"MEXICO: THE BUSINESSMAN S PERSPECTIVE" JANUARY 22, 1987

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP92T00533R000100110019-9
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 12
• Document Creation Date: December 20, 2016
• Document Release Date: February 1, 2008
• Sequence Number: 19
• Publication Date: January 22, 1987
• Content Type: REPORT

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"MEXICO: THE BUSINESSMAN'S PERSPECTIVE"
JANUARY 22, 1987
DIGEST OF CONFERENCE
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DIGEST OF CONFERENCE:
"MEXICO: THE BUSINESSMAN'S PERSPECTIVE"
Held On January 22, 1987
The political and economic stability of Mexico is of major interest to
U.S. policy-makers because of the country's geographical proximity to
and economic relations with the United States. However, Mexico's current
economic crisis is endangering this stability. In the midst of this
crisis, a potentially stabilizing force is growth in the private
business sector.
As part of a larger effort to improve its understanding of Mexico's
political and economic system, the Central Intelligence Agency requested
that Deloitte Haskins & Sells prepare and host a conference to explore
both the prospects for growth in the private business sector and the
consequences these prospects would have for political and economic
stability in Mexico. Deloitte Haskins & Sells proposed to provide the
viewpoint of U.S. businesses operating in Mexico, particularly with
regard to the potential for future business opportunities.
On January 22, 1987, Deloitte Haskins & Sells hosted the conference
titled "Mexico: The Businessman's Perspective." The speakers were
businessmen, academicians, and economists. The participants consisted of
personnel from several government agencies, including representatives
from the Agency. The results of the conference are summarized in the
following digest.
The objective of this digest is to summarize and highlight the major
issues raised and discussed at the conference for future reference by
Agency personnel. The major points presented in the panel sessions by
the various speakers are listed below, including issues discussed during
the question and answer sessions that followed the panel presentations.
Brief summaries of the principal conclusions reached in the panel
sessions are also included.
STAT
A. Major Points:
(1) Economic changes are affecting the political process in Mexico.
(2) There is mounting pressure on the current highly structured and
centralized one-party political system--ruled by the majority
party PRI--to change. This pressure is the result-of two recent
developments:
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. A growing consensus among the politically active urban
middle class segment of the population in favor of a
genuinely decentralized multi-party system, which is
indicated by a rise in support for the minority party PAN
. A growing desire among the aforementioned group for a
genuinely federal political system in which elected
officials more clearly represent their constituents.
(3) Both developments are intensifying as a result of the increased
circulation of dissenting literature.
(4) While the PRI candidate will likely win the next election, he
will also likely rule with little legitimacy.
B. Conclusions
The potential for a change in the political process is increasing
steadily. The ramifications of how the current governing elite respond
to this potential will significantly affect future political and
economic policy-making.
A. Major Points
STAT
Indicators of the investment climate in Mexico are
providing conflicting signals.
. Recent policies have met with mixed success:
"fiscal hemorrhaging" has stopped under the
International Monetary Fund (IMF) program, but
deficits remain very large
monetary policy has essentially "ratified" past
inflation, but. real interest rates are lower
exchange rate policies have helped to offset the
decline in oil exports through more capital in-flow
and more non-oil exports
subsidization of domestic industries has decreased
and public sector prices have increased
while the number of state-owned enterprises (SOEs)
has decreased, the amount of public sector output
has not significantly decreased
with Mexico's entry into the General Agreement on
Tariffs and Trade (GATT), tariffs have been reduced
and the trade situation is improving
the debt-equity conversion program is reducing debt
and encouraging new capital infusions
direct financial intermediation by the state is
decreasing.
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There are three main concerns about the goals of current
policy:
the probable growth rate in 1987 of 4.5 to 5.5% will
be enough to keep pace with the growth in the labor
supply, but not enough to help in the servicing of
external debt
an apparent acceptance of high nominal deficits
indicates inflation reduction is a low priority,
which could have a negative impact on private
investment as the government finances the deficits
presidential elections typically have been
disruptive in terms of policy stability, and de la
Madrid's six-year term expires in two years.
STAT
Recent developments in trade relations between the U.S. and
Mexico have not been well coordinated and indicate a lack
of recognition on the part of U.S. trade policy-makers of
Mexico's trade situation:
in exchange for reductions in domestic subsidies,
the 1985 trade agreement granted relief to Mexican
exporters by requiring application of the "injury
test" before the imposition of countervailing
duties under the current U.S. law
Mexico's entry into GATT has resulted in lower
tariffs, but at great cost to the Mexican economy
Congressional prioritization of the criteria for
awarding duty-free concessions under, the Generalized
System of Preferences (GSP) has not recognized
Mexico's policy initiatives and resulted in fewer
benefits.
Protectionist pressures in the U.S. are worrying Mexican
business interests, particularly with respect to the
countervailing duty law; continued subsidization of energy
products for domestic industries could subject Mexico to
future countervailing duties.
STAT
There have been recent significant changes in both U.S. and
Mexican tax laws; changes in the latter are designed to
fulfill commitments to the IMF program and broaden the tax
base.
Mexico has suffered significant reductions in tax revenue
due to reductions in the tax base, caused by:
inflation
tax avoidance and tax evasion.
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. In order to increase tax compliance, Mexico has instituted:
more mandatory reporting
broader powers for tax authorities
increased civil and criminal penalties.
On balance, the new tax laws are neutral with respect to
investment, but some-provisions offer substantial
investment incentives, including:
immediate depreciation of taxable assets by 36 to
937. in which the present value of future deductions
are taken up front in one lump sum
the writing down of inventories.
Mexico is not a tax haven for offshore manufacturing
interests, since the maquiladoras are not tax-motivated
creations.
STAT
. While 6,978 companies with foreign capital participation
are operating in Mexico, direct foreign private investment
in Mexico is only 5% of total investment.
The current recessionary period, which dates back to 1982,
has had both a psychological and investment confidence
impact; prospects for moderate future growth are dependent
upon domestic and external factors and the timing of those
factors, all of which are very unpredictable.
New fixed investment decreased in 1986 by 15% in real
terms, but growth rates in the future should be better,
depending on:
the real and perceived success of de la Madrid's
overall economic recovery efforts
the level of domestic and foreign funds available
for investment
how successful companies in Mexico are in export
markets.
A current goal of the Mexican government is to average 30%
annual growth in manufactured exports (in dollars) for the
period 1986 to 1990; this goal is extremely ambitious,
considering industrial production in real terms is down in
many key sectors.
Direct foreign investment has been regulated since 1973 by
the so-called foreign investment law, which among many
areas restricts foreign equity participation in Mexico to a
maximum of 49%; major exceptions to the law are in the
in bond or maquiladora industries, where plants can be 100%
foreign-owned.
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New private foreign investment has decreased sharply in
recent years in all major sectors except for the
automotive, computer-related, and in bond industries.
. Government policy toward direct foreign investment is
currently more liberal than at any time since the foreign
investment law was promulgated:
projects are being handled on a case-by-case basis
by the National Foreign Investment Commission (NFIC)
more exceptions to the law are being allowed in
different manufacturing areas which provide for 100%
foreign equity ownership
some financially troubled companies are being
"de-Mexicanized" through temporary allowances for
majority or 100% foreign ownership.
Government policy is currently directed at encouraging
foreign companies to offer:
substantial fixed assets investment
a definitive and ongoing exports program
the transfer of technologies, particularly in
manufacturing.
. New factors affecting investment decisions in Mexico are:
the new tax laws in the U.S. and Mexico
the updated controversial law on patents and
trademarks in Mexico
the credits capitalization or debt-equity conversion
program
the revised laws regulating mutual funds which open
up foreign participation in the establishment and
operation of such funds, subject to NFIC approval.
. The maquiladora industries showed the strongest growth and
repesent the best opportunity for future direct foreign
investments.
Flexibility in foreign investment policy is still subject
to capricious decision-making. STAT
. There is a tendency in the maquiladora industries to accept
U.S. inputs and place the factories near the border.
STAT
J I /-H I
. Attempts to increase the tax base are not likely to be
successful because of governmental legitimacy problems and
a pervasive unwillingness to pay. STAT
. Many experts expect a boom in the underground economy to
result from the changes in the Mexican tax law. STAT
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B. Conclusions
Economic policies, especially in the areas of trade and foreign
investment, are creating a more favorable climate for foreign business
opportunities. However, confidence in the 'future direction and success
of these policies is not high in either Mexico or the U.S. Furthermore,
U.S. policy initiatives are not fully responsive to the needs of the
Mexican economy. The prospects for future growth in the economy--and
growth in foreign investment in particular--are consequently uncertain.
A. Major Points
STAT
The official open unemployment figure reported to the
International Labor Organization (ILO) by Mexico of
6 to 7% does not reflect the economic reality, particularly
in the hard hit industrial sectors and major urban centers.
The level of training and expertise in many areas of Mexico
is low and does not fulfill the expectations of foreign
firms attempting to operate there.
Many of the maquiladora factories hire women, which leads
to a step-wise migration and immigration problem: the men
follow the women to the northern areas (where most of the
factories are located), crossover into the U.S., and
are eventually followed by the women as well; skilled labor
is lost in the process.
Generally, the unions have cooperated with the government
and kept silent, despite the government's failure to keep
real wages from falling; the potential for future labor
unrest is growing.
. The transfer of technologies and information is often
limited by cultural factors which preclude the foreign
companies from an awareness that the transfer is incomplete.
STAT
The primary concern of the Mexican government regarding
foreign business ventures is what the operation leaves
behind for Mexico, particularly in the areas of exports and
technology transfers.
The government is the largest client for computer and
computer-related products due to:
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the government's centralized structure
the centralized and nationalized nature of the
financial industry
the number of state-owned enterprises.
. Moving hardware and equipment across the border is easier
than moving software because of:
translation problems
cultural differences
different laws and business practices which require
different approaches to software development than
those used in the U.S..
The computer industry is capital intensive, resulting in a
high cost of operation; labor costs are also high because of
the shortage of computer specialists and the high wages
these specialists earn world-wide.
Even though the level of technology in Mexico (.e.g.,
real-time telecommunications) is not sophisticated, the
ability of Mexican personnel to operate with what they
have is comparable to what exists in the U.S..
. The reduction in the amount of the foreign tax credit under
the new U.S. tax law is potentially damaging to U.S.
business interests with respect to current and future
Mexican ventures.
STAT
. Operating a business in Mexico is facilitated by examining
worst-case scenarios and adopting appropriate strategies
in advance of crises.
The key steps in understanding the "prosper-survive" cycle
operative in Mexico and managing effectively through it are:
decide the key personnel to be retained during the
survival period
decide the tertiary customers to be released during
the survival period
decide the marginal products to be eliminated during
the survival period
examine the income statement to determine if a
break-even result is possible during the survival
period
decide the level of sales to the government during
the survival period
price replacement costs in dollars
establish fall-back positions with respect to the
supplies of inputs and foreign exchange.
After performing the above analyses, the following concerns
should be addresed:
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the company's employment policies
the company's code of conduct
the company's direct and indirect labor costs.
. A low profile with respect to the government is the best
approach for a company to take.
. On balance, Mexico is a good place in which to operate.
. The Mexican worker is typically bright and eager to learn,
but is not particularly loyal in the face of competing
recruitment offers which confront the more skilled workers.
The government is actively promoting growth in the in bond
industries, which are now the second largest source of
exports; labor is the principal value added in these
industries, with inputs typically coming from the U.S..
. The principal concerns facing Mexican exporters are:
unresponsive or negative attitudes of U.S. trade
policy-makers towards Mexican exports, particularly
the exports from in bond industries
the resistance of U. S. policy-makers to classifying
Mexico as a beneficiary of the Caribbean Basin
Initiative (CBI) rather than as a donor
the political and economic stability of Mexico
the government's potential inability to deal with
growing labor unrest and the current socialist
labor laws which, for example, require that workers
laid off must still be paid
the view of indigenous companies that the in bond
industries represent a potential threat to current
export markets
punitive measures taken by the U.S. against Mexican
exports.
. U.S. policy-makers should develop a comprehensive trade
policy and recognize private sector initiatives from U.S.
businesses.
It was the general consensus of the group that while
corruption in the Mexican government is a problem, the
long-term interests of foreign businesses operating in
Mexico are best served by not engaging in it.
Potential harassment tactics by the Mexican government
should be accounted for in the strategic planning of a
foreign business.
STAT
STAT
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B. Conclusions
While it is possible to operate profitably in Mexico, an understanding
of the political, economic, and cultural factors and sound strategic
planning by management are necessary in order to effectively manage
through the "prosper-survive" cycle which exists in Mexico.
A. Major Points
Much of the discussion about the need for policy changes
is a "smoke-screen"; the principal factors to consider in
assessing the potential for policy changes are:
the geographical proximity of Mexico to the U.S.
the rise in Mexico's population
the large role the state plays in Mexico's economy
the changing and predictable political cycle which
Mexico exhibits because of the six-year presidential
term
the form of the political system--authoritarian and
centralized--affects how business is done in Mexico
the growing "internationalization" of Mexico from
increasing economic and cultural contacts with the
international community.
Within the last two years of de la Madrid's term, radical
policy changes are highly unlikely.
U.S. investment in Mexico will continue, but it is
necessary for U.S. policy-makers to be as open in dealing
with Mexico as possible.
. The main issues in formulating the forecast are:
the announced and applied economic policy in Mexico
the choice of policy goals: economic growth versus
inflation reduction
the impact of external debt on the economy.
The main assumption of the forecast centers on the degree
to which announced policy is applied, particularly with
regard to the growth-inflation trade-off.
STAT
STAT
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. The forecast also builds off the assumptions that
soon-to-be-introduced foreign financing will increase
general credit availabilty and that optimistic increases
in private and public investment will occur.
average annual growth over the next two years of
3 to 3.5%
higher inflation in 1987 and 1988
higher current account deficits in 1987 and 1988
negative transfer of credit from abroad
likely introduction of major economic reforms (an
Azteca plan) as soon as 1987 and as late as 1989
renewed external debt renegotiations as early as
1988.
Renegotiation of external debt will likely be repeated
every two to three years until the international monetary
system finally writes off the debt; only if the problem of
negative transfer of credit from abroad can be permanently
solved will these renegotiations cease.
If one compares average annual rates of inflation and growth
under de la Madrid with average annual rates under previous
administrations, one finds significant variances:
previous rates of growth all averaged around 6%,
while de la Madrid's will likely exhibit zero
average growth
previous rates of inflation averaged between zero
and 30%, while de la Madrid's will likely exhibit
100% average inflation.
The risks associated with the forecast are:
the Mexican government placing a higher priority
on reducing inflation as a result of social strain
introduction of an Azteca plan--currently being
contemplated--of radical economic reforms
significant changes in oil prices which alter the
level of IMF relief (over $14 per barrel means less
relief and less than 99 per barrel means more)
foreign exchange problems in 1988 resulting from
postponements of banking agreements.
STAT
Massive global economic structural change will occur in the
mid to late 1990s, resulting in:
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exchange rate realignment
movement of currently prospering countries into the
survival period of the "prosper-survive" cycle
greater prosperity for the U. S. and more
opportunities for both domestic and foreign
investment in the U.S.
Mexico can potentially benefit from these changes and the
externalities they will generate around the U.S.
. In addition to the foreign financing which Mexico has
sought, there are significant monies available for
short-term use immediately across the border; these monies
would have to be included in any comprehensive measure
of the Mexican money supply and constitute an additional
source of funds for financing economic policies.
Future investment will focus on the maquiladora industries,
and the U.S. government should work with the Mexican
government to exploit this as the area with the most
potential for growth.
. U.S. businessess will have to re-orient their strategies
away from trying to penetrate local markets and toward
developing export markets for their Mexican products.
. 1987 is a highly political year, so only hyper-inflation
could generate tensions severe enough to result in radical
policy changes. STAT
. The PRI is still the party with which to cooperate for most
Mexican businessmen--even in the northern areas--despite
recent apparent gains in public support for the PAN party.
Most of the increase in the nominal government deficit is
directly due to the high inflation which Mexico has
experienced, and inflation impacts more on the internal
component of debt than the external component (which is
valued in dollars.)
B. Conclusions
STAT
STAT
The outlook for future investment opportunities in Mexico is uncertain
because of the modest prospects for growth and the potential for future
policy instability. In the long term, prospects look much better for
Mexican exports and for foreign investment opportunities in the
exporting industries. Any decision to invest will have to be balanced
against an assessment of the short-term and long-term interests of the
company and an assessment of the political and economic stability of
Mexico.
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