Created: 12/1/1976

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


A. Mexico and the United State.

8 The Mexican Economy and

C, Dynamics of Policymaking in


of the Ne* President

of the Administration

C Prmpecft and Possible

Stabilization. Confidence, and


Crowth and Genera! Economic


ucgai immigration



Political and Social




Jose Lopez-Portiilo, when he assumed the presidency of Mexico on Decembernherited an economy in the gripsychological crisis. Successive attemptsanaged float of the peso in the last days of the Echeverria administration, while bringing about an undervaluation of the currency, failed to check capital Right and.act, further reduced business confidence, already undermined by thearid" attitudesgovernment. The extensive last-minute land redistribution of the outgoing president added to the air of tension and uncertainty.

Fortunately for Lopez-Portillo, the Mexican presidencyowerful decisionmaking center that operates under remarkably few institutional constraints. If he has theew president could move quickly on the troublesome issues that confront him. Lopez-Portillo has given every indication that he has both the willrogram to arrest and reverse the current downward spiral. This is not to say that the road will be? easy. He is faced with such basic problems as rapid population growih. high unemployment and underemployment, and JowIn agriculture. Echeverria's populism has some momentum, and

* Thij EiCmsti -a,f (carjitlM Inollow-up Estimate Is planned forhe policies ofUpn-Pwtiilowill (we become morerrawr.

various interest groups, particularly organized labor, will at times cause problems. Some compromises are likely. However, the Mexican president has unique tools with which to copr with his problems and insure the success of his programs

The new president, generally considered to be pro business and economically conservative, is expected to: (a) hold public and private talks to persuade businessmen that his administration understands their problems; (b) affirm the objective of maintaining exchange rate stability- (c) reemphasize that the government has no intention ot establishing exchange controls; (d> take special measures to aid individual industries; (e) make use of wage and price controls to reduce the inflationary effects of devaluation; (f) announce specific programs to reduce the public sector deficit; and (g} emphasize agricultural productivity over land distribution This program should begin to show results7 and achieve substantial success by the end

As the emphasis of Lopez-Portii to's economic policy shifts from stabilization to growth, oil will become increasingly important. While there are strong forces within the Mexican government that will resist all-out development of the country's oilmay be as much asillion barrels and nearly as large as those ofpresident would clearly like to produce and export oii at something near the maximum prudent rate. VVe believe that the president will win most but not all of his battles with the bureaucracy and that0 production and export levels will be on the orderillion barrels per dayillion barrels per day, respectively. Such rateschietert* ibstantialxniirent account surplus. Bynd of Lopez-Portillo's term2 Mexico could be well on the way to becoming one of the world's major oil exporters.

On the political side, we believe that Lopez-Portillo can prevent Mexico's admittedly serious social problems from becomingbut land redistribution and labor problems will be particularly difficult. The government should be able to maintain its authority and to stifle and deflect pressures through the traditional methods of cooptation. coercion, and limited reform.

With regard to the L'nited States. Lopez-Portillo promises touch more cooperative neighbor than was Echeverria. It is clear, however, that the new president sees improved relations with the United Stateswo-way street and hopes to maximize th^economic. financial, and commercial benefits of the new relationship.

Thus, while the president's cooperative stance will extend to those areas of most concern to the Unitedas illegal immigration, narcotics, trade relations, andinstitutional and political factorsrevent rapid breakthroughs in most of these areas.

Illegal immigration to the United States will continue toroblem until Mexico can offer potentialiable alternative. In narcotics matters wc can expect the Lopez-Portillo government to continue cooperative enforcement efforts, but, in spite of US assistance, inefficiency, corruption, and thc profit potential will continue to limit the effectiveness of enforcement programs. In trade relations Lopez-PortiJIo can be expected to pn




A. Mexico and ihe United Stares

I. On Decemberhe administration of Luis Echeverria was replaced by that of Joseacheco The Echeverria years hadime of economic difficulties for Mexico and considerable strain for Mexican-US relations. Theumber" problems as well as some unexpected op por! uni lies: howaces its problems and makes use of its opportunities will impact directly and indirectly on US interests

2 Present US interest in Mexico is stronger than at any time in the recent past. The United Statesexico tha; will be:

a source of increased oi! supplies for the US and world markets:

a hospitable market for trade and investment;

ii secure southern border:

a helpful and moderating influence inforums;

a cooperative partner in working out such bilateral problems as narcotics smugglingllegal immigration, and

a politically and economically stable nation that is well enocgh on tnp nf its domestic problems to dispense with demagogic diversions.

This Estimate will examine the Mexican situation and prospects under the Lopez-?orti!!oinsofar as they have implications for US interests.

B. The Mexican Economy ond Society

most of the period since the latehas been among the more successfulcountries in terms nt both political stabilitygrowth. Despite the country's violentpresidents have been able to rule and

_transfer rule without threat of coup, revolution, or military pressure. Successive administrations, though far from democratic, have responded to the interests of most groups in Mexican society reasonably well. Moreover, they haveblic order and their own authority without relying heavily on ihe more blatant forms of censorsnip and repression.

political authority has allowedfollow an economic policy that hasand stability more effectively thanbeen the case ia Third World countrieshave becr> spectacular Realercent annuallygenerally been lowC standards,has progressed rapidly. Duringthe mining at'.riemi-industrial! red one. The sharegonds in total exports rose0 inercent inthe border


* nm

rgehese achievements were the direct result of an overall strategy lhat included (a) maintenancetable eichange rate, (b! banking and financial policies conducive to the growth of private saWngs and investment, tad <c> public resource allocation policies favoring growth of the private industrial sector.

5 Nevertheless. Mexico faces serious and growing economic problems Some of these problems nave been caused ur exacerbaled by Eehevcrtia's poiitieallv motivated disregard of the three-point strategy that had served Ihe country io well in the pelt; olhers are more bask

exico's population growtn rateercent annually is one of theighest and is reflected in growing urban slums, deterioration in some public services,important from our point ofof land and iobs that accelerate the illegal flow ofew facts should be noted

Agriculture, with more thanercent of the labor force, accounts for leu thanercent of CNP.

Undissue of greatas well at practicalnearing its physical limits, while anillion peasants remain landleo

The migration of peasants to such large whan centers as Metres City. Guadalajara, and Mon-

ferreyactor inercent urban growth rate

The rate of unemployment andthough extremely difficult to estimJte. could range ai high asercent

Incomeetween ncti and poo* are incieaiing.0 the lowest decile earnedercent of total personal incomehe highest earnedh:Kr0 the lowest decile earnedercent compared withercent for the highest.

cheverria came to power0ime of considerable political and social unrest. The new president wasolitical hard-liner, the man largely responsible far the Tlateiorcc student massacre. Although most opponent! of theincluding the students, were middle or upper class, they claimedpeak tor the worker, the farmer, and the unemployed. Echeverria. in an effort to shore up his position and perhaps also for basicreasons, decided to change both his image and traditional economic policy.

ft During the early yean of his administration. Echevema boosted wages and iharply stepped up welfare spending and government investment The public sector tookarger role, and social welfare was emphasized with some adverse consequences for economic productivity. When Mexico began to be seriously affected by thc world recession, government -spending;In an effort^rTTOStairj" economic activity. This expansionary fiscal policy resulted ir. rising prices and balance-of-payments pressures Wige increases further erodedompetitive position. Rising current account deficitsountry already heavily dependent on externa! borrowing fed rumon of devaluation that encouraged capital flight The governmentanaged float nl theonexico's first devaluation4

l was truehe government lailcd to make dear the rationale of the September do sluation to business, labor, or the general public. It failed to resist union demands for iharp wage increases or tu scotch rumorsoup and fearsank account freeze. Business confidence was thus furtherIn res pome to resumed capital flight, the governmentecond. October

and on Novemberuspended ttmporanly the sale and purchase of ail foreign currencies and gold bv banks

The IMF. responding to Meiican requests fcr assistance, putinancial packageillion [fl Special Drawing flights, contingent on Mexico's adopting certain stabilization measures In order to lide the country over until IMF assistance could be obtained, rhe United States agreed0 million special currency swap in addition to the0 million swap Tbui far Mexico Has drawn5 million from theillion from the US Treasury0 million from ihe Federal Reserve Bank. Mexico will be elrgiblr to draw down the5 million from the special swap when negotiations for IMF extended fund financing are concluded7

The devaluation and subsequent measures taken by the Echeverria administration did not produce thc eariy improvement in the economy that wsu hoped for; indeed, they may have pushed busineit confidenceew Urn In addition to having to cope with those basic problems cited in paragraphopez-Portillo has inherited an economy afflicted by

higher federal spending.

record budgetapid rate uf inflation.

a stagnation of foreign and domestic private investment.

a slowing of economic

a large current account deficit, and

greatly increased foreign indebtedness

Echeverria') attention to locialtabor andmplmed havetf any lasting benefits. Moreas the population growth ratebegun to be addressed. Nevertheless,tensions ateowerere in the. The students arethe never-very-important terroriit andare well under control, there is(and even lesi inclination on the part of


leaders) for tha "democraticlion" of the government party, and the press remains reasonably happy in its twilight rone between freedom and subservience.

n foreign affairs. Echeverria'^ activist effort to enlargeMexico's--prestige in the Third World led to increased friction -ith the United States and"other developed souatries. Mexican presidents in the past, although sharing theiristrust of US motives and power, have generally tried to maintain good relations with "the Colossus of thecheverriaartial exception, while giving private assurances to the US Government, he made common cause with the Third World in hh rhetoric against the developed world Mexico's votes and influence in international forums have reflected Echevema'i orientation.

C Dynamics of Policymaking in Mexico

ht Mexican president is theighly authoritarian system,hli lingle six-year term, he operatesfew Institutional limitations. Publicmil-fit groupsheelite, the government political party, thepeasant organitations. and 'heinimal role in influencingthey have athance to react topolicies. The legislature, tbe courts,governments do not have even this

here are. of course, external influences operating on the president. At the most baiic level, these Influences include environmental factori such as available human and material resources, thestructure and style of internal politics, the inherited network of foreign relations, theeopolitical location, and the existing guidingof the governing elite. This guiding ideology, the so-called "revolutionarytressessocial justice, economic development,o reelection'resident cannot appear to be acting against any of the elements of the consensus, he hai great latitude in defining these elements and setting pnurilirs among them In any case, all of these influences act primarily as constraints or limits, conditioningtcstdent feels he van da

f more direct relevancehe influence of the various state agencies or. rhe president's decisions. Thc bureaucracies of the national governmenthe ministries and the jcmtautonomous agencies such as PEMEX (the state oilave taken or, an increasing number of functions involving theand guidance cf societal labor and economicrates, profit sharing. Mexicanination, type and rate otbureaucracies have taken on increasingly wide responsibilities. Mexican presidents are becoming less able to control these bureaucracies and more dependent on rhe technical expertise :hat they can provide, both for understanding theon which decisions must be made and for executing the decisions. The technocrats of thesemany case* feeling themselves to be more patriotic and less corrupt than thehave strong opinions cn thc proper course of government policy within their areas of expertise; their influence could be greatistracted, uncertain, or weak-willed is unlikely tha; Lopez-Porttllo wi! be this kindeader.


A. Profile of rhe New President

the Mexican system, theand strength of the president are al!

fporiaht. Uniike ail but one of Mexico's pest-revolutionary civilian presidents, Lopez-Portillo cane to the presidency from an academic andbackground rather than through the official party organization and the political bureaucracy (Interior Secretariat; While this augurs well for publicand the economy, the new president's lack cf political experience could cause him problems in managing the political process.

assuming thcamily tradition of government service.great grandfather and his grandfather servedof Jalisco state. His father. Josey Weber,ecognizedwho played an important role in thenationalizatione authoredof scholarly works,islcryoil. The new president appears to have

identified strongly -nth hond literary bent. Lopez-Portillo'* novel. Oueizalcoail. is bated in part on hi! father's hiitorictl work On the occasion of ha father* deathe referred to hii father at hi* best friend and distributed copies of his father's book on Mexican oil.

opez-Po.'ti'lo |Oir;cd the official party shortly after he enrolled in the National Autonomous University of Mexicofter earning his lawe taught law and political science at the University and at the National Polytechnic Institute for the nettean.e began his concurrent public careereries of appointive jobs that included membership onisioni on urban development and administrative reform and the position of chief legal consultant to che Secretary of the Presidency In0 he was appointed Undersecretary of National Patrimony by his former schoolmate and long-term friend. PresidentDunng the Echeverria administration he also served as Chairman of the Federal Powernd was Secretary ofntil resigning to become the official party'sfor president

opez-Portillo appears to be an unusual combination of idealist and pragmatist. fieol.tical eventsroad temporal perspective, which recognizes the evolutionary character ofdevelopment Although his tendency is to moveautious and deliberate fashion, this does nol hinder

"Lopez-Portillo's personal style of governing should contrast with Echeverria's We suspect he wi'| delegate more authority, engage in iess frenetic activity, and be iess austere in his public and pnvate manner. He has an appealing personality and presidential appearance, wrncn will stand him in good steadetico lhat yearns to be proud of Use is likely to be Mexico's first genuinely respected and well-liked president since Lopeznd perhaps easier to deal withajor question that arises with regard to the new-president is whether, given his tendency toward broad-scope thinking and delegation of authority, He will maintain adequate control over the bureauctacv and particularly over the state agencies

riorities of tho Administration

he priorities of the Lapez-Portlllo adminisl'a-tion will be determined by thc gravity and immediacy of Mexico's soaal and economic problems, by tne limitations of the Mexican decisionmaking process and by the character and philosochv of the president Although, in keeping with thc Mexican tradition, the president-elect was unable to publicly define his position to thc extent that it conflicted with that of the outgoing president. Lopez-Portillo has revealed much of his political and economic thinkingriting and in private conversations We assume that thc new president's personal bent will prevail in all cases where if doe* no: conflict directly with Mexican

A man of precise and meticulous intellecttiong philosophicalevidenced in his treallse The Ctnem and Central Theory of ihe Modem Sien and his philcaophical satireigh value on language and ideas,especially the importance of individual rights. Particularly in times oi stress or uncertainty, he can be expected to rely on his intellectual approach to problems developed over many yean in tht academic world. On the other hand, hewell aware of the dangers of Ivory-tower thinking, in his novel Quetial-coatl. the great Toltec culture-hero lets his nation fall into administrative chaos while he studies the stan Ir.der-d. the elimination of Inefficiency in government wbi one of the ifrongrst themes in his campaign speeches to an Embassy assessment.

ht Lopez-Portillo administration will put its economic problems, including those involving US-Meiican relations, first. Mexican relations with the Third World, so strongly emphasized by Echeverria. will not be given tbe same importance under the new president. The shift in emphasis will, we foresee, create little popular opposition, since neither the gentralor any important subgroup has wholly identified itself with ur benefited from the official position on the Third World advanced by Ecocvtrria himself. The United States must, however, be prepared to see Mtnco maintain positions In interna-tiopii forums that at rimes run counter to its own

opez-Portiilo has indicatedariety of channels that heloser and more harmonious relationship with the United States than

Prospects and PoislWt Strategies

Stabilization,nd Trade

fter successive devaluations, the Mexican peso is now undervalued, the problem is no longer one of restoring international competitiveness, but ofconfidence. The peso's depreciation inexchange markets after the September decision to float was more than double thc estimated erosion cf its value through Inflation7espite undervaluation, further depreciation was feared, and massive capital flight was stemmed only

his does not mean (hat stabilization will come as quickly this time as It didil depend on such imponderables as the rate of recovery in the United States and the size ofican harvest. If Lopez-Pott Illo acts as we believe he will, however, the final results should be limdar. The new president reportedly is critical of the handling cf the devaluation. Ills Implicit argument appears to be that, given the declining Inflation rata and improving trade deftdt In the months immediately preceding rhe devaluation, improved confidence to stem speculative capital flows was an indispensable companion piece to devaluation.

opez-Portillo is known to support theplan presented to mm IMF in the last days of (he Echeverria administration. This plan Ktsumber of economic measures designed to bring about Important structural changes in the Mexican economy The somewhat optimistic bask objectives of the plan are to:

the real economic growth rate;

Jncteaie, r -

Stimulate domestic savings and reduce foreign borrowing;

prices in line wrth those of maior trading partners, and

a sustainable balance-of-paymentsThe program relies heavilyiscal policy of reducingblic sector deficitercent of CNP and on on effective incomes policy

he public sector deficit increased rapidly under Echeverria and is currently moreercent of CNP This should be reduced to no more than 2Vt percent of CNP in order to bring external and domestic borrowing downanageable level. We doubt that the government car. effecteduction in less than three years.

n the expenditure side, we believe that the government will try to hold Its investmentatercent ofcurrentbetter management and strictThe growth of current expenditures will be Cut partlyeduction of government subsidies but mainly through control of the public sector wage bill. The stabilization program rails foe reducing the annual growth rate of of federal employment fromercentercent in pursuit of thb goal, th* government freeze instituted ir the last months of the Echeverria administration may he extended wellPorttiIo is aiso known to beajor streamlining of the executive branch to cut costs and increase control, and tie is eipected to holdthe rise in public sectorrates. On the revenue side, the new government plans to raise its receipti fromercent toercent of CNP by hiking 'axes and increasing the prices charged by state enterprises

lthough cutting the public sector deficit would In itselfavorable effect on businessthe tax hikes involved ir. thiswill fall mainly nnundermine this effect Confidence willdo-civ undermined ii Lopez-Portillo is unable to limit the growth of real wages. Organized labor traditionally haseactor rather than an actor in Mexican dectsionmakir.g, there are signs, however, that this Is changing Independent unions are growing in importance, the aged leadership of the government dominated laborconfederation can not last arotlier six years, and the favoritism that Echeverriaabor may have become institutionalized. Despite these factors, we believe that thr new president has the inclination and the political power to hoid real wages beiuw pre-davaluation levels during (He crucial first years of his stabilization plan.

ubstantia! improvement in the balance of trade is not expected in the short run. Commodity export trends depend Seivilv on continued recovery of foreign demand, notably in the Cm ted States which accounts forercent of Mexico's foreign sales Capacity limitations caused bv several years of lagging capital investment vlll limit increases in manufactured goods experts Foreign tourism in Mexico, which usuallyercent of foreign exchangexpected to respond more quickly, and Mexican tounsm abroad will be

discouraged Imports, primarily raw materials and capital goods, cannot be cut sharply without curbing economic growth. This year's current-account deficit will total an4 billion The government has used most of its foreign exchange reserves and Ll now relying on large foreign loans to offset recent massive capital flight.

n the medium term, currency devaluation should improve the trade account. If Lopez-Portillo is able to induct increased investment in the pnvateharp upswing in exports of manufactured goods. especsJIy those cf thc border industries, should be possible. Exports of raw materials and agricultural products should alio increase somewhat as foreign consumers adjust to changes hi relative prices and producers take advantage of the more favorable foreign market. Continued import substitution will be encouraged, especially in thc manufacture of capital goods.

e believe that Lopez-Portillo's stabtliaation plan will have achieved substantial success by the endhis will have been asesult of the president's words as of his actions. As foteign exchangeby oil. border industries, andup. foreign and domestic businessmenegin to believe tn the presidential commitment to exchange rate stability. Pro business statements, backed by even partially successful efforts to cut budget deficits and hold down wage rates, willew atmosphere. Large-scale capital flight should cease7 and'new inflows begin well "before the end8 The inflation rata, which may exceedercenthould fall substantially the next year.


s the emphasis of Lopez-Porrillo's economic policy shifts from stabillMlion^ogrowtli. oilome increasinglytfKQuiimates place oi! reserves in theT^oasee and Chiapas statesillion barrels, and we believe that additional drilling could yield reserves as large as thoseillion barrels. An all-out development effort -ould allow Mexico toillion barrel* per day andillion barrels per dayt currentwe expect Mexico to follow the OPEC-set price though not to |oin thea level of exports would bring inear. By tbe end of Lopez-Portlllo's termexico could be well on the way to becoming one of the world's major oil exporters.

he new president would cleoriy like to produce and export oil at something near the maximum rate. He has already indicated that the petroleum sector, along with agriculture would receive the lion's share of government Investment funds. Shortages ofand. in some cases, trained personnel could slow development Although thereorldwide shortage of rigs capable of dnlling to the depths where oil is found in the Reforma area, this shortage has ameliorated greatly in recent months. Lack of equipment should not prove an msurmouritable problem, provided PEMEX can obtain sufficient funds or supplier crediti. The Mexican policy ofercentage of domestic content in equipment purchased by PEMEX could prove troublesome, if not modified by the gov-rnment-Although PEMEX workers and engineers are in general quite competent the pace of development could be increased greatly if foreign contractors were used.tep would be contrary to government practice and ideology; Lopez-Pcrtillo has indicated privately, however, that he may make some moves In this area even at the risk of antagonizing PEMEX officialdom.

by PEMEX officials andthe government may prove to be the most serious

titacre to the president's plans tor IncreasedThese officials generally believe that erode output should eventually be limited to amounts that Mexico's refineries can process and that only refined products should be exported. Conservationists within PEMEX also worry that accelerated rates ofcould result in the waste of associafed gas and limit the long-term productivity of thr fields. Lopez-Portillo has some sympathy for theseproduction in thee Oro fields ins given great emphasis in his father's book on Mexican oil. The president feels, however, that much higher than current growth rates are well within the bounds of prudent exploitation policy

will depend on the ability ofthat the new president appoints tohierarchy to make the president's desiresthe organization Middle-level engineers


liurejucrjlsbeen notably secretive about the country's ji*crc.aing nilome cases jppurrnllv withholding luch information' from their superior* and liom Ihe preiident himvelf On the other lund. the desire of PEMEX technicians to show themselves technically how better couldn than hy rapidlv Increasingthe need of PEMEX tn increase eiports to payquipmentl strengthen thcand. The appointment nf Jorge Diaz Serrano us rhe Director General of PEMEX should creadythc president in his efforts to control the PEMEX bureaucracy.

41. In an assumption which we consider most probable. Lopez-Portillo wins most but not all of hii battles with the bureaucracy Thii would resultroduction levelillion barrels per dayillion barrels per day (see Table) Such rates would allow Mexico tn achieve an estimated current account surplusillion, despite large and growing imports required for rapid cennornic growth Under an alternative, far less likely assumption. Mexico limits it* Oil output to the level of its domestic needs. With zero oil exports, the current account deficit would be close toilllnn0 (see Craph)


(assuming major but not all-nut effort!




long with petroleum. Lopez-Portillo has stated that he will give Increased attenlinn to agriculture. Mexican agriculture is gripped by two very difficult problems Increased food production primanty from large commercial larmsarms having the legal maximumectares of irrigated land) Iso feed the rapidly growing population and to earn foreign exchange Conlfnacd land redistribution to creulc mure rural employment is needed to slnw down migration In the dries and to the Untied Stales


Outlook for Current Account Balance

Attempted solutions to one problem nt'ten exacerbate the other.

he factors limiting increases in food output are not ensily overcome:

Mexico has almost run out of new land to bring into cultivation unless expensive long-range development of Ihe tropica! snurherr. low land is undertaken:

The must readily irrigable land Is already under

Aboutercent of the crnp land ts in small plots cultivated by subsistence and semicommer-cial farmers; and

Expectations of further Und reform keep the large commercial farmers from investing to increase output.


The new government must rati* productivity in both the modem and traditional farming lectors The large farmen need security for their holding! or they will continue to restrict needed Investments. These farmers alio need continued priceteady flow of new technology, and other economicto use their Und more intensively. The greatest potential for improving agriculture, however, is in those areas of the Traditional farming sector with high annual rainfall. Widespread application of presently available technology could in time male Meiico self-sufficient in corn. To do this, the government would have to provide significantly more direct assistance to the small farmers in thc form ot financial assistance, education, price incentives, and modern infrastructure facilities. Organising thiswouldlow process and would be costlyould take five to ten years toignificant improvement In output.

lthough land reform is an important part oi thc governing party's ideology, we believe that Lopez-Portillo will stress increased production rather than continued land redlstrihulion He has stated that "the land doesn'that he wishes to avoid further division of land holdings into non-economic units, and that many small farms and cooperative! ihould be combined We doubt that Lopei-Portlllo will reverse the land redistribution executed in the last days of the Echeverria administration. Echeverria's action, however, willerious problem of private sector confidence for the new president. In any ever.r. even radical land redistribution could helpart ofillion landless peasants in the country From the point of view of political and social liability, it may be more important to feed the many peasants who go lo the city than to accommodate those who 'tay behind agitating for their own plots of land.

eiico currentlymall favorable balance o: agricultural trade, and we expect that it will be able to maintain this favorable balance during most of the nextyearl Com imports, however, will continue to increase sporadically, and. in years of poor rainfall. Could cause an overall agricultural trade deficit. The growth of agricultural exports will depend largely on the government's altitude on land reform and the amount of resources that the government Is willing to invest in the agricultural sector.

Growth end Gtnnral Economic Outlook

ramatic improvement in the economic growth rate is highly unlikely during the next two or three years. Only after stabilization is seer, to be working and business confidence is fully reestablished will foreign and domestic entrepreneurs make the investments necessary to return Mexico to its rradl-tional growth rate We doubt lhat the average annual growth rate willercent in thehe outlook for the last three or four yean of the Lopez-Portiilo ad mi narration is much brighter. Civen The absence of domesticnd foreign recession, we expect Mesican economic growth to

average in excessercent annually.

We see such growth being export-led. with oil.

tourism, and border industries playing the most

important roles

Political and Social fVospacfs

lthough Mexico faces serious long-term social problems, we do not see these becomingWe do not expect rural and urban unrest, land seizures, strikes, and guerrilla or terrorist operations ro cease; indeed, they could increase marginally as the initial social costs of stabilization begin to be felt We believe, however, that the government will be able to maintain its authority and to stifle and deflect pressures through the traditional methods of coopta-lion. coercion, and limited reform.

eith an Embassy assessment thatplit within the ruling coalition, not generalized social unrest, would constitute the most immediate real danger to politicalhc most likely sourceplit would be organized labor]

"his could lead to an Interna! idciship coriTTtct in which important members of the ruling purty, "both inside and outside the labor movement, fine up against nach other. Although riva! union .'eaders would be mere likely to look up to the party leadership than down to ihe worker* for their support, there would be an inevitableabor discipline.ajor party split would undermine the president's authority in allwhat authority remained would have to be exper.ced

in political fence-mending rather than in solving or containing the nation's social and economic problems, inituation, it is not impossible thai newfrom outside the party andwirh the laborchallenge thc party's right to rule and the whoic Mexican political system. Such leaders might gain considerable middle-class support

do not believe that the above scenarioThe Mexican iystem Hasumbercrises in the past and seems well designedthem. Much depends on the strength andthe president, in the caseeriousdispute, we wouid expect the presidentdawn early andavor cf one ofThe other rivals would be toldthey had everything to lose byreat deal to gain by going alongpresidential decision. Tlie Mexican presidentpower to make either thc carrot or the stickto do the job.


gives every indicationealistic and constructive approachwith thc United States and theln private conve.-sations with US officialshas emphasized his belief lhatWorld posturing has been counterproductive.clear, however, that the presidentwo-way street and hopes toeconomic, financial, and commercial benefitsnew relationship.

wc expect Lopez-Portillo tocriticism of thc United States anda more cooperative attitude Inhe will also try to keep hisin good order. He and hisUS domestic constraints, but if he feelsresponse is inadequate to meet what hejust demands. Lopez-Port! Iandlo doesaot seemis the United Statesbe expected lo approach issuesostureequality and an ample opportunity forof ideas

A. Illegal Immigration

The number of Mexicans entering the United States illegally is growing steadily. According to figures compiled by the US immigration andService, nearly 7GO.0GO illegal Mexicanor "undocumentedere returnedhere is no reliable data on how many escape apprehension, but the number is probably much greater than those returned each year. Although the problem has not yet been adequately studied, both sides recognize chat it originates in Mexico'sand over populated rural sector andprimarily to continuing US demand for low-status, tow-wage labor.

In addition to actingafety valve for excess population, illegal migration benefits the Mexican economy in several ways. Accordingecent MIT study of selected Mexican communities, most illegal migrants stay in the United Statesimitedfrom six to eight months. Mostwhile in the United States, send cash remittances of between SIOO andonth to their families in Mexico. Such remittances stimulate community economies and slow rural-urbanwithm Mexico. Moreover, many returnedhaving acquired capital and learned new skills in the United States, assume positions of economic or political importance in their communities. The overall effect is to increase the economic and social viability of rural life in Mexico.

Since4 the Mexicans have chosen to attack the problem of illegal immigration bylabor intensive industries in rural areas. Given the size of the problem, the depressed state of the rural sector, and thc shortage of ecc

s part of an effort to increase employment in rural areas. Lopez-Portillo will probably ask for special access to US markets, for Mexican agricultural products. This would complement plans to create labor-intensive "agricultural production units" to produce agricultural products for export. Lopez-Portillo may aiso try to get another farm labor agreement with the United Slatesart of a

ost of the heroin and much of the marijuana and dangerous drugs entering the US market are produced in Mexico Cocaine transits (he country en route lo the United Slates. The magnitude of the problem has increased in recent jean. There have been indications in recent months that lastradication effort has had some impact oa the street availability and punty of Mexican heroin in the Unitedustained Mexican effort will be required, however, if Mexican narcotics are to be reduced over the longer term

59 Both the United States and Mexico have committed considerable resources to stop illegal traffic, and (he Mexicans have the politically sensitive decision to use herbicides. We believe that the Lopez-Portilto administration, at (helevel, will maintain Mexico's commitment to the antinaicotics effort. Lopez-Portillo is concerned over Mexico's own internal drug abuse problem Because of the centralization of authorityico City, the current poppy eradication program wilt suffer during the change of administration. Current managers feel that new major program decisions must await the appointment of the new team. More important over the long rsn will be the degree of dedication of the new leadership, which ati

jfoor management. Insufficient

manpower, inefficien. use of resources, andrivalries remain problems. Natural factors, such as the long growing season and the variety of suitable growing areas, are hard to overcome Finally, in areas where drug cultivation is the major source of livelihood, any major campaign to eradicate the trade -would meet with strong rural resistance which has been increasing steadily over the past eight or nine months. Apparendy in recognition of this resistance as well as thc severe problems in thc rural sector, Lopez-Portillo campaign statements emphasized the need to find alternate sources of income for the campesinos who grow illicit crops.

C. Trade Sslanoni

he new president will undoubtedly uphold Mexico's traditional policy of using trade to support industrialization. This means protection of Mexican industry by tariffs and Import licencing requirement! al well as strong opposition to restrictiveas import quotas, seasonal tanffs. and orderly marketingby developed countries against Mexican eiports. The differentia! export taxes imposed after the first devaluation have

been reduced In some cases and eliminated in others, but they remain potentially troublesome

exico ii the fourth ranking customer for US exports, and the United States it by far Mexico's leading export marker Nevertheless. US-Mericanampered by reonctioru imposed by both sides. Several of Mexico's important ag neutral exports to the United States are subject to marketing orders (although these have not seriously hampered exports in recentnd its industrial exports are subjectertain degree cf tariff escalation. On the other hand,ajor beneficiary of the US duty-free system of preferences as well as of US legislation governing border industries Manv prod--crs of Mexican prMected industries can inter the L'S market at sufficiently low tariffs to competeNevertheless. Mexico feels wronged by the restrictions that do exist and by rhe threat of new or tougher onesarketing oiders, countervailing duties, and quotas) and believes that its massive trade deficir with the United States justifies its own protectionism.

can be expected to askMeiican access to American marketsstatements, he has strewed that highand the resulting flow of illegjl aliensUnited States should be attacked by creatingthe export sector. We therefore expect him toabolition of seasonal duties andn tomatoes, onions, andfor "special" application of CSP provisionsWe believe he would react strongly toby the United States to create new barriersUS Tanff0essential to Mexico's border industries program

has granted its domestic industryprotection from competing imports. Ill policydeny the entry of goods similiar to thru* madeas well as to restrict most other importsessential to economic growth Thehowever, has allowed Meiico tolicensing restrictions on some items andimport tariffs N'evcrtbetess. tariffs onespecially luxury goods, areery highwill remain so while theIt) stabilization program

exico is notATT member and thus not bound by .ts trading rules, reducing US leverage On Mexican trade policy The United States if reluctant to resort to bilateral negotiationsime when it is attempting to move rncsf tradeto the multilateral arena. The United States has urged Mexico to join CATT. but thus far the Mexican government has stated that its decision will depend cn completion of the CATT reform with regard to special treatment of LOCs. Trie prospects of Mexico joining should improve under the new administration. Lopez-Portillo has privately said he looks forward to working together with thc United States in the Multinational Trade Negotiations and that he hopes to bring Mexico into CATT during his administration.

although administered mmanner, will continue to affectinvestment. We do not expectmake major changes in Mexico's foreignwe believe, however, that the presidentthe need for foreign Investment and willto adjmt procedures and pspedife decisions.meetings with foreign businessmenstressed thai, while .Mexico welcomessuch investment must be selectivedirectly to Mexico's developmentjobs and earning foreign exchange.has indicated that he will reviewPatents and Trademark Law forwith Mexico's international treatyThis law inetv:des requirements for the use oftrademark and shortens the life ofand patent rights It? modificationa highly visible welcome sign to foreign investors.

iiio's hopes for foreignrun afoul of some ideologically opposedThe National Commission ofrecently drew up proposals thattighten controls on suchin the feed and beversze industries.reportedly were drawn up withoutal (he secretarial ieve! and theirnot likely. We believe that thiswas implicitly encouraged by theand antiforcign attitudes of theTo the extent thatknown his own attitudes. w* expect lower-level


bureaucrats io be much mote caatious in (heir action* and proposal*

D. Oil

lthough, as we have stated earlier, Lopez-Portillo appears toapid and orderly eipansion of Mexican oil production,esult is by no means assured

US companies involving financing of equipment technical assistance, particularly for offshore develop ment. and possibly construction of siich infrastractur: facilities as coastal Koragg and installations might find acceprabilit

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