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Mexico's Drug War and Booming Economy (Agenda)

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Colin Chapman: Mexico is shifting the ground of its long and deadly war against drug traffickers. At the same time, President Enrique Pena Nieto is attempt a set of major economic reforms designed to propel this middle-income country higher in the league table in G-20 and as a regional power. U.S. President Barack Obama has just spent two days with him seeking to boost the economic relationship with America's southern neighbor.

Welcome to Agenda, I'm Colin Chapman today with Stratfor founder and chairman George Friedman. George, can you start by talking us through the policy changes in Mexico?

George Friedman: Well, there's firstly a change in relations with the United States and this was clearly a long time in coming. The Mexicans want to approach the war on [drugs] somewhat differently than the Americans would want them to. They want to have policies that cause less violence in the north, and that frankly means somehow or another, if you can't defeat the cartels -- and that's really not the word, they're not cartels, they're gangs -- but if you can't defeat the gangs, form a cartel or in some way try to manage it that way.

One of the things they've done is shift the structure of their intelligence organizations so that they report to the Ministry of the Interior. But Mexico has done far more than that. Mexico is in the process of struggling with a range of questions from changing the way its telecommunication law works to changing some of the finance laws and above all, changing the way that Pemex works. For example, Pemex -- which is their national oil company, government-owned -- is constitutionally in a position where it must own all of the oil in Mexico. In other words, if an investor comes in to do something with Mexican oil, he can't own the oil. That's not unique in the world, but its fairly rare, and also cuts down the number of people who want to invest in Mexican oil. And therefore there is a move under way to somehow, if not get rid of that, modify it sufficiently to make Mexico attractive.

We have to remember Mexico is an enormously rapidly growing economy. In terms of parity power of purchasing, they're about the 11th-largest economy in the world. In nominal terms, you know, measured in dollars, they're about 13th I think. And so when you look at Mexico, this is a major country and behind all of the shifts in the narcotics trade and so on and so forth, the most important things that are happening are in the economy, which are fairly dramatic, and the Mexican government is trying to catch up.

Colin: Trade between the two countries has now risen to something like $500 billion. Mexico is an important source of prosperity to the United States and vice versa. So these reform plans are very important. Will they all go through?

George: Well, remember we've seen this growth in Mexico's economy without the reforms. If the reforms went through, we'll assume that Mexico will grow faster and it probably will. But the Mexicans are walking a tightrope between their national political culture, which grew out of a revolution that wanted to end foreign exploitation, and an economic reality that would benefit from foreign investment -- in effect renewing foreign exploitation. So whatever the idea of the ideal economy, which is usually what, you know, so foreign investor thinks the ideal economy is, the Mexicans are dealing in a very sophisticated fashion between the tension between their national principles and aspirations and economic growth.

So the question of how successful they will be will be measured not only by how much more growth has increased -- and I believe they are projecting growth at about 3.8 percent next year in Mexico, which is not bad in this world today -- but is also going to be measured by how much social stability is retained. So many in the financial markets are simply looking at the numbers, the Mexican government is looking at the numbers, and the stability of the country is going to balance between the two.

Colin: Will any of these policies clash with U.S. expectations?

George: Well, the United States has a fairly unreasonable view of Mexico. They still view Mexico -- many in America, not all but many -- as a Third World country. Others view it as a gangland much as the Europeans viewed Chicago as what America was all about in the 1920s. All of these are true in a sense but really more complex. Mexico is three countries: it is the borderland, which is where the supply chain of narcotics passes through; it is the area north of Puebla just south of Mexico City up to the borderland, which is one of the fastest-growing regions in the world -- economically diverse with foreign companies investing there, its quite extraordinary what goes on in that region; and then there is an area south of Puebla that really is part of Central America and is part of the Third World. So it's all three of these countries. The United States really doesn't know what to make of Mexico. To the Department of Justice, it's all about the borderlands. To investors, it's all about towns like Aguascalientes. And to yet others it is simply another Third World country filled with deserts and jungles. This is a very large, very complex country with a large population -- well over 100 million people -- and the United States is really having trouble coming to terms with the rapid changes taking place.

Colin: To what extent does Obama's changes in immigration policy affect all this?

George: Well, once we know what is actually going to be in place, it will have some effect on the mood and the spirit, but one of the interesting things is that going on here is immigration reform is coming in sort of after the fact. The American economy isn't growing that fast. Mexico's is growing faster. The tendency right now is for Mexicans to remain in Mexico, not come to the United States. But more interestingly Mexico now has an immigration problem of its own as Central Americans, particularly from Guatemala, are coming up into Mexico looking for these new low-paying jobs that are opening up in Mexico. So the immigration reform begins with the assumption that all Mexicans want to somehow come north and find work in the American fields and how shall we facilitate that. The really interesting point is that that's declining, Mexico is rising and the issue of immigration has become less desperate than it was even five years ago.

Colin: Now here's a question. Is there any reason to suppose the drugs will not continue to flow? That hundreds of millions of U.S. dollars in the drugs trade route won't continue to pass across to Mexico?

George: Well it'll billions of dollars. It is billions of dollars that pass into Mexico. One estimate is $40 billion. But so long as drugs are illegal in the United States, they will command a high price. Most drugs are low-cost agricultural products. Anybody who can multiply the value of those products by moving it north 200 miles, well, many people will do so and you're not going to stop the trade. One of the things the Mexicans have said consistently is the drugs are not a Mexican problem, they're an American problem because the Americans can't, after fighting the war on drugs all these years, do anything about them.

So from the Mexican point of view, continuing to try to interdict them has created a civil war in one region of Mexico, it has not come any closer to solving the problem, the Americans are demanding that they continued the civil war ad infinitum, but the Americans are not taking any steps to cut demand, or not effective steps. And therefore the Mexican government is really looking at this and saying, "Look, we can't go on this way. We can't stage a civil war in northern Mexico to cut drug supplies to the United States when United States is not prepared to work effectively to either cut demand or lower the price by legalization."

Colin: George Friedman, founder of Stratfor, ending this week's Agenda. Thanks for your company and until the next time, goodbye.

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