MEXICO UNDER JOSE LOPEZ PORTILLO: PROBLEMS AND PROSPECTS FOR US-MEXICAN RELATIO

Created: 12/15/1977

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memorandum to holders:

mexico under jose lopez portillo: problems and prospects for us-mexican relations

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CONTENTS

INTRODUCTION AND SUMMARY

DISCUSSION

I. MEXICO UNDER LOPEZ PORTILLO

A. Domestic Political and Social Policies

B Economic Policies

C Oil Policy

D. Foreign Policies

II. OUTLOOK FOR MEXICO UNDER LOPEZ PORTILLO

Prospects

III. IMPACT ON THE UNITED STATES

for US-Mexican Relations

Issues

Illegal

Foreign Investment

MEXICO: IMPORTANT ADVISERS TO LOPEZ PORTILLO

INTRODUCTION AND SUMMARY

When. Mexico Under Jose Lopez Portillo: Problems and Prospects for US-Mexican Relations, was issued last December, the Intelligence Community agreed to take another reading of thc Mexican situation after the policiM of Lopez Portillo. who assumed the presidency of Mexicoecame more fully known. This paper aims to do that. The long-term outlook for Mexico will be examined in greater depth in an NIE to be written next year upon completion of basic research now under way within the Community.

Starting with his masterful inaugural address. Lopez Portillo. who presides over an authoritarian political structure, hasidactic leadership style andresidential bearing that have commanded the respect of the Mexican people. He also has proven toapable politician in his dealings with labor, business, and other interest groups. He has emphasized organization in restructuring the administrative machinery of the executive branch, and the same orderly approach apparently permeates his personal governing style. In all. the new President's approach has been rather low keyed, when compared to the flambuoyant style of his predecessor.

Lopez Portillo has calmed the crisis of confidence brought on by the policies, rhetoric, and erratic action of the Echeverria administration and has made considerable progress toward stabilizing the economy after the tumultuous eventss was anticipated, he has placed financial stabilization and adherence to Mexico's stabilizationwith the International Monetary Fund (IMF) well ahead of economic expansion and employment creation. Lopez Portilloineptember state of the union address that he would not be tempted into premature reflation of thetrong stand, since Mexicoall in real per capita income for the second consecutive year and increasing unemployment and underemployment that could over time lead to social unrest

The longer term outlook for the Mexican economy is brightened because of vast oil reserves. Lopez Portillo has approved an ambitious investment program for Pemex. the state oil monopoly. The program, as stated, does not aim at maximizing output, however, and may prove actually to be relatively conservative. We believe that the program goals will be exceeded and that0 production and export levels will be on thc orderillion barrels per dayillion barrels per day, respectively. Such rates of exportation would allow

DISCUSN

MEXICO UNOER LOPEZ PORTILLO A. Comctlk Political and Soccl Policies

I. Jose Lope: Portuloit tit-yearterm7ime when ihe management of the Mexicanr.ted more serious short-ierm problems than had been faced by any other incoming president in recent years. After the furor and confusion Jriij accompanied 'he final days of the Echeverriahe rear euphoria that greeted his inauguraticn. Lopez Pottllkr has proceeded to solidify rut power, improve govern-ment efficiency, and undertake the protracted and difficult tail of rebuilding Mexico's economy.

President has followed thapattern of striving to consolidate Sisbyabinet of personalby establishing independence from huWe belkve Lopezompletely in

command ofovernmental and politics.'

machinery, and any belief lha! former President Echeverria remainsower behind the throne is a

mispercepii'on.

light of Mexico's ever-preseni yetpressures, Lopez Portillo has worked firm internal security He quelledat severs)Oaxacahuge national university.theof persuasion and force. The strikeAM wai the most serious direct challengehas yet faced, and hii ability toacklash from the left wuThe land dispute in Sonera, which arosefarmers contested"iyearectares cf their farmland,settled along lines that should maintainrevolutionary credentials withoutland invasions Thc most active23rd of September Communist(he People's Revolutionxry Armed(he potential for spectacular actions, butnumbers are small and the governmentconstant pressure.

he spectacular wave cf terrorist bombings in September does not indicate that Ihe government U

o. tne Lopez rortuio admlnisiraiion is giving atrtMg MtppOrterious and far-reaching family planning program. Only recently have Mexican governments recognized the severity af the prcbiem created by having one of the highest population growth rates in the world. Tne Lopez Pirtiilo plan optimistically alms at reducing the popjlaiion growth rateeicenlercent annuallyn contrail to previous government efforu0 mi'lion program is to emphasize limiting family size through contraception rather than Improvingand child health. The program wtll be difficult to implement. Even if it succeeds in reducing the birth rate, the past baby boom guarantees thai the labor force will grow at anercent

conomic Policies

opez Portillo has calmed the crisis of confi. dence brought on by the policies, rhetoric, and erratic action of the Echeverria administration ard has made considerable progress toward stabilizing the economy after the tumultuous events6 As waxlie hat placed financial stabilization and adherence to Mexico's stabilization agreement with the International Monetary Fund (IMF) well ahead of economic expansion and employment creation.

T. Upon assuming office. Lopez Portilloajor reorganization of thebranch to reapportionesponsibilities among (he Cabinet secretariat! along more rational and efficient lines. Specific policy duties, especially In economic affairs, were consolidated in individual ministries to eliminate duplication and bureaucratic competition. A

Secretariat of Planning and Budge, (modeled iftof the Office of Management and Budget in ine WW State) -ai created, and theovernment enterprises were placed under the superv.sion of app.opr.ate Cabinet heads to make them more accountable. The large scale of the- reorganization ncceuarily means that it -ill take time to iron out. Our preliminary assessment is that it is improving administrative efficiency and control, but that efforts to reduce the number of federal pbs subject to appointment, which was also part of the reform, will not succeed.

8 To help chart his economic course, Lopei Portillo has created an econom* Cabinet under his personal chairmanship, which raises the hope that his govern-menl's economic policy will be planned and executedore coherent fashion The President listens to advice andl1Cab.net. but in the actual policymaking process, no Cao.net member probably has as much influence as Raraei Coniaiea [zquurrdo oc Jose Anton* Ugarte. the President's private economic advisers. Lopez Portillo has moved deliberately through the profuse and often conflicting advice he has been recei.ir.g_ seeking to avoid the rash implementation of ill-conceived policies characteristic of the Echeverria administration. At times this has led to reports that the President has difficulty understanding complex economic issues andaking decision*

to meeting the IMF stabilizationreflects the influence of Irquierdo. Ugarte.calling for severe anti-inflationaryIhe realization that failure to implementwould drastically reduce Mexico's accesscommercial credit. Mexico, so far. ha,the limit on foreign public botrowing andthan met the monetary goals prescribedstandard IMF delUtionary package forThe budget deficit probably will

the IMF target (in part because of increased spending on oil development) but -ill be below the deficit projected in7ajorconsidering recent deficit, have exceeded the prelected budget deficit byercent.

Portillo has been most successful in

trimming average -age increases from the inflated

levels under Echoerria to aboutercent this year

Tins has been indispensable fot 'he *

economic stabilization

ercent increase in norugricultura! -ages above productivity guns adds almost one-third percentage pc-nt to the inflation rate.

n imposing -age restraint. Lopez Portillo has worked closely with labor czar Fidel Velasquez, whose cooperation has been crucial in maintaining Ubor discipline- Velasquez,year-old leader of the Confederation of Mexican Workersas dominated labor politics (orears. With respect to long-term political influence. "Dons olten described a, the most durable man in Mexican politics.

ustere -age and financial measures initiated by Lopez Portillo have substantially reduced Inflation, but at Ihe cost ol pro'ongirg last fall's severe economic downturn. Although the sharp drops in real COP and industrial production that follo-ed the Moating of the peso apparently bottomed out in ihe first qusiier. demand remains depressed. The matching or lastercent increase in real CDP. far below ihe rate necessary to absorb all the new entrant) to the labor force, is probably ihe best that can be hoped for. If the government held iu deficit to the IMF target, the CIA') econometric model of the Mexican economy indicate* that the inflation rate for the year would have been shavedercentage points from theercent we currently estimate, while the required reduction in government spending would have cut the teal economic growth rate to zeroercent.

conomic recession coupled with theof tha peso has resulted indramatic improvement In Mexico's current account deficit. The deficit should be reduced by aboutercentillion which, along with resL-ictions on government borrowing, will alio- Mexico to slay within theillion IMF hmit on net public sector (including Pemex) foreign borrowing while building up foreign exchange reserves.

H. Lopez Portillo is discouraged by the failure of domestic investment to pick up. as he was counting on this sector lo provide the stimulus for economic cro-th. While Lopez Portillo has cleared away much of the bad feeling between the government and the private sector, business investment response isslow. Companies are financially strapped by the large increase in the peso cost of servicing their dollar debt, and becausef the economy has restricted credit even beyond what ihe government had planned- Presidential exhortation -il!ole in reviving investment; In response to the President's pleas for increased private investmentuid pro quo for labor's wage restraint, business

T

ob crearion program ,ultPresideepieraber jute of thc un.cnbelieve lha; much o( this program willFearful of interven-

tion, the Monterrey industrialist group hai warned that the political risks ol not investing outweigh the economic. iki of investing.

C. Chi Poke/

opez Portillo and fcii chief advisers are convirced tnat increased pe exports are neceuary and have ioop investment program for Pemej

hc major potential constraint onbility to carry out the Pemet development program and construct the gas pipeline if financial, if Pemex botrowing continues to fall under the IMF agreement. Pemex estimates that it wUl need to obtain half of the funds for its investment expenditures from foreign sources. Mexico, for the first time, is Milling to commit gas exports to foreign companies in exchange for development financing and reportedly may bepaying Japanese pipeline suppliers In crude oil exportsotential constraint on Mexico's ability to construct the gas pipeline is the need for US Covernment approval of the Memorandum ofsigned in August with six US gas companies.

oeillion oarren pet moreillion barrels per dayhu would allow od exports ofillion barrels0 and It million barrels per day!illion development plan. although calling for lower production levels, is extremely ambitious but attainable. Pemcx seeks to raise crude oil and gas production21 million barrels per day3 billion cubic feet per dayproduction2 is very conservative; in February Mexico exceeded its daily production targetf current drilling success rates and average well production flows continue,evelopment wells to be drilled onshore in the Rcforma area alone will yield moreillion barrels per day.

n addition to the development plan. Lopez Portillo has approved the constructioninch pipeline to move natural gas from the Refor.-tia area to thc UI border. The line, which will take two to three years to complete once construction begins, will have an eventual capacityillion cubic feet per day. When the line Initially comes into operation, possibly as earlyexico willillion cubic feet ef gas per day to the United States;2 this would riseillion cubic feet per day. Six US companies have already signed up for this gas. with only thc price yet lo be determined The Mexicans want to price the gas at the equivalent

oreign Policies

opeilacing primary foreign policy emphasis on relations with the United States and consequently ii nai striving for the leadership role In international affairs sought by former President Echeverria. This appears to be contributingeduction in confrontational tactics by Mexican delegates at international forums, but does not

ilateral consultative mechanism tobetween the United States and Meiicoat (hegovernment and la

hannel lor the coordination of the operations of the various US and Mexican agencies involved was agreed to in principle by the presidents of the two countries inayen Secretaries Vance and Roel established three working groups on political, economic, and :ocuI iuues By the end of August the economic and social woriing groups hadull round of meetings.

B. Socio! Prospects

any of the problem, facing Lopei Portillo are the enormous and intractable issues that faced hispopulation growth, tunemployment rite, and an ever-widening gap between rich and poor. These problems areand the most deep rooted of them cannot be wived within thc term of one administration. Not only will the governmentifficult time in obtaining the goals of its family planning program, but it would still take until the middle of the next century for Mexico's population to level off atillion If the replacement rate of fertility were achievedowever, Mexico's potential for growth and its natural resource endowment should, with prudent

he meetings have surfaced mutual problems and have attempted to de-sign steps for pursuing solutions. The discussions deal principally with bilateral topics (for example, trade, tourism, and export of Mexican ot! and gas to the Unitedut multilateral topics (for example, the MTN'J are also discussed. Moreover, they range from very specific measures, such as ways to liberalize viu requirements, lo major policy questions, such as the problem of undocumented Mexican workers. Even without the consultative mechanism, existing agencies on both sides would probably have discussed the various issues from time to time. The mechanism provides,edium for dialogue among senior policymakers, as distinguished from operational technicians, and can smooth the conduct of relationships that areimportant to both countries.

II. OUTLOOK FOR MEXICO UNOER IOPE2 PORTILLO

A. Polificof Prospecls

he political reform program announced by Lopez Portillo in7 state of the union address is not likely to diminish the power of the Institutional Revolutionary Party (PRI) The key

S^-stfl

policiesavorable international economic climate, keep these problem] within manageable limits

C. Economic Prospects

opei PortiEo realised that rapid developmenr ofetroleum reserves provide* anfor the country to tackle its economic and social problems and to implement adevelopment model that would provide growth with Improved income distribution. Earnings from oil exports canajor contribution toward correcting Mexico'sfinancial problem and helping it back on the path oLtapid economic growthear or two.

for oil exports, ii

is posatBieicr^rjrrrnjie Mexico's current account balancender alternative scenarios for real economic growth. Oil etports under the Perries plan wouldubstantial narrowing In the current account deficit90 if economic growth rangesercent andercent annuall) perccnt.l

he outlook for Mexico's financial position is even brighter than these projections Indicate, since the estimated eiport levels do not reflect gas sales to the United States, which could startto three years afret construction on the guharper increase than the conservativelyercent increase in oil prices used above would, of course, also speed improvement in ihe current account balance.

he administration currently is attempting toew development strategy lhat would be export oriented and would provide for better income distribution The challenge facing the government intrategy to improve incomeshould not be underestimated Lopei Portillo does, however, appear to be effective at bringing disparate groups together and may ultimately be able to bringax reform that would moderately improve incomeadical program would hit thc veated interests of almost all politically powerful groups in Mexico, and it is highly unlikely that Lopei Portillo would supportolitically risky effort. One advantage of the low-income base from which the distribution policy must proceed iselatively modest redistribution of earnings on the margin could substantially Increase absolute income levels of certain segments of the poor, thereby reducing social tensions.

opei Portilio is working to defuse the lard tenure issue In his state ofon address, the President strongly reemphasiied that land no longer can fulfill agricultural workers' aspirationsore equitable income distribution. Instead, he suggested rural labor legislation Is improve agricultural -ages. We believe that national land reform ideology will not dilute Lopei Portillo's basic determination to increase output, although small land redistributions may be continued in order to cement the President's revolutionary credentials and to buy off incipient peasant leaders and maintain peace in the countryside. Structural problems, however, will liVely prevent substantial acceleration of agricultural output growth during the next five years.

III. IMPACT ON THE UNITED STATES A. Outlook for US-Mexicon Relations

he process of consultation set up by the bilateral mechanism should help Illuminate the dynamics of policymaking on both sides of ihe border, especially the complex decision marocess of thi

n coming months, the Lopez Portillowill continue lo be highly concerned over the problem of undocumented aliens, and thison US congressionalbring an end to the honeymoon that has existed ir^iiateral relations since the change in presidents.!

exica.tiration. although administeredondiscriminatory manner, continues to affect US private investment adversely.ew Law regulating the automobile industry affirms thethrust of Mexican policy. The government has stated that it will not change its foreign investment laws, we believe, however, that Lopez Portillo recognizes the need for selected foreign investment and will reduce the red tape associated with the laws. He has stressed that, while Mexico welcomes foreign Investment and indeed needs it, such in-estment must be selective and contribute directly to Meiico'1 development by creating jobs and earning foreign exchange.

he Lopez Portillo administration has been cooperating In the herbicide eradication program, and will probably continue to do so. We have Indications that the program has reduced the amount of heroin produced in Mexico. Eradication of opium poppies does not being progressive successes; however, failure to spray during one cycle of the growing season would wipe out previous gains. It isong-range solution.,

fficials of multinational corporations are encouraged by Ihe government's attitude, but they are concerned, as they have seen nowith regard to modification of the Patents and Trademarkencourages them to renew investment in Mexico. Foreign investors are concerned thai Mexican investment taws aie being used to force foreign-owned companies to Increase exports and investment levels In Mexico. Moreover, foreignwill be carefully assessing the climate for firuncial stability, growth potentials, and continued freedom to remit profits. Though these are reports of proposed new and significant US industrial investments, it seems likely that foreign direct investors wilt remain cautious for the next year or so.

Oil

lthough, as stated above, Lopez Portillo appears toapid and orderly expansion of Mexican oil production,esult is by no means assured. Technical and equipment limitations could create obstacles to the government! carrying out its development program expedifiouily. Provided the fact and appearance ol Mexican sovereignty wereUS companies might find acceptability for

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