------ e7 C-T TS •uthorlty ' CLASSIFY s Sor C Sec __ Excmptlon S 15 - _ p9 W l RADJ TS u J xcmptlon'I FOIA PA S or t MBXICO OUTLOOK FOR THE LOPE PORTILLO ADMINISTRATION UMClASSIFIED BUREAU Of Summary - - The outlook for the new Mexican Government is of special sJ gnificance to the United States A multitude of i ntertwined relationships--a mutual border 11ubstantial bilateral trade billions of dollar11 of US investment--join the two countries As a result the problems of one often have consi derable impact on the other IHHlllGEnCE flnO RfSfRRCH •' '· · · Jose Lopez Portillo who took office as President of Meltico on December 1 faces a formidable array of problems at the opening of his six-year teJ m The short-term effects of some of the policies of his predecessor Luis Echeverria provide his most immediate tasks --to restore confidence in government --to stabilii e an economy in psychological crisis sinc e last fall's devaluations of the peso imd • --to effect f1ome reconciliation between business and labor landowners and landless peasants · ' - Mexico's new President will also have to deal with mor·e deeply rooted problems --the high under- and unemployment rate _ --lagging industrial and agricultural productivity and · --skyrocketing population growth Lopez Portillo brings a variety of experiA former professor ence and skills to the job UNCLASSIF E WARNING NOTICE UNIITIY INTKLLIGRNC• SOUJICU AND MffHODS INVOLVED 2 • 3 Report No 675 January 6 1977 -·and Secretary of Finance he is an intellectual a pragmatic and a skilled administrator whose personal style is to stress reason and compromise rather than rhetoric and ideology He appears in the first weeks cf his administration to have made a good beginning on the tasks before him His inaugural address stressing calm confidence and reconciliation and his cabinet appointments inc icating responsible administration have generally been we ll received In addition he has taken steps to garner support from the priv aector and to avert armed conflict over lar d invasions Under Lopez Portill o' s a dministration Mexican-US relations should improve He has stressed the need for a more cooperative relationship between the two countries and is hoping for special trade pref'erences for Mexican exports increased investment and more US tourism to bolster the Mexican economy In return the US may look for a more constructive approach to the prciblem of illegal Mexican immigration continued cooperation c n the joint narcotics control program - and a more moderate stance from Mexico on Third World issues • UNCLASSIFIED 4iillll' NOT RELEASABLE TO FOREIGN NA IONALS NOT RELEASABLE TO CONTRACTORS OR CONTRACTOR-CONSULTANTS Mexican President Jose Lc•pez Portillo who took office on December l faces a formidable array of pressing problems at the opening of his six-year term How efiee-t vely he deals or comes to terms with t hem holds important implications for the US Mexico's significance for the US lies in the multitude of intertwined relationships that join the two countries a mutual border substantial bil ateral trade billions of dollars of US investment in Me xico and a host of jointly undertaken projects ranging from the eradication of agricultural pests to narcotics control Because of this interrelationship the domestic prc bl ems of one country often have considerabl e impact on the other--for exampl e Mexican unemployment becomes illegal j mmigration to the US and US recessionary cycles depress Me xico' s export and tourism industries heightening its bc lance of payments deficit with the US Bacl ground During the period from World War II to the early 1970's Mexico's economic managers emphasized growth in industry and manufacturing achieving an in1pressive sustained GNP growth • rate of more than 6 percent annually However as former President Echeverria found whEm he took office in 1970 the growth pattern had masked such basic national problems as an exploding popul ation rate burgeoning unemployment neglected Ural development inequities of income distribution and inadequate programs for the poorest sectors of Mexican society In an effort to build for the future the Echeverria administration poured huge sums into ambitious long-term projects--dams steel mills increased petroleum exploration--and into social programs including schools roads and hospitals Hit hard by the stagflation that gripped the US in the mid-1970's Mexico saw a sharp drop in tourism and export earnings and a steep rise in the cost of imports at the same time that government spending and borrowing were at an all-time high By the spring of 1976 Mexico's foreign N O T RELEASABLE TO FOREIGN NATIONALS NOT RELEASABLE TO CONTRACTORS OR CONTRACTOR-CONSULTANTS t UNCLASSIFIED U Cl SS f EU - 2 - debt was estimated at some 1 22 billion pressures were building for the devaluation of the peso and the private sector was becoming incronsingly concerned by Echeverri i's anti-business diatribes Devaluation rumors begun in April became a self-fulfilling prophecy as capital flight snowl alled forcing Echeverria to take the necessary--l ut bitter--pill of allowing thu devaluation of the peso on September l -_ In the wake of a second devaluation on October 26 rumors of an imminent coup --although unfounded-- gained widespread credence an indi cation of how badly public confidence was shaken These J umors were exacerbated by Echeverria' s sudden action i n mid-November seizing some 250 oo o acres of privately wned agricultural land for distribution to landless peasants Additional land distributions on the eve of his departure from office raised the hopes of additional thousands of landless peasants and resulted in widespread land invasions in northern Mexico As Echeverria relinquished the presidency Mexico was in the grip of a psychological cril is Two Transitions • f· t ' t Echeverria's inheritan e on taking office from Diaz Ordaz was a prospering economy but a middle class restive under the authoritarian one--party system and a shockingly neglected segment of society--the rural and urban poor-which had not shared in the prosperity Student violence was high and pressures from the left threatened to force Echeverria to turn to incre 1sing repression in order to govern Considered at the l eginning of his term to be another conservative president little different from the lackluster Diaz Ordaz Echeverria instituted a number oi social programs and surprised observers by outflanking the left with rhetoric--a favorite move being to call demonstrating leftist students fascists · Although private-sector profits certainly did not suffer under Echeyerria they were in fact at an all-time high private-sector psychology eventually succumbed to the years of Echeverria's leftleaning verbal barrage resulting in cutbacks in private investment and a torrent of capital flight On leaving office Echeverria said that the accomplishments of his administration will be better understood in the future than they are today He is probably right Although is i ediate legacy to Lopez Portillo appears to be a 1 II ' · · -· ' •· ·tilllllNoT RELEASABLE TO FOREIGN NATIONALS NOT RELEASABLE TO CONTRACTORS OR CONTRACTOR-CONSULTANTS UIC ASSIFIED ·--• ' - I -- __ _ national economy in disarray and a badly divided society these are short-term effects that Lopez Portillo--with skill and a little luck--can overcom in the first years of his · term In the long run Echeverria's investments in infrastructure should provide a solic basis for further expansion of Mexico's fundamentally sound economy--particularly in petroleum and steel There is however another bequest from EchEwm ria that is likely to cause difficult medium-term problems for Lopez Portillo By raising the expectations of the landless campesinos for more land and of labor for continuing wage increases Echeverria encouragecl demands that Lopez Portillo could fulfill only at the expen e of agricultural productivity and higher industrial pr ces However higher productivity and greater production are majo components of Lopez Portillo's economic stab iJ ization progr·am Openly to deny these demands could re' uirH stern repressive measures Lopez Portillo is more likely to follow the time-honored-and more prudent--course of watoring down demands by persuading sector leaders of the m ed for restraint The new President will find his ability to achieve compromise between conflicting interest grc ups put to the test from the very first days of his administration Lopez Portillo Lopez Portillo at 56 bri igs a variety of experience and skills to the presidency w iich should stand him in good trtead at this juncture in Mexico's political life Trained as a lawyer he taught history nd political science for some 20 years at Mexico's National University and at the Polytechnic Institute His public service career includes ex Perience in the Secretariat of National Patrimony and in the Secretariat of the Presidency and he has served as Director General of the Federal Electricity Commission and as Secretary cf Finance He is an intellectual and a pragmatist as well as a skilled administrator willing to delegate authority and interested in streamlining the government structure His style is to emphasize reason and compromise rather than rhetoric or ideology and he is inclined to take a realistic and moderate approach to problems Inaugural Speech·· Lopez Portillo's inaugural speech appears to give a good picture of the man his style and his priorities • Jllll NOT RELEASABLE TO FOREIGN NATIONALS NOT RELEASABLE TO CONTRACTORS OR CONTRACTOR-CONSULTANTS UNClASSIFIED UMClASSlf EO - 4 - Statesmanlike--in parts eloquent--it was clearly an allout effort to restore the heavily eroded confidence in government In it he realistically acknowledged the many problems facing Mexico and frankly admitted that he needed time and the cooperation of all lements vf society to deal with them Emphasizing that the greatest danger to Mexico is fear he asked for time patience faith and goodwill to bind up the nation's wounds -- The address largely devot ed to economic policy called for an austerity program and a national effort to increase production and promised to rest ructure taxes cut government spending reduce foreign borrowing control imports and attack the problem of inflatiot Lopez Portillo did not outline specific programs but spoke at length on the economic policies that his government would pursue --Exchange rate No f·•xed Eixchange rate was announced and no promise was ir ade tc establish one in the future The President howe· rer spent an appreciable amount of time explaining to the public the real meaning of devaluation and indicated that he would introduce measures designed to disce urage capital flight • --Bal ance of payments _ The size of Mexico's huge foreign debt was not mentioned but the President promised that foreign borrowing by the public sector will be limited to that required for capil al goods attention wil l be given to _increasing labor--intensive exports and for the private sector moves will be made to substitute tariff protection for import quotas --Investment solicy The government will seek to focus domestic an foreign investment prirnaril y on agriculture and livestock energy petrochemical s mining steel capital goods transportation and basic consumer goods --Tax policy The President called for the adjustment of tax rates for inflation and the reinstatement of progressive taxation of incomes To encourage reinvestment higher tax rates will be applied to· companies' distributed profits --Wages and rices _ Stressing the need to avoid further det ioration of income distribution the President O T RELEASABLE TO FOREIGN NATIONALS NOT RELEASABLE TO CONTRACTORS OR CONTRACTOR-CONSULTANTS UNClASSIFIEO -- 5 - proposed to tie salaries tc- an improved cost-of-living index and to make strong efforts to control inflation --Natural resources Mexico must make rational but Intensive use of its natural resources Citing fossil fuels as an example Lopez Portillo warned against past errors of senseless waste and pressed for improved use of such non-renewable energy sources as oil gas and coal until techniques in atomic solcir- - a-nd geothermal energy are developed --Agriculture Mexico will emphasize the need to become self-sufficient in food prcduction and a program will be set up for tectmical research in tropical agricul tural areas Lopez Portillo did not however spell out his policy on agrarian reform --Industrial development SF cial emphasis will be placed on stimulating the a gricultural mining and steel industries with support for small- and mediumsized operations A special ministry will be set up to coordinate industrial se ctor affairs Foreign policy was dealt wi th only briefly The Pref ident stressed the continui t y of Mexico's traditional foreign policy based on the principles ·of sovereignty independence and international solidarity He pledged support· for the Charter of Economic Rights ai d Duties of States CERDS and reiterated Mexico's determination to continue to gress for th peaceful resolution of conflicts and the prohibition of weapons that thre aten humanity's existence Finally Lopez Portillo proposed three new laws related to reform of government administration which indicat his concern for streamlining government structure in order to increase its efficiency and responsiveness --an administration law to reorganize and regroup the cabinet ministries possibly creating a few super ministries1 --a public debt law that would give the Mexican Congress better control over executive branch expendit_ures _and --a governn t expenditure law that would place a single ministry similar to the US Office of Management and Budget in charge of the budget and government spending NOT RELEASABLE TO FOREIGN NATIONALS NOT R E E TO CONTRACTORS OR CONTRACTOR-CONSULTANTS '' I - -- 6 - Ut ClASSiFIED The Cabinet Lopez Portillo' s selectior s for cabinet and other high government positions are genera Uy of high quality and have been favorably received by polj tical groups of the center and the right Breaking with the E cheverria administration Lopez Portil lo has demonstrated his independence by surrounding himself with close associates and has rete±n ed only two of Echeverria's former cabinet officers--both of whom received posts of lesser import ance While many other Echeverria appointments have bE en kept on in second- and third-level positions Lopez Pc rtillo has made it clear that he intends to be his own man--another reassuring sign to the private sector Among his major cabinet appointments are --Secretary of Government resus Reyes Heroles --secretary of the Presiden ry- Carlos Tello Macias --Secretary of Finance Julio Rodolfo Moctezuma Cid and --Secretary of Foreign Rela1 ions Santiago Roel Garcia These men are close to Lopez Portillo pave broad previous experience in government and 9enerally have established good records in administration planning and finance • • The relative importance and responsibil ities of some of the other cabinet positions remain unclear pending the passage of Lopez Portillo's bill to reorganize the government In his proposal al read before Congress the P esident seeks to streamline the unwieldy Mexican ureaucracy in order to reduce waste and duplication and to improve its useful ness as an instrument of planning His program calls for --a merger of the Secretariats of Agriculture and Hydraulic Resources to maximize agricultural and forestry production --a combined Secretariat of Patrimony and Industrial Development noting that energy resources are the key to Mexico's development and that only by their sound and expeditious exploitation can basic industries flourish illlliilllll NOT RELEASABLE TO FOREIGN NATIONALS NOT REwsm E TO CONTRACTORS OR coi _TRACTOR-CONSULTANTS UNCtASSIFIED - 7 - U Glt SS F ED --a new Secretariat of Commerce to coordinate production and distribution to promote the competitiveness of Mexican exports and to mana re import control policy --a new Secretariat of Human SE ttlements and Public Works to unite government pr grams related to housing population and urban welfar -· --a new Secretariat of Programning and Budget to combine the planning and budget acti ities now scattered among three Secretariats and --the creation of a Secretarial of Fishing to encourage exploitation and consumption of -fisheries resources Prospects Many of the probl ems facing Lopez i ortil lo are the enormous and intractabl e issues that faced his predecessor-skyrocketing population growth a staggering lll employment rate and an ever-widening gap be·t ween rich and poor ae·fore he can begin to wrestl e with thes1 however Lopez PortiLLo must first deal with more immediate probl ems left him by Echeverria restoration of c nfidence in government stabilization of the economy improvemc nt of balance of payments and reconciliation or compromise between such conflicting interests groups as business and labor peasants and landowners On some of these he has made a good beginning • --his inaugural address stres ging cal m reconciliation and confidence was well rec aived by the public --his cabinet appointments indicating responsible administration buoyed the mood of the private st tor --the armed confrontations over land invasion appear to have been diverted into legal channels at least for the present and --his private talks with businessmen have garnered support for his first investment and development programs His next immediate chall enge came from labor's threat to demand huge wage increases on January l which if granted coul d have seriously jeopardized economic stabilization measures However a compromise was achieved with increases of 9 and 10 percent authorized In his choice of - NOT RELEASABLE TO FOREIGN NATIONALS NOT RELEASABLE TO CONTRACTORS OR CONTRACTOR-CONSULTANTS UICtlSS f EO - 8 - the highly capable and efficient Pedro Ojeda Paullada former Attorney General for the post of Secretary of Labor Lopez ortillo seems to have indicated his concern that the labor sector may present his administration with some of its most difficult problems Ojeda's effectiveness is increased by the addition to his team of Alejandro Gertz formerly his executive officer in the Attorney General's office · -· If private-sector confidence can be restored reversing capital flight and encouraging savings and investment Lopez Portillo will likely turn to the two major items stressed in his campaign --stimulating agricultural production to·make Mexico self-sufficient in food create jobs in laborintensive agriculture and provide farm products £ or exporti and ·--increasing development of Mexico's energy resources particularly petroleum and natural gas to fuel an expanding economy and provide needed foreign earnings The problems facing the Lopez Portillo government are formidable and the most deep-rooted cannot be solved within the term of one administration However Mexico's basically sound economy and wealth of natural resources should with careful nurturing and a favorable international economic climate provide the growth necessary to keep those problems within manageable limits • • Implications for Mexican-US Relations Mexican-US relations in the main friendly and cooperative for three decades suffered during the term of President Echeverria His verbal blasts at the us economic imperialism and allusions to dark interests promoting Mexico's economic destabilization took a heavy toll of US goodwill as did his unprecedented for Mexico activism in international forums and his ardent espousal of Third World causes Lopez Portillo is well aware that these actions have hurt Mexico in tangible ways including a drop in US tourism and reduced US investment He has repeatedly stressed his desire for a friendlier more cooperative relationship with the US and indicated that his choice of Aniliassador to the us would be one of his most important appointments He has chosen Hugo Margain a former Finance Minister who served NOT RELEASABLE TO FOREIGN NATIONALS NOT RELEASABLE TO CONTRACTORS OR CONTRACTOR-CONSULTANTS UNCLASSIFIED • • • as Ambassador to the US fr m 1965 to 1970 and most recently as Ambassador to Great Bri· ain where he is said to have forged strong economic links for Mexico among British financial circles Margain has long been a champion of Mexico's efforts to assert greater political and economic independence from the US He neverthel13ss favors a close working relationship between the two CQUntries on matters of mutual concern This coupled with his strong economic and financial background points toward • he course that7' opez Portillo will pursue with the us emphas Lzing --friendship and cooperation but not at the cost of compromising Mexico's independent posture --increased us investme11t in Mexico but channeled into are s serving Mexican development goals and --us trade preferences i o allow Mexico to boost its manufactured and agri ul tural exports to the US Lopez Portillo unders1 ands the constraints placed on these measures by the US pc litical process He hopes nevertheless that the US will nhow its support by early action on · such matters as an increas11 to $200 in US customs exemption to encourage more US tourinm to Mexico and legislation to grant Mexico a higher US l1 gal imtn'igration quota In three areas of major interest to the us--narcotics illegal migration and pet l oleum--the prospects are mixed Lopez Portillo has pledged his all-out support in continuing Mexico's efforts in the jo nt narcotics control program with emphasis on poppy eradication In the last year this program has seen some succoss in reducing the supply of Mexican heroin available in the US However corcuption among some Mexican officials is a problem and although Lopez Portillo has promised to wage war against this he is likely to find it a well-nigh impossible task Nevertheless to the extent that Mexico continues its commitment to the narcotics control program and that official corruption can be contained or limited some continued diminution of the quantity of Mexican brown reaching the US can be expected As long as the demand for narcotics in the US continues however Mexico will remain a prime transit point for drugs from other areas destined for the US • Illegal migration with deep roots in Mexico's most intransigent problems--population growth unemployment NOT RELEASABLE TO FOREIGN NATIONALS NOT RELEASABLE TO CONTRACTORS OR CONTRACTOR-CONSULTANTS UNClASSIFIED • ' rural and urban poverty--se ms unlikely to abate Lopez Portillo hopes to combat th c labor outflow by creating more jobs in industry and agriculture and is looking to greater us involvement to help crea· e those jobs Higher employment and lower birth rates howe- er are long-term approaches • In the meantime illegal miqration to the US will continue building pressures within the US for tighter border control and more deportations and b Jilding reactiOll S-in Mexico to violations of the migrants' human rights To the extent that such measures--if they are taken--prove successful in shutting off the US safety · alve the Mexican Government will face increasing social unrest at home A wide range of propos ls concerning undocumented aliens is being discussed t various levels in the Mexican Government ---- --resurrection of the b racero program for temporary Mexican labor --the formation of a joi nt us-Mexican commission to study the problem and make recommendations to both governments and --the creation of special industries in rural areas vf high emigration which · ould receive special support from the US Government for their exported products • Given the complexities of the issue the lack of a broad base of factual data on illegal immigration and Lopez Portillo's pragmatic orientation it seems likely that Mexico may propose a joint study as an initial step Mexico's oil reserves are presently estimate at some 20-40 billion barrels and exploration by Pemex the Mexican Government-owned petroleum company continues to locate promising areas for future drilling Furtr er testi11g may reveal that Mexico's reserves range close to the 60-billionbarrel mark--about the extent of Kuwait's With the increased investment in exploration drilling and production capacity of recent years Mexico has once again become self-sufficient in oil and in 1976 began exporting crude oil reaching a year-end rate of some 100 000 barr 1ls a day Given a major' production effort i t is estimated that Mexico's exports could reach 300 000 b d in 1977 and 850 000 b d in 1979 · • Lopez Portillo has called for increased--but rational-He has named as j' ·o ·_ 'l ·' ' ··exploitation of Mexico's energy resources 1ij § -- - - N O T RELEASABLE TO FOREIGN NATIONALS NOT RELEASABLE TO CONTRACTORS OR CONTRACTOR-CONf'ULTAN '3 • -- 11 - UMClASSIFIED Director General of Pemex Jorqc Diaz Serrano a long-time friend and a former prfvatE• contractor to Pemex for oil exploration Diaz is said to be highly knowledgeable on both the technical and financial aspects of petroleum production and to be favorably disposed toward Mexican private business and US oil companj_es Although pressures exist for a conse i_5mist approach and some quarters favor exporting only refined petroleum products Mexico's current foreign indebtedness would appear to dictate that--at least c ver the next decade--every effort be made to lift and export crude oil as rapidly as possible • _ This rapid production would allow 1exico to reduce its del t and provide capital for expansion of other aspects of its eccfnomy To make the conc rted development effort Pemex would require additional equipment and technical assistance especially for offshore drilling--a situation that could provide opportunities for tlS petroleum-related i11dustries • Mexic o' s nationalistic senE1i ti vi ties however would require the utmost delicacy in handling any foreign connections in the development of its petroleum industry Beyond the term of Lopez Portillo it seems J ikely that Mexico once its debt problems become more tractable would revert to a more conservationist approach to its petroleum resources • -there is a built-in re J uctance to allow any one factor to dominate the economy --too-rapid development and production would result in waste of associated nc tural gas and limit the long-term productivity of the fi elds In the international arena the us can expect a more moderate stance from Mexico and perhaps an atmosphere of better understanding in working out compromises on such issues as Law of the Sea disarmament and Third World demands_ for a New International Economic Order Lopez Portillo has felt that his predecessor's frenetic involvement in every Third World cause has proved of no benefit to Mexico and in fact has occasionally involved the country to its detriment in quarrels not its own Moreover Mexico's large foreign debt and its need for continued inflows of private and official investment tend to dictate moderate courses of foreign policy aimed at retaining US and other international confidence in the country's management Under Lopez Portillo NOT RELEASABLE TO FOREIGN NATIONALS NOT a RELEASABLE TO CONTRACTORS OR CONTRACTOR-CONSULTANTS UM llSS f EU • ' Mexico can be expected to focus its energies on the multilateral issues that directly involve its own interests On balance then while the us can expect a friendlier tone and greater cooperation in working with the Lopez Portillo government on matters of mutual concern it must also expect hard bargaining and must attempt -tQ forge ·• compromises over the thorny issues on which Mexico's interests diverge from those of the us • • Prepared by D E Morris x22557 Approved by L E Misback EXEMPT FROM DECLASSIFICATION SCHEDULE E O 116 2 SB 1 2 3 Cl assified by M Packman x20584 O T RELEASABLE TO FOREIGN NATIONALS NOT RELEASABLE TO CONTRACTORS OR CONTRACTOR-CONSULTANTS UNCLASSIHEU