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

Created: 12/1/1976

OCR scan of the original document, errors are possible

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

THIS ESTIMATESSUED BY TME DIRECTOR OF CENTRAL INTELLIGENCE

THE NATIONAL FOREIGN INTELLIGENCE BOARD CONCURS, EXCEPT AS NOTED IN THE TEXT, AS FOLLOWS!

The following intelligence organiiationt participated in tbe preparation ol the Estimate:

The Central Intelligence Agency, ihe intelligence orgoniiationi of ihe Deportment! ol Stole, Detente, and Treosury. and the National Security Agency.

Concurring:

The Deputy to the Director ot Ce*rol Intelligent* 'or the IrrleMgewce Commwnity. Vice ChafevMB

Deputy Director ol CeMrol |nfei>ge*Ke representing the Central trUeeVgence Agency

The Director o* Irtefigeoc* ond teeearchthe Department at State Th* Director. Derenie Intelligence Agency The Director, National Secunty Agency

The Soeciolto the Secretory tor Nato-ial Security. Department ol the Treasury

The Anlilont Director, Federal Bureau of Invent go Hon Abstaining,

The Deputy Auicont Adminitlor for Notional Security, Energy Raworch and Development

Ado Participating:

TheChief of Staff for Intelligence. Department of the Army

The Director of Novol Intelligence, Deportment of the Navy

The Auistont Chief ofntelligence. Deport-nent of the Air Force

CONTENTS

Page

PRINCIPAL

DISCUSSION

I. SETTING THE STACK

A. MwIod and ihe United Slates

II The Mexican Economy and

C Dynamics of Polkymakln* in

II THK OUTLOOK FOR MEXICO UNDER

A Profile of lltf New President

U I'r . . -Il-

C rn-mpwl* and Pnwiibli; Strategics

Stabilization. Confidence, and

OH

Acricttlliiri'

Growth uud General Economic

Political and Social

HE IMPACT ON THE UNITED

A. Illegal Immigration

B Narcotics

Relations

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

PRINCIPAL FINDINGS

jm/ I'ortillo, when lie assumed the presidency of Mexico on Dcceml>rrnherited an economy in the gripsychological crisis. Successive attempt*anaged float of the peso in the lust days of the Echeverria administration, while bringing about an undervaluation of the currency, Failed to check capital flight and. in fact, further reduced business confidence, already undermined by the aiitibiJMnm* nets and attitudes ol the outgoing govern ment. The extensive lost-minute land redistribution of the outgoing president added to the air of tension and uiHTitninty.

Fortunatelyprz-1'ortillo the Mexican presidencyowerful decii ion making renter thatnder remarkably few imtitutional constraints. If he has theew president could move tguickly on the troublesome issues that confront him Lopez-Portillo has given every indication that he has both ihe willrogram lo arrest and reverse the ourrenl downward spiral. This is not lo say thai the road will be easy. He Is faced with .such basic problems as rapid population growth, high unemployment and underemployment, and lowIn agriculture. Kcheverria's jtopulism has some momentum and

' Tfcnm ikmtrkJ iJcttoui* Mkm up-r<tw-Pottirtf vimlXMi^lm willtvn*-M

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

The new presidcnl. generally considered to be pio business and economicallyxpected lo (a) hold public and private talks to persuade businessmen tliat hb administration understand* their problems; (b) affirm tbe objective of maintaining exchange rate stability; (c)hal the government has no intention of i'sifihhshing 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; if) announce sjrecific programs to reduce the public sector deficit; and ig) emphasize agricultural productivity over land distribution. This program should begin to show results7 and achieve substantial success by the end

Al the emphasis of Uipez-Portillo's ecofiomic policy shifts from stabilization to growth, oil will become increasingly important. While there are strong forces within the Mexican government thai will resist all-out development of (he country's oilmay he as much asillion barrels and neady as lurge as those of(Hesident would clearly like to produce and export oil at something near the maximum prudent rate. We believe lhat ihe president will win most but not all of his battles with the bureaucracy and that0 production and export levels will Iw on the orderillionr dayillion Iwrrels per day.uch rates would allow Mexico toubstantial current account surplus. By the end ofortillo's term2 Mexico could be well on the way lo becoming one of Ihe world's major oil exporters.

On the political side, we Itelieve tliat IxHprz-Portillo can prevent Mexico's admittcdK seriousproNems from Iwcomingbut laud redistribution and lalmr problems will be particularly difficult. The government should be able to maintain ils authority and to stifle and deflect pressures through the traditional methods of coo|ttatioii, coercion, and limited rrfomi.

With regard to the Unitrd States, Lopez-Porlillo promisesuch more cooperative neighbor than was Echeverria. It is clear, however, that the new president sees improved relations wilh the United Stateswo-way strret and hopes to maxim) re the economic, financial, and commercial benefits of the new relationship. At the same time, he must avoid any appearance of acline at the Itehest of the US.

Thus, while (lie president's cooperative stance will extend to those areas of niosl concern to lite I'nllrdas illegal immigration, narcotics. Iradc relations, andinstitutional and political factor* will prevent rapid breakthrough', in mml of ihoe area*

Illegal immigration to the I'nited State* will continue toroblem until Mexico can offer potentialiable alternative In narcotics matters wc can ex|iectpcz-Portillo government to continue coo|(eralive imforcemenl efforts, but. in *pile of US assistance, Inefficiency, corruption, and the profit potential will continue to limit the effectiveness of enforcerograms In tradepcx-Portillo can In- expected to press for speci.il hade advantages for Mexican product* in ihr IIS market. Oil development* will Itc of primary tin port awe to the Cnitnl Slates Imaginative ami discreet assistance from the US Government and the private sector muv find receptivity as long us ihe fact and appearanceexican sovereignty uro protected*.

SKgET

DISCUSSION

SETTING THE STAGE

A, Mexico andUnited Stole*

On Drofnlieihe administration nf Luis Fehcunift was irplaced hy thataclieeu Ihc lilieseiriaadimeeconomic dilflcollles for Medio ,ind iou<idcriiblc Mum (ot Mirelations Tlf liev> adimuislra tinniiiii.Imi id old problems as wdl as some una xpetI'll opportunities; how itin pruhlrim and make* us* uf lit uppof-nnitirsimpact oSrectr* and indirectlynterests.

Present (IS luti-iest in Mexico i.har al any time in the rrceiil past. Thr United Stalese.dciill br;

a source of increased oil supplies fur die I'S and world markrr*.

amarket for Irade and invcttruenl;

a srcnie niotliiio liordrt,

a helpful and in<*lcraluig influence inForUDM

ooperative partner in working out Mich bilateralas narcotic* smugglingl immigration, and

ii patliti'.ilK and cvoitomicalhation thaiell enough onisI-lu dispense with demagogic divi olons

T Mr-.I ,

and prospects underpeg-PnttilloInsofar a* they have implications for US interests.

B. The Mexican Economy and Society

i'Vir most of llili ;iin"

iod sinceh- lulus, the more successfulcountries in terms of IxifIi political tl.ihililv anil eronomu growth Despite theiolent past. Mrikii's pres>dents hate Isren able to tule and transfer mlc willnait threat of coup, revolution, or mtllliiry pressure. Sucorsaivi' tulmi nisi rations tliou<li fin fmm I'iiioi ralli. have responded lo the interests ol mini yioiips in Mexican society reasonably wi'll. Mooosif. rht) have maintained public oiilei oml their own authoritv without relying heavil* on (he more lil.il.ini forms of cenvoeihip and

4olitical authority has allowedlolluu an ecouoinie policy that hasand stability more effectively thnnhem ihi: case, in Third Wculd cotnilrir*. Real growth has

ercent annually since I'l'ii ini has generally been lostDC standaidv and dereiUfteBlion has pWgWw raptsH* During Ihts prmnl ihe mining and jgiMullurr-busedulveslemi-industiialized out. Ilic shairniniliis'lijieil good* in total exports ranercenl in ItfJUloolith lln-hordrr

MEXICO

illion.

IWI yw*H mbIC"mnI' IWlott>

: <if uluib (iiifd" ImtutiiH*

6j*

'sf-sjjti

:^

S$ -if.

'-'Z.fi^-^

04

1 ll

.

ftp1'1

7

gli

arge parichievement *ihe dtrevt mult <il an overall ttrategy lhat included (ol mainlenanerhange tale, (bl hanking and financial policies conducive to the growth of private <civinp nnil investment,ublic reftniircY allocation poltdf* favoring growth ol llie privylit

Mnuiitenou* and growing economic profile mi Somr i4roblem* have been earnedxaceiliated by EchcvrrriVi politically motivated dltirftard ol the llirec-pointhad setveil the loniiliv mi tvell in theolhrn are

lw*ic

opufatiun growth rateercent annuallv on* of theighest and it reflectnl in growing uHian rfnmi deterioration infrom our pointof land and

illeg.il (In* nf immigrant 1 ew fncti <hoold be

noted:

Agricullute. wiih motr thanereetit of the labor lone,ot leuf GNP

landof great Ideofogi-eiil ai well un practicalnvorlng It* physical limits whileillion peasant* remain landlew

The migration of pravanlt to tuthban MM a< Mexico City, (iuadalajara. and Mon-

spsget

h mujor fata inerceni urban growth tale.

The rate nf iincinplnyiriinl nnd tindrremplny-inent, llaitigh extremely difficult In estimate, couldn highieroenl

hh' ilil'rirnllnU between rich unit poor arr iricren.iiig. in lHfiO (he lowed decile earnedin. -total pcimhial income and the highest earnedercent, while0 (heercent cnmpeircd withercent lor the higho!

ower0ime of cikuidrraher political mil wtciaJ unrett The new pecsident wasolitical harrl-liner, the man Unci* mp"niUr lo* the llatetoltii ttiiovij mavactc Although mod tipponrnU nf the govern menl. Including the ttudenu. were middle or upper cluvt. tliry claimed lalor the worker, the hirmet, and the unemployed. Krhcvenin. inort to shore up hi* pnsitinnfii.ii i< alto for Italic phllo-opln-col rea.tons, decided In ctiungc Uilh his image and

j:ti 1 i ll< v

H. Dining ihe early years ol lilt admin lit ration. KrheviTriii hoottid wages and sharply siepped up welfareod government invetlment.e publicinnkamer rule, nnd unial welfare wa* rmpliauicJ with tome adverse ennwiiuencr* fur economic productivityi. Mexico i- (an to bevI recession.spending wasn .in effort to sustainctivity Ihit rxuftnttonary final policy resulted inwe* andpretuire* Wage increase* further eroded Mexico's cornpHtlitr podium luting (intent -nwnl uVfkitv. .r'i-" oil.pendent on eitenulfed. thai encouragexijih'.il iitcm Ihe governmentanaged float of the pesoint devaluation Oner )UM.

t wiit true. the government failed to muke clenr the latlim.ili nl the Scplernher devaluation tu buiinotk. Inl.nr or the gcneiul public It failed to residn demands fur 'harp wilge Increases or to scolch rill not' ofoiip .mil Iranank account freeze Husincw confidence wim tint' further under-mined. In response lo irntinird capital fli|(lil, ihe governmentecond devaluation in Oclohcr and on Novemberuspended teinpnianly the tali and purchase of all foreign currencies and gold b, hanks

ID The IMF, responding to Mexican icquctlt put together a

nulh-i'i in Speiia! Drawing Righn.exico'i adopting certain dahalt/ation measures Ir order to line the counlry over until i'llCOtjU be obtained, the United Stales .igreiil! million spectul currency tit.ip in nddltion lo thrillion swap Thus fur. Mexico hat drawn down KWiS million fromlSliO million ln>ui the IS Treasury0 mil ion from the |ed<-tj) Keservfin- will be rlifjblr lo draw down thel million (mm thewdp ^her nesotiiili-hk lot IMF extended luml (iiienciiig art concluded7

di'vahiiition andhyi:nia iidininiitiittloii tikithe curly iinpnwcmeiil in Ihc hoped foe. aulevit thet have pushrtl

ew low In addttrofi

havtofope wilhptobleimdu Inhertlcd en ecotvomy afflicted by

- tlinrplv higher federal "pending.

record budget delicti.

a cipiil rule of inflation

aof torrign andprivate int-ealrnent,

. -mi, growth.

a laige ninenldelint. und

gmilly iticteiitcd foreign ludehteilnnvi.

Ivfipverriu's attinlion to mkiuiijihm and ihe unemployed haveif any lading benefits More fundaments i

i'ukfl ai the population growth eate Itave only liegnn U>evrlheleM. surfacetentioiit etc undoubtedly lower6 than they were in llie late IttfifK The "linlnitt ore largely cowed, the never veiy-irnportiiul terinrltt and bandit inuvcmeitts arc well uiidir ciititml. thtw is little agitation (nnd even less inclination on the part of

XsSe<%Er

Irwh.'n) for the

govrtoincnl party, and llw prrosonoNvI"twilightbetween Inand suhservieniT

I'l lu foreigneheveirla's artisist eft net In enlargeintlin ihe Third Worlilncreased hicltmi wilh the United Stales andntlvr developed countrfea Mexican [aiimleiiU in the past, although sharing theti people'* dot nut i4 USnd power, has* generally tried In mainlain good relations with "the Colo-eats of therlclieveriiawili.il exception: while givingto Ihe US (iiwminoni. he inaile coiiunuii cause svith (he Tlilul Woric!hU rh"lnrlc against the dcvHnped world Mexico'* vote* nnd influence in international fwuimrrfleitir* I orirnUlin.1

C. Dynamics of PrJlr^rmaking in Meutico

he Mexican piwidcni I* tho centernlotimakingighly authoritarian sydrm.his single six-year term, he operatesfew iostitntkNul limitation* Publicintern) group* lododingckutnal-aelite, the government polnk-al parly,inl organizations, and theiaini.il inlc in influencingIheyfithance In lead toiwjides The legislature, thehi not huve even tbii rewctlvr

fund km

here are. ol course, externa!on lire president At the merit Kr t* Iiinfluence* include environmental factor* tuchhuman and materialheslrncture ami slylenternal prJilliyrietwwrk ofcnunlrv'*

goipohtkal location, and the ending guidingof Ihe governing Hite. This guiding loVologs. the axaJfed 'revolutionarytrew*social justice.itt development, anil musti-UitioiiullMiioresident cannot apjiear to lie acting against any of the dements ol the iritwcnsus. he ha* great latitude in d. fining thesend setting prioriamong (been In anyll of these influences act unmanly as constraint* or limits, conditioningrrshlent feels In can do.

lb Of more directhe inllurncee various date ugenrict on the president's (ininnoi The bureaiKiacie* of the nalkmal gm erraarnt leg. tbe mtnntrtet and the st-niiauliMiumnus agencies such as PKMKX |lhe dale oil monnpds j1 have taken mi an mi leasing number ol (uncttom involving the dlrmilu-llon imtl guidance, of vicletill desnlopment I'murly In labor androfit dialing, Mexicani/jiliou type and rale niburr aiKiacin have lakm on inercudngly wideHi hill tie* Mexu-an president" are fwemning lew able Inl these liiir-.nnr.ii us and inure dependent oil the tcehmial ex pert he that (hoy tan provide. both hit uhderdandiiig the ptiib-Icms on whH'h liecikliuu must la* made am) lmnliiii liie ricrisjouv Ihc tcrhnorrai* ol thesen manyerling ihemwivr* hi hepotnd lessthan ibe "pneiti-cians olteii ruse Wrongnperf governnienl pnJicy within theireir influence could be greatistnuiitl. uncertain, or ne.ilresident Huw-iM'i, it ii unlikely (hut hipcr-Portilio will In- this kind- i i

il. THE OUTIOOK FO* MEXICOlOTFJ-PORTIUO

A. Profile of tha Now President

liven the Mexican nitein. the philosophy, slahihty. and drength ol the president ere all important Unlike all hot one of Meiicoport-revn|uiH>nary civilian prnhk-nls. taipe7-fNirtilki lame to Ihe prnidencycademie andr Iii'lei oh mi rather than llimugl) the official party oigiiniwilinn and the politlail hureancrucy (Interior Secii'lariAtV Whileunguis well lor piihllc admin-islralion and llie lennimii. the new pn-ikienl'sL of political experience ixaild cause himin managing the political pruces*

IS In assuming ibeper-PurliHonmily tradition nf government service. Hotli hit ft il grandfather and Ills graiidhithers governori nfscn stale. His falher.eber,isogni/ed soldier-hidoriam engineer srfxi played ann the hblorii pHrobum natlonali/atmn ofi-umber of icbolarl> works, tikchlding hidf Mexican oil The new presidento have

SEQM7

identified Uronglv wtlh his filhri'* intrlk-ctual and literarype* Pnelillo'sased in part on his lalhcrs liivlorlcal work. On theits father's deatheo his lalhei as hi*riend andn> of hi* fathft'i bookMedea n

|oinrd the official partylie enrolled In the Nationalol Mrvlco9 Afioi earningr taught law and political sewnerUniversity .md at the Nattonalfor the nesteane lirganpublic careereries ofthat included memberililp "ii commissionsoWiktMnrut and administrative reformpotilion nf shlcf legal consultant to thethr Presidency.0 heof National Patrimony by liband long-term friend.he Ks-hrvt-rna .dnonntrslkxi heo' (li-iirmau of the rVdrrnl Puwrrund wai .Secretary nf I'maw**resigning to hoeotnc the "Hln.tl parly's lor president

appears, tn be anIn nation of idcalht and piugmatis) lb*eventsioadallecognitrs theamster ofdevelopment Althoughn move1and deliberate fashion, tlii* dots notability to respond to cunr.nl |irob|rms and

21nun of pmtw and metkulcu intellectr.evidenced in his treatise: the (interl* and general 7'ricorqhi Modemnd his philiKuphieul <atiie Don he pluses ii high value ihi language und ideas,etpciialry the Importance of individualtli ulariy in times of stress or uncertainty, he ran be expected lo rely on his intellectual approach to prohlnus devrloped over main years in tin- academic world (h> thr other hand, he it well aware of the dangers uf ivory-lower thinking; innovelthr ureal Toltrc eulliire-hero lets hi* nation fall into administrative chaos while he studies thehe rliminalion of iiioffictency in government wasof the strongest themes In his rampatgu speeehes acei wiling tossessment.

"IjipeT-Portillo't personml style of governing should contrast withWr suspect he will delegate more atithority. engage In less frenetic activity, and he less austere in his public and private manner, lie has an appealing personality und presidentialnce, which will stand him In good steadeilco thai yearns to he proud ol lis president He is likely lo be Mealeo'i first genuinely respected and well-liked presidentpei M

1 and perhaps easier to deal withajor question lhatwith regard lo Ihe new president is whether, given his tendency Inward broad scope thinking arid delegation of authority, lie will maintain adee|uute cootrol over thend particularly over thr AM agencies

B, Priorities of the Admlnlmotion

hefpe/-Prwtlllo admmlil'ie lion will be determined hy ihe gravity and immediacy of Meilco's social and economicy tlw limitations of the Mexican decisionmaking |nocrss. and by the ehamclcr and philosophy of the prevlder.t. Althmigli. in keeping with the Vlriiian tmditlon. Ihr prrsideol-eleit was unable lo publicly defiur In*to the rstmt lhat it cvwithtted with that of the outgoing president. Isipez-Portllln has revealed much of hb jiotltlcul and economic thinking in hi* writing und in prtvulr conversations We assume thut the new president's personalwill prevail Inhf-rt itonflict direHlv with Mnican voctal and noomnlc mifity: In otherompro-iium'ruthed.

he liipr/Poitlllo administration will put Its economicm-ludiin; ihow- involving 1'S Mriiiaii rdalvms. first Meakun relation* with (lie

Uorlfl. so strongly cmphasiml hynot he given lint same importance untler th*-The shift in emphu'ls will,ittle ixipillar opposition, since neitlnrpublic noi auv important tultgioup hasifrll with or benefited from theon the Third Worldtates must, however,to see Mexico mainlaln position* inlorums thut at limes runo ils own

aptr-potillo hasarietv of channels thai heloser and more htninonloiis rrlutlonship with thr t'liifed States llium

existed in Ihc tiinc nf Ivchevrrria. Here again, we see no important bines thai would uork ngaircl (In president's general desire in this area, 'litis is not to say lhat iMiwcriulin the Ministries and statenot work against US interests in specific cases In addition it i* politically essentia) thatavoid any appearance of sulwrrvicnix- In Ihe United States, Appearance isimporlant interest groups, lacilly recognizing tliut il is sometimes in the Mexican interest to follow US initiatives, do not choose to look, beyond appearances.

l is iu lhi area of domestic piioritics that Lope/-Pur lilln will lace, his greatest obstacle.concerned with social justice, he will give highest priority to achieving progress (liiough Implo-mentation of sound economic policy The first priority will he lo restore financial stability All Interest groups recognize the importance of this task, but they also all hope thai It mi he done at little or no cost lo the. in selves. Compromises arelosely related priority is that of restoring business,including thai ol foreigntheprogram may runeactive, groups nurli as orgiiui/isl labor Hen- again. Some compioinises appear probable. In the longerxpect the president to attack the. Interrelated Issues of oil, agriculture, economic growth, and international trade. Wc believepc7-Portilloleast in ihe first years ot his administration -give relatively low priority to political and social problems. Although Ihe presidnil is concerned wilh (be all-important problem of population growth, he is unlikely to find the time or resources toigorous attack on this problem early in hi* administration

C. Prospects ond Possible Strategies Stabilization, Confidence, and Trade

fter successive devaluations, tin: Mexican peso is now undervalued; the problem is no longer one of restoring international cninncfi liven ess but ol resti tr-

io floui was more than double ihe estimated erosion of its value through Inflation70 Despite undervaluation, further depreciation was feared, tmd massive eapilal flight was stemmed only by temporary limitations on foreign exchange

Mexico's lasl devaluation before the current series (Aprilhich set the stage for twn decades ol growth wilh stability, ubo had severe mili.il effects. The cause of1 devaluation and the imuirdtalc-public reaction to it were much the same as In IHity Although the balance ol payments hud liecti under severe pressure forear because export pries and volumes had slumped with the end of the Korean War boom, it was substantial capilnl flight that precipitated the move. Popular reactinii lo the devaluation was swift nnd much sharper lhan expected. Confidence in the government fell, and capital flight increased rather lhan moderated aflei the devaluation. Foreign reserve* fell by about one half between April and June. Other hoped for benefits of devaluation also failed to appear. Imports,capital goods, continued unchanged, while the dollar value o| exports, primarily raw materials, declined Tourism togged as domestic prices jumped. The government sel about the task of restoring public mnfldenoe, attracting investment, and encouraging exports Some llirec month- alter the devaluation the situation lwy.au tobecauseod harvest in Mexico and economic recovery iu the United Slates Capital flows were reversed before theof the year.nflation receded and the current account went into surplus Tbe initialof theits lack of immediateMexico to live with inflaliun rates higher lhan those of its major trading partners tor many years.

This doe* not mean that stabilization will comeii'.-klv this time as it did4 Progress will depend on suchhe rate of recovery in the United States and the size, of the Mexican harvest. If Lopez-Porlillu ads as we believe he will, however, the final resultsbe similar. The new-president reportedly is critical of Ihe handling of the devaluation. Ills implicit argument appears lo he lhat. given the declining inflation rate and improving trade deficit in the months immediately preceding the) devaluation, improved confidence tn slern speculalivc capital flows was an indispensable companion piece lo devaluation.

lii- is Indeed the president's umlcrsluuding of ihe situation, we Isr-lns. he will follow ihe following dablii/atlnn dralegy

a series ot public andk. to

persuade lhat his administration

understands theii pcoMem*;

Solidly aflirrn the olijnctivc of reed id dishing the strength of the peso;

Heemphadre that the government has mi in fen-Iron ol establishing foreign exchange controls;

Tale special measiiies to aid inrlJvlduul

Male use nf wage and prise corHmb In reduce the inltationaryhe devaluation, and

pecifU program' to reduce the public fafitOI deficit wilhnul gieatly itMiuuliig ihe la* burden on business

I latillnm.n'.i. In support the siabiiira-tinu |Jan presented In the IMF in the last doss oi the hcbevcrrla ailrnirustration This plan sellumber ol economic measure designed to hring nl"Kit linpnrhint dniclural ifiungcs in ihe Mexican

n- some-whal optimKlie bade ob|ci'

thr phui are to:

Improve the real economic growth rale:

Increase rmptnyntciil-.

Stimulate domestic 'Risings and mimew rowing.

line with those of map* trading

ji.i'-i nd

a sustainable bain men if-pay men Is eipii-libitum The ptogiam relies heavilyl icy of reducing the public scctl* deficitens-nINT and mi an effective Incntnei policy

a- public serin* deficll increased rapidly under Kelicvcrrtii and is currently more thanet cent of WiP Tlas .hould he rrduced tn no more lhanerceni of (AT In onter lo being eitcrmJ and domedic borrowing downanagrahle level We doubt (hut the government cim effecteduction iu less th.hi three years

On tint expenditure side, we believe that ihe govcriiinrnl will Iry to hold lis investmentaterceni nfcurrentbetter nsanagernerl and drsctThe growth of current cxpencUtiires will be cut partlyerlnction ol government subsidies hut mainly through control of the public sector wage bill Thebi ligation program calls for reducing the annual growth rale of uf federal employ ment fromOOCBlercent In pursuit nf thb goal, ihe governmentnstitutes) In the last mrmths of the Kchcverria administration may be externlcd well intoipi-/tWiilc- is hImi known to liea hit sliemnllning of the executive brunch to oil cost* andntrol. and he l> expected In ln*ld down the roe In public sector wagen the revenue side, the new government plans toeceipts from 2l> percent toerci-nl nf CNP by hiking 'axes .mil incr-aslng the prices charged by date enterprises

eulting the puWie sectnt deficitilaeMavorxbh'et on businessihe lax hike* involved In thismainlyhLswill be doubly undermined IfIs nimble to limit the giowlh ofradilioiially has been athan an actor In Mixlean decisioi unaare signs, however, that ihU isni union* are growing in impnrtunec.leadership of the ftmrrnmenl dominatedcan nnl last iiuolbi-rnnd ihe

.'that KchcsxHa showed labor mayIndrtutinnallfrd Despite these 1.

hainew presidrnl lias the irtclinatioo and tin poll In il power lo hold real wage* helms pre-devalnutliNi levels during the crucial (list veins of his slaliili/.ilion phm

improvement in the balanceb rxrf expected in tlw short mn (trend* depend heavily on continued recirverydemand, notably innited Statesfoiercent nf Mexico's foreignInn talinm i'ii1 sears,capital investment will limitxports Foreign ton mmwhich usuallyercentexchange earnings, Is expected loquickly, and Mexican tourism abroad will be

T

discnuiagcd Imports, primarily raw materialsgoods, cannot In- cut sharplycar's current-accounttotal an estimatedlllon- reserves and is

l sine on large foreign loan* to offset recent niasose capital flight

In ihe medium term, currency devaJuatkiei should improve the Irade account Ifble lo induce imTrased Investment In the privateharp upswing In exports of manufactured goods, especially thosehe hoidet industries, jhould be possible Exports nf raw material* and agriculturiil products should ubo Iticreiise snmewhat as foreign consumers ndjact hi diuiigr* in relative prices and produccis fake advantage ol (he more favorable foreignined Impoit subslilution will In-ertcouruged, cspcciully in Ihe manufacture of capital goods

We believe thai laspor-Pralillo'splan will have avhicvrd suhstantial MicceM hy the end8 This will have been asesult of the president's words as of hi* actions As Inreign exchange earn lugs--ltd by oil. hofdri industries, andup. foreign and domestic buslrtcurneri will begin to heltcvc in the prrsidrntial commitment to exchange rate stahditv Pro biisiries* slatemenls, backed by even partially successful efforts lo cut budget deficits ami hold down wage rates, willewurge-seal- capital flight should cease7 ami new Inflows begin well before. Ihe inflation rale, which may exceedercenthould fall substantially Ihe next ycai

Oil

Ihe emphasisope/ PortiHo'&shifts fmin *ta lull rut (on to growth, oilincreasingly important CIA (sirtcntoilhe Heforma area of Tabascostatesmrrefl and weadditional dnllmg could yield rrserves as Urgeof Kuwait metarrel* Aneffort would allow Mrs.ten to7 millionas andper day0 .At currentMexico to follow thericeto join Ihe organization-evel ofbring Inear. By the endper-1'ortuVs termexico could he well on ihe was to beeomiiig one of the world's major oil

exporters

he new president woidd dearly like lo produce and export oil atnear the maximum rate fie has already indicated thai the petroleum seetor. along with agriculture, would receive the lion* shore of government Investment fundi Shortages ofand. in some cases, trained personnel could slow development Althoughdd wide shortage of rigs capable of drilling to the depths where oil is found in the Rcforma urea, this shortage has ameliorated gteally In recenl months. Lack of equipmeni should not piove an tniunnrnmtuhle. problem, provided PEMEX eim oblnin sufficient funds ik suppllei ciedits The Mrxictui pulley ofercentage of domestic content in equipment purchased hy PEMEX could prove troublesome, if not inndlfled by the government Although PEMEX workers and engineers are in general quite competent, the pace nf development could he increased greatly if foreign contractors weretrp would he contrary' to government practice and ideohsgv Loper-Portilio has indicated privately, however, that he may make some moves in thb area even at the risk of antagonizing PEMFX officialdom

by PKMEX officials andthe government may prove to lip the mostto the president'* plum for IncreasedThese officials generally believe thatshould eventually lie limited to amountsrefineries cnii pioiess and that onlyshould be exported. ConseivalinnistsaUo worry lhal ucceleratcd rail's ofcould result In the waste of associated gasthe long-term productivity nf ihe fields.has some sympathy for thesein thee Oro fiehh ingiral emphasis In kit father's book onThe presidentowever, lhat muchcurrent growth tales arc wet) within theprudent riplnlUlion policy

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

..ml burotiucrMta haw Iwcn notably sem'tiw iibout the countiuctviising nilsunn' rases apparently withholding suth information limn thrii vwrscrinrs and fromsiiirnt himself On the irfber hand, the desire of Pr.MKX IcfiuuMan* to show themselves technicallybin* better ii in Ido so th.iii h> rapidly Increasingtbe need ofIn iniiiosc exports In pay hi equipment import* will it lengthen the'oil Yhr-o u> the Oi rest if Ccm-rnl of PKMKX should greatly assist the president in htv effort* to loutml the pkmkx bmcauciacy.

most

n an assumption which'lirlilln wins most bill nol hanks ullh tlie Irunauctucy This would WHO.codiKlmei levelullmn Ii rby and exportsillion barrelsblel Such rates would allow MesUn Incurrant urt'inml stirplu* uf |L< rlespile large ami glowing import* 'isiulred economic growth. Under an alleriu'ive. lm

Mi Wi Hunt* lis oil output In t|

its dfMMtttr needs With fern oilflicit wniilil he Hose In hlllloi iscc Graph).

Mexico:

Outlook for Current Accoont Balance

Biniiin US

With Anlicipated Oil Exports

a

ir

- -

W.0Otlli/il

Hno.otm ii'J

.

' crude oh. phoducnon and

lYlrtliKtim

an.nmLaorLfliniiAl

Agricvlluit

long with patfrs1 th.il he will give Iikti Mi 'ii in agriculture isif. liKi'-jsedIrtigr ciimuieiclal lam maiimiimeet:mllv gr< foreign rtihatigc Cm neale more rural empi ninfi.ilinn lo the cita

Attempted solutions lo nnc prnblem often exacerbate Ik oilier.

sVlfarlor,ricteasts inul|Mi! are mtiiveer*itrre

il nut of new land to bring

inlu cultivation inih-ss ivpenslve lung range ib ielr,|imenI of the (ir>|iical soulhrin low land is urn I'-taken:

The most readily IrrigaMe land is Jrcudy nndn cultivntiim.

About MO percentie crop lain) i> In small plnis rultlvatrsl by vulnidence ardfarmers; and

I*ti- of further laud reform keep the large commercial fiinners from Investing to increase output

ovrriunoul noil naivr pi(<riiiitivi<vth" modern and traditional burning scetncyfarmers nerd vest ill Is haiVddingv otaoritinue in irjiui nceslcd mvc-Une-iil*abo millnewhim] ubrc icvavsmic cncvwt-

... ii.- ihHrn.ml, Tnc-

greatest potential (in iniprnvlirg agn-.cburc. however, I- in ihnse arc.ti i4 the. traditional farming -ectochighitf.ill Widespread tippli'iioit-presently availableld in tineexico self-sufficient in com To ilu this, ihc. giivcrrnninl would Uow in provide -if nificarrily more diced assistance- In the small lurnten In Ihe form of financial assistance, (iliiefiliou, price incentives, and modern iufiustoii'liiw latillMtix Orgaiirdng this oxslst-ance wouldlow pnicras. ami wnsdd he costly, ii would lake live to trn yean Mimpii'vinienl in onlpul

Although bud loform it> on liiiportL'tl part nf Ibe governingdeology, we lieilrve ir>aiwill ilreu Increased production rather Ibon continued UmI reditliilHiliui. lie lies vlaied that "ibe land rJnetn'fial he wlshus ro aeold furtbc: divfaiwi uf land hobtlngi mi" nun eesrsomtr* units, and :hat many vinull lamn and cooperatives shookl be combined We doubtK*'WJK revere the land itsfJrlrlbutltKi eieruted ir. ihe last slays of the Felicvcrda jidmtimlintioii.ction, however, willerious piohleiuiHsai.-KCtnr confidence lor the new piiKldcni In an/vent, even radical land redlslrlbuines could helpmall part ofillionpeasants in its country. From the pulnl ol view of political and social stability, ii may he more lni|joitarit lo feed [Uc many peasants who go lo the lily than to aooutiiiudats? those who slay behind aglliiuugeti own piok ol land

re oilymall tameable halame 'J agrieiiltural trade, ami wc expect that il will lie able

niaiulaln tbhulame during most ol tbe neil dseii importi ham-ever, will continue tn Increase sporadksdlv and. itiainfall. eoeJd cause an met all agrKidtural trade deficil. IV grovrth of agriculturalwill depend largely on the. uu1 reform and the amounl ol resource* that Ihe government Is willing to invest in the

'Vi'owffi o'ldotiotnk. Outlook

ramatic improvement inconomic rrisw Idi thiee years. Only afler stabilization is seen to be working and businessully reestablished will foreign and domestic entrepreneurs make Ihe investments necessary lo return Mexico to its tradi-.ioudl growth iuir Wehn! thennualmilccol< pi rind lOTfi-io. I'hc outlook for the lust three or lour yvors of the Lopev.-Portlllo administration is much brighter. Given the absence of domestic hiraioil and foreign recession we expec! Mexican economic growthvcr?gr in nersv'nnuallyee sue}'being export-led, with oil, tourian. and border Industrie* pJnying the mostoles

in v; i ''o-

lthough Mexico faces serious long-lerm social problems, we do not see these bertomlng uiimanage* able. Wc do net erp=cf luni! end urban unrest, land seizures, strikes, and guerrilla or terrorist operations to cease; indeed, they could rncieave marginally as the initial Social costs of stabilization begin to be felt. We believe, bctvewir. thai the govcintiieni will be able to ituMntalrt Its authority and to stifle and deflect

lion, coercion, and limited reform.

i!OM.sy th

split within tbe ruling coalition, not generalized'arould constitute the most iinmedlateto politicalhe most likelylii woiiid he oi^.iiuceit labor The head oflabor Federation aridutenanf cm heiie ire from1 if rulen- tiim 1

adiniirisl'nlion. This could lend to an internal leadership oonflicl in which important members nf the ruling party, both inside and oulslde the labor iiiovrmenl, hiir up against each olher. Although rival

in leadeis would be more likely lo look up to the

party leadiTsliip ihan down lo the workers for their vippoit. there would be un inevitable breakdown of lalMx iliM'ipline.ajor party split would uudcrniiiv' the preudenl's authority in allsviiat authoiity remained woiih! have to be expended

in political fence-mending tutllcr than In solving or containing the nation'* social anil economic problems. Inituation, it I* riot impossible that newfrom outside the party andwith the lain*challenge the party's right tn itile and the whole*politieal system Swh leaden might gain consideraNe middle-class support.

ilo not hdleve that the above scenarioThe Mexican system hasumbercrises in the pu.il and seems well designedtheru Much depend* on the strength andthr president In tin cumeriousdispute, we would expect ihe presidentdown early and heavily In favor ol one ofTin other rivals would he toldthey had everything lose byient deal lo gain by going alongpresidential decision. The Mexican piesidenlpower to make either thr carml or thr stickto do the h

III. THE IMPACT ON THE UNITED STATES

gises every IrtoWatkaiealistic and enrotriictivr ippouchwith the United Slates and theIn |xivatr conversations with IS officialshas ernphusl/ed his hellef lhatWorld ixnturing has Iseen ciHiiiterpniductive.clear, however, that the presidentwo way street and hnprs toeconomic, financial, and commercial benefitsnew relationship.

hile wetprc-IVrtilln to reduce government critidsm nf the t'niird Stales and toore csHipeiutive attitude in international forums, he will also try lo keep his nationalist credential* in good order. He and bis advisers understand IS dome-Oii limit lainti but if he feds ihe USohat he consider* are lustortillo may revertaider and less cooperative hnr Unlike many Third Worldr-Purlillu dors not teem lo have any sense of insecurityU Ihe United States and can he eiprvtrd to ap|*riKi<'h hsuesosture of psychological equality aad self-confidence TTiere should be an ample oppottunily fori-hauj'.os of Ideas.

A, Illegal Immigration

The tiumlier of Mexicans entering the United States illegally It growing steadily According to ligiires compiled by the US Immigration andService,llegal Mexicanor "undocumentedere returned5 There is no reliable data on how many escape apprehension, but the numberprobably much greater than those retmiHslaih vrar Although the problem ha* not yet been adequately studied, both sides recognize lhat il originate* in Mexico's under-devdoped and over populated nnal vest or andprimarilv, to continuing US demand fnr hrw-status. low-wage lain*

In addition to actingafety valve for excess population, illegal migration benefits the Mexican economy in several way* Assordlngecent MIT study of select id Mexican communities, most Illegal migrants stay Inn.il Stalesimitedfiom six In dghl months Mostwhile in Ihe United Stater, send cash remittances ofQonth lo their families In Mexico Such remittances stimulate community economics and slow raial-mbanwithin Mexico. Moreover, many relumedhaving uiquliod capital and learned new skills in the United Stales, assume position* of economic or political importance In tbrtr communities- The overall effect is to increase the economic and social viability ol rural life in Mexico

ince4 ihe Mexicans have chosen to altaek Ihe problemlb-gal Immigration bylahur liiti-irave indouius in mral orcas Given the size of the problem, tlx- depressed stale of the rural rector, and the shortageoatnenic resources, this appmach will be long and dnw To have any ehaivce of success il must lie aecoruparHrdore effective familyogrjin The new presidentwill sponsorove.

As part of an offiat lo Increase empliiymeiil in niral areas. II'o'lilln will probably ask lor special jcecss to US markds for Mexican agilculturalhis would compli-menl plain to create lalxn Inleiisive "agricultural production units" to produce agricultural products for export. Lopez-1'oitillo may also ley in get another farm labor agreement with the United Slatesart of a

package that would include incrvastd investment* in the rural sector ami greater access to US markets.pcy.-Porlillo government will try at all costs to avoid any sudden bared return ol masses id lis nationals Irorn tin* United States Such act inn would greatly increase unemployment, rural unrest, and internal migration Inarge cities.

single approach is likely to reduce theillegal migrants significantly In the nearmany approaches encounterfrom US labor unions andThus, we expect illegal immigrationto grow as long a* the incentiveswage, better living conditions,prcjeiil Until Mexico*programs yield their desired result, thetbe United States Can ho|b> for is the adoptiondeveloped measures aimer! at reducinganil keeping the problem from growing inloirritant to bilateral relations.

B. Narcotic*

of Ihe heroin and much of thedangerous drugs etilenng the US marketin Mexico Cocaine transits the countrylo the Untied States. The magnitude ofhas increased in retenl years. Thereindications in recent months tbut lastelforf has had some impact on theand purity of Mexican heroinustained Mexican effort willhowever, if Mexican narcotic* are toover the longer term.

die United States and Mexicooonsulcrable resources to stopand ihc Mexicans have made tbedecision to use herbicides. We believeLopez-Pnrlillo administration, at thelevel, will maintain Mexico'sam it itspez-Pnrllllo isMexico's own internal drug abuseof the centralization of authority intbe current poppy eradication programduring the change of administrationled that new ina|or program decisions(he appointment of the new teamover the long run will be the degreenf the new leadership, which atez-Purtillu averts that the basis has been set for expanding the drug control program and has Indicated that he would welcome more US help

ecause ol domestic constraints and In avoid ihc appearance of acting under USpez-Portlllo couldalky partner at times. Like his predecessor, he will resent US criticism and tend lo downgrade the importance of US government assis-

UtKi I

muggling will be difficult to stem and all but impossible to stop so long as the US rnarkel remains

[Poor manner-merit, insiiiiiiient manpower,l resources, and buicau-cratic riv allies icniain |Mohlrmictors, such a* Ihe long growing season and the variety nf suitable growingre hard to iisercnnie. Finally, in arras where drug cultivation ii the major source of livelihood, anvinpalgn lo eradicate the trade would meet with strong rural resistance whichen increasing steadily over the past eight or nine months Apparently in recognition of this resistance as well as the severe problem* In the rural sector. Loper-Portillo campaign statement! emphasised the need to find alternate source* of Income fin trie caiiipesinirs who grow illicit nop*

C. Trade Relations

he new president will undoubtedly uphold Mrxfuo's traditional policy of using trade to support irsdutrrialiration This meani protection of Mexican Industry by tariff* and import lionising re*|iunroenU a> well as strong opposition to reitiictiveas import iptora, seasonal tariffs, and orderly marketingIry developed conn tries against Meils-an e* ports The differential export taxes imposed aflet the first devaluation have

reduced in .iiiiii' cases and eliminatedth-rs. bii( they remaint rouble-nine

iMiui is the. fourth rankmfl'S exports', and (tie Uniliils bv !ar Mexico's leading export market. Nevertheless. US-Mexicon Iradi .' hampered liyet ions imposed by liol)!

i.il ill i < uillinil

exports lo the United States are subject to marketing orders (allhm'gh these have nol seriously hamperedn recentnd itsxic Subjecterlain degree of tariff escalation. On 'he other hand,ajor beneficiary of the US duty-free system nl References as -veil as of US legislation governing border industries. Manyof Mexican prWccied uidunriei can enter ihe US market at sufficiently low tariffs to compere succsh-fully. Nevertheless, Mexico feel* wronged by the restrictions thai do exist and by the threat of new or tougher onesarketingountervailing duties, andndhat 'ti ithijIv? rt9.de deficitihe 'iiuindsuries lis own protection isrn.

ope/-Portlllo can be expected io askMc*irsn oocess to American markets,statements, he has stressed that highand the resulting flow of illegal aliensHulled States should be attacked by creatingthe export sector. We therefore expect him toabolition of scasnuul duties andn tomatoes, onions, andfor "special" application of CS? prnvbioiuWe Isellevc he would read strongly *oby the United States to create newi'. '.I I! h

.1 . .ill-i ,

IV) Meiiio has gmiitcd iKdome.sln idie.li' dmusl total protection from onmneHng imports. Its policy is

i- n, l! ul, > d

Mexico ax well asestrict most nUier importv not considered essential In economic growth. The: recent devaluation, however, has allowed Mexico lo drop iniporl limning restriction', on some items and to lower imporl taiillv N'evirllieless. hirills on consumer

lid.ivr l

l remain

i. id i'i

no Mexico is notA TP member andbound by its trading miles, reducing I'SMexican trade policy. The United StatesIu resort to bilateral negotiationsitti;iuptii|i; to move mod' 11rena ico to joinut thu fai the Mexii m

t/nvi-rnim-nl bus staled that its decision will depend

ll ihith regan lo ip< rraiment of The.lexicnivrewooks1irking

together with the United State* In the Multinational Trade Negotiations and that he hopes to bring Mexico into CATT during his adminlsiration

exlcafliJaUoji. although administeredtoncusctimlnalory manner, will continue to affect US private investment. We do not expeel Lopez-Portillo

v

law- we believe, however, that the presidentthe tired fo/nvatment and willlilitB to adjust pfocedurer and expedite decisions. Inith frireign businessmen LopcE-portillo has stressed tbat, while Mexico welcomes foreignstmeiit. inch investment musl be selective and contribute directly lo Mexico's development by creating jobs and earning foreign exchange. Lopez-Portillo has indicated that he will review the controversial Patents and Trademark Law for possible conflict) with Mexico's internationalncludes requirement* for the useexican trademark and shortens the life of exclusive trademark end patent rights. Its modification would

dImpes foiiii (menlmi'.i.ii-I.'n. Investment recently drew up proposals that would substantially tighten controls on inch investment, especially In Ihe fond and beverage industries."wi up withouti.is ids h'Iji ilial :hi< hureai cralii

lu

nevs and antifoieign attitudes ofreveitla administration. To the extentpe/ I'miillo il its ll tudiuwei level

liutraucratsriiK'h more cautious in llicir action* ami proposals.

1i'.i't

D. Oil

stated eadiei

CjH. Although,'oilillo appears lo <

r.iii-r

working process.

Josely but lh

with PEMKX.are not ihe

by no means assured liuiilalious and iihslnicl government official private companies,speed up tlie critical factor LopcK-Portillo has indicated that helx; rcceplivo to some form of US private sectorheretrongespect lor the US oil industry's technical capabilities running ihiough his father's otherwise highly nationalistic book on Mexican oil. Since his new government is short on investment eapilul. imaginative proposals by

US companies involving financing of equipment, technical assistance, particularly for offshoreandeonsttuellori of such Infrastruchire facilities as coastal storage and loading installations

ageiueilt through

might find acceptability provided the necessary fact and appiamiice of Mextend sovereignty were pro-tcclnl This could lie done through the integration of Mexican paitnets. use ol Mexican linn names, and general Me.xicaui/ation of the effort.ortillo rriighl ivelcomc the US (arvernmeiit'sciim-and assistancerivate soctor effort ueh instrumentalities as tbe Kxport*Import Bank, but he nould not waul publii-ity about US Uoveniment help In Mexico's oil industry or alxnil US .It.iits lo incmisi* Mexican crude exports to the US.i.-ii mi. '.'illidly

l i ' 1i..iii- i'-nin-

clearly identifiedexican Initiative serving McxiCsiu. not foreign, Inferesls.

I

n

to

a' Di/eflof ol .hldllige.Tce andd' the Depanrne- tb Di'"<'o'. pete'-icAgcecy, for the- Of fee of tint Sejcetoiy' "of

Detentethe ofgcfitjotKin of Ibe Joint Cbleh o! Staff ; AiiHlont CWf of Srot? forepartmeri' of rSe

Wparfrno'nl'pi'thft Army d. Director ol Noyal intelligence, for trie Deportmonr otAitlifon) thiefoff, Irtcllitionce.'fd' the. Deputy Ajslitanl Adminntrceor for Natlonol Security,o

Dovalopmeoi Adniiuistrofian'Ailr'iTontBI, fc. the Fede'gt Bureau ofooDirector of MSA, tor the Nottcnol SecuritySpec-al Aiiatant lo tbe Secretory fee Not'oicl SeeV . .

Otputy for Noiiciol intcltloence, for ony olrtof I

jcumti" may be retained, o* doitrcyca by bunting In ori'liif-n' retuinod lo the. Control IntnlllaeKewinS^ijTo'SJQS^pul^ lor National Intelligent*.

Ihewhenfrom theuld.bec

hit dcKcrrcnf ri ariTe-ettQCtva the oreeieoi may "retain it fcxceisr At the *vl el rhl. period. .Ac dscumerit ihoJld eiiw.'be deitroyedii(^orc!incj'rrriiioh ih-uid'be requMltW iheloe, locto-dorvc wrtrj

Original document.

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