented to pay to the teachers in order to -- how many seminars you could have. For instance -- well, I don't want to make -- (inaudible) -- of what kind of course they were taking, but today, 50 percent of the Carrera Magisterial, which is very linked with the money they receive, is still 50 percent depends on the improvement of your own students according to the exams we are doing year after year.

Now, one outcome could be, for instance, the PISA test. In six years we establish a goal in the -- in PISA test, and we are reaching, we overcome, we surpassed our goal in 2009. And probably we did the same this year, especially in math. Mexican students were the students that advanced the most in PISA exam, in particularly in math, in 70 -- in 65 countries. Of course, Mexico is probably still today one of the last countries unfortunately on that. But we are advancing a lot, in particular in math.

And we are measuring that in our own exams. For instance, the Enlasse (ph) -- it's an evaluation program we have last year to this year. (Inaudible) -- our goal was to reach 40 percent of good at -- excellent students. We overcome that goal in that sense in math. We are not doing the same, unfortunately, in Spanish. So we need to improve on that.

Now, talking about the challenges, I admit that this is probably one of the most demanding challenge for Mexico today. I mean, it's absolutely necessary to do much more in terms of quality of education. And you need to get more cooperation coming from teachers unions. The paradox is there are two kinds of teachers unions. One has a lot of bad practices, if I can say that, or bad reputation. But the other one could be worse. (Laughter.)

So one is a lot of things that we need to improve -- and that is, for instance, a new bill I presented to the Congress last month in order to reform the labor law, to open to transparency the finances of the union, and to stop this direct vote and universal vote in the union and so on. But there is another group -- another union more radical. They refuse exams. They take the control even of the payroll of the workers.

So the -- there are some governments in Mexico that they need to give the money to the union teachers and the union pays the salaries according to its own criteria. So unfortunately it's my own state, Michoacan, but it's -- that's a probably in that.

HILLS: Mr. President, we could go on all morning. We really do thank you for your presence, but also your excellent, wide-ranging remarks. (Applause.) Let me make a request -- let me make a request of the audience, would you please out of courtesy stay seated for just one minute and a half so the president can exit with his party and get to his next appointment on time -- just a minute and half.

CALDERON: Don't worry -- (inaudible, laughter).

HILLS: You have to run fast. Thank you so much. (Applause.)

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