FROM THE OFFICE OF PUBLIC AFFAIRS

It’s good to be back in Mexico. When President Clintonwas here in May he spoke fondly of his honeymoon in Mexico. Myrelationship with the country has often felt more like a marriage-for richer, for poorer, in sickness, and in health...

I’m particularly pleased to be the first senior U.S.official to visit since last month’s elections. Thoseelections sent a powerful message to the world that Mexico’sdemocracy had come of age. After fifteen years of market reformsthe country has had the courage to take the next step - cementingthose reforms in more lasting, transparent and democraticinstitutions.

No one can say how this historic transition will proceed. Butone thing is certain: the U.S. will be with you every inch of theway. History, 2,000 miles of border and a host of commonchallenges bind together the fates of our two countries. Togetherwe can meet the challenge of seizing the opportunities of theglobal economy and raising the living standards of all ourpeople. Only together can we achieve that goal which PresidentZedillo spoke of in Chicago the other day -the goal of Asustainedeconomic growth....but with a human face.

I’d like talk today about Mexico’s recent past andits future, outlining what I would consider to be the main reformhurdles the government needs to cross to continue this new path.We in the Clinton Administration know -all too well -thatachieving change through consensus, rather than by decree, can bea grueling process. It is, though, the only way to make sure thechanges we achieve will outlast us.

I. Two landmarks

The economy turns a corner

When we look at the Mexican economy today we see an economythat has put crisis well behind it. You would hardly know thatjust a couple of years ago we in Washington were being lambastedfor pumping money into a sinking ship.

The unusually benign mood in international markets has helpedMexico. But Mexico would not have been able to take advantage ofthe congenial environment had it not been for the steadfastmonetary and fiscal policies which President Zedillo, MinisterOrtiz and Governor Mancera and their colleagues have pursuedsince the crisis. Short-term interest rates have fallen -and arestill falling. Inflation, too is heading downwards.

Best of all, the return to a healthier national balance sheetis at last filtering through to other parts of the economy.Output, as you know, grew over 5 percent last year. Mexicans maynot yet feel good about the recovery - but they certainly feelbetter. And there is every reason to believe that growth willmake a bigger impact on people’s real pay packets this year.Real wages are already heading upwards.

Back in the U.S. this return to health has shown, to thedoubters, why we and the international community were right tostand with Mexico as we did in 1995. Our faith in Mexico has beenrepaid -in dollar terms, more than 3 years ahead of schedule -andmany times over in its steadfast policies. Mexico, and the world,have learnt this was not a government that would choose the easybut misguided quick fix.

And so does the country

Last month’s elections were a second landmark ofMexico’s new era. President Zedillo went into themdetermined to show his commitment to a more truly competitivepolitical process. And he did. We can only hope that many whohave felt disenfranchised in previous times will now feel theyhave a stake in the new way of doing things -and a new way tomake themselves heard.

It’s genuinely exciting that such a process has begun inMexico because for too long we’ve heard it said that thegrowth enhancing market reforms we’ve seen here, and aroundthe world in recent years were not consistent with open andaccountable decision-making. Open your political system, thecritics warned, and watch the markets throw up their hands inhorror -and market reforms fall by the wayside.

Well, Mexico has staked a bold claim to a more democratic wayof doing things. And the markets -the markets seem to haveapplauded that decision. In almost any other market I can thinkof the risk premium on assets would have risen in the lead-up toan election as decisive as this one.

Yet in Mexico that premium just kept on gradually declining.What is more, Mexican markets have been only slightly affected bythe volatility which has spread through East Asian markets inrecent weeks.

Why such confidence? The hope must be that investors sawbeyond the short-term doubts surrounding the election and saw thelong-term prize of a more responsive, and thus more enduringframework for Mexican reforms. That’s the hope. But thisoutcome is hardly a certainty. There will be the continuingconcern that the markets are again buying into a happy ending tothe Mexican story -before it has really been written.

That uncertainty, and Mexico’s vulnerability to a changeof mood, makes it all the more important for it to continue toshow that market-led growth, and democratic institutions, arecomplementary goals -not conflicting ones.

II. The Road Ahead: sustaining growth

1. Macroeconomic Policy

A basic prerequisite for continued growth in the years aheadis continued sound policy -sticking with the same virtuous mix ofprudent fiscal policy, responsible monetary policy, and decisivederegulation which has put Mexico where it is today. That is jobone. But like the US, Mexico will only deliver better jobsand higher standards of living for its rising workforce byincreasing its sustainable rate of annual growth.

This country’s long-term growth rate may have risen inrecent years, but the government rightly called for furtherprogress in the medium-term economic plan it unveiled in thespring. There is no reason why Mexico should not grow by the 5percent or more the government has targeted -and every reason forit to try to do so. The difference, remember, between growing bythe 2 percent a year average Mexico achieved between 1985 and1994, and growing by 5 percent, is the difference betweendoubling national income in 36 years -and doing it in under 15.

The trouble, as you know, is that if Mexico relies too heavilyon foreign capital to finance its growth ambitions, that growthwill be vulnerable to the vagaries of market confidence -andother market factors beyond Mexico’s control. The onlysustainable way to faster growth is growth in the savingsavailable at home. In an open economy, how much a nation’speople save, and where they invest those savings is also atelling sign to the world outside of the confidence andinvestment opportunities which that country has to offer.

Long-term national saving rates do not go up by accident -nordo they do so quickly. But again, it is worth remembering what alittle more national savings can do. Inevitably, with or withoutlarge inflows from outside, the vast bulk of domestic investmentis still financed by its own citizens. It would require atwo-thirds increase in the foreign inflows, for example, forMexico today to achieve the same impact on investment as a 10percent rise in savings from home.

The government’s medium-term economic program targetsboth higher private and higher public savings. And the move whichbegan last month, from a public pay-as-you-go pension system, toone of privately managed individual accounts, should indeed raisenational savings in the medium and longer term.

In the mean-time, the government has targeted a balancedbudget by 2000, a laudable goal. Keeping this solid program ontrack -against the backdrop of a multi-party configuration inCongress -will be a challenge. Yet tight control on publicborrowing is vital for Mexico for the same reason it is vital tothe U.S. -because it is the single best way to support nationalsavings and ensure that the fast growth we have seen in recentyears can be sustained.

Economists and political scientists in recent years haveextensively studied what they call the political business cycle,the tendency for business cycles to track electoral cycles inmany countries. Alas, over the past generation, Mexico has been aclassic example of this theory, with pre-election booms followedby post-election crises. These are then followed by restorationof confidence by the middle of the Presidential term which thengives way to complacency setting the stage for the next round ofthe cycle. No economic challenge facing the Mexican economic teamis as great as putting an end to this cycle. This requirestransparency in all aspects of economic policy, constantvigilance with respect to possible imbalances, and a clearrecognition that market sentiment can change quickly andbrutally.

2. Open markets and deeper integration

For both the US and Mexico, sustaining growth will also meancontinuing to keep our common border open to trade and our twoeconomies looking outward. In doing this both governments havehad to take on those who would prefer to forget that sharedborder -and the advantage which closer integration can bring. Yetthose benefits are increasingly speaking for themselves.

Joint trade between the two nations has grown nearly 60percent since 1993, the year before NAFTA, with Mexico importingmore from the US last year than it did then. This, despite thedevaluation of the peso and the deep recession which followed.Mexico, with an economy 1/20th the size of the US, is now ourthird biggest trading partner, just behind Japan. Our trade withMexico is greater than our trade with all the rest of LatinAmerica combined. Meanwhile Mexico’s export sector has risento 32 percent of GDP, up from 24 percent in 1993, and a mere 11percent in 1980.

Combining the two countries’ resources and talents hashelped several North American industries make great stridesagainst their Asian competitors. And the benefits for consumersare all around us. People here are enjoying a wider choice, ofcheaper and better goods, than ever before -some with previouslyunthinkable services attached, like 24 hour free telephonenumbers.

That the country has been able enjoy these gains is a tributeto the Mexican government’s determination to keep marketsopen in the wake of the peso crisis rather than shut them tightas it did in 1982. And we are glad to see that Mexico is workinghard to build on that experience through even closer integrationwith its neighbors.

We see Mexico’s several bilateral trade agreements withChile, Venezuela and others as a potentially useful way toprepare the ground for the Free Trade Area for the Americas,which heads of government will start negotiating next spring inSantiago de Chile, and for which we will be working to obtainAfast-track authority from our Congress in the fall. We share, Ithink, Mexico’s interest in ensuring that FTAA, like NAFTA,will create trade, not merely divert it..

3. Investing in people and distributing growth more widely

In the Clinton Administration we’ve worked hard toreplace Atrickle down with Abubble-up -to ensure all workingAmericans have a chance to reap the benefits of our steady growthand low inflation. Prosperity has to be inclusive to be enduring.And as a former education minister President Zedillo has aspecial understanding of the need to invest in the population -sothe whole country seizes the opportunities of a growing globalmarket. In a world of fast-moving flows of capital and resources,a nation’s most distinctive resource is its people.

The government reaffirmed its commitment to a fair andequitable education system in the National Education Plan for1995-2000. This assigns a high priority to programs to reduceregional differences in access to a good basic education. Bothprimary and secondary school enrolment rates are higher in Mexicothan in much of Latin America. But as in the US, there are graveconcerns about the quality of the education which some of thepoorest receive. Equally, Mexico’s secondary schoolenrolment rate, at 55 percent, still falls well short of the 70and even 90 percent rates which have underpinned rapid growth incountries like Korea and Singapore.

It is a reflection of the government’s commitment to thisarea that Mexico will be organizing the discussion of educationthat will take place at next year’s Summit of the Americas.Clearly, there’s a lot more to do here in all our countries.But I am confident that the Mexican government will keep hold ofits priorities in the difficult budgetary negotiations which maylie ahead. We faced the same challenge in the balanced budgetnegotiations we have just concluded; and our belief in investingin our people, and in our future, won out.

III. And Strengthening Institutions

Economic reforms are easier to list -and easier to implement-than the many rules, agencies and customs which comprise theinstitutions of a modern democratic economy. And yet, the lessonof history is that this second stage of reforms is every bit asvital as the first. Markets are important. But they are notenough. The invisible hand needs the strong skeleton ofappropriate government regulation - and an abiding rule of law-if the true benefits of market reforms are ever going to berealized, and the scourge of corruption overcome. Social capitalis every bit as important to economic growth as human or physicalcapital.

The price of failing to build adequate institutions is higherthan ever in a world in which crime and corruption -and theprofits which flow from them -can cross borders with the flick ofa switch. We in the US face this every day as we struggle to giveour enforcement and supervision agencies the same sophisticatedskills and equipment as the criminal elements they are trying tooversee. Yet Mexico already has living examples of effectiveinstitutions in the making, like the reformed electoralcommission, whose independence was so vital to the credibility oflast month’s election.

Other areas will require very different approaches. But Iwould like briefly to comment on three tasks, all of particularrelevance to Treasury, and to the US.

Strengthened banking supervision

The first is the job of safeguarding the banking system, notmerely in day to day supervision but in the laying down of alonger term framework to see it into 21st century. The crisis ofrecent years is now well behind us -though, as you know, pocketsof fragility remain. But with the last stages of theconvalescence comes an even greater need to focus on prevention.

The new institutions which the government put in placeimmediately after the crisis have helped support Mexico’sfinancial credibility at a critical time and have earned thegovernment the respect of many of my colleagues in Washington. Wehave also welcomed the introduction of new accounting standards,which brings Mexican practices closer to those of the US andother international accounting standards.

That said, the challenge of balancing the conflicting demandsinvolved in modern day global banking is hardly over in Mexico-any more than it is over in the U.S. The CNBV is right to betalking about phasing out the universal deposit insurance Mexicohas enjoyed for so long. But clearly, it will be a constantstruggle for both the U.S. and Mexico in the years ahead toensure that our supervisory skills are up to the challenge whichmodern-day derivative and other financial market transactionspresent.

Combating money laundering

In this area, too, we see impressive progress being made inthe creation of institutions, laws and expertise to tackleinternational crime at its Achilles Heel. The drug kingpins andother bosses of organized crime may be able to separatethemselves from their criminal street-level activities, but theycannot keep entirely clear of its profits.

We in Treasury have been working hard to come up with new andinnovative ways to close off the channels the launderers use tomove their funds into the economy, and to put the launderersthemselves behind bars. Both individually and in partnership withus, the Mexican government has recently been making importantprogress on the same fronts.

First came the law passed last summer to criminalize moneylaundering and increase the penalties against it. This has beenfollowed by the issue of new regulations aimed at insulatingcommercial financial institutions from funds from illegalsources. As you know, we are offering our help to the authoritiesto improve these regulations and make them even more effective.Yet it says a great deal about the will of the government thatthese regulations were conceived, designed, and issued, all inthe space of a year. We were also honored to participate in theinauguration of Hacienda’s new financial intelligence unit,which should also substantially enhance our ability to worktogether in investigations.

And cracking down on illegal trafficking of firearms anddrugs

The creation of the new Mexican organized crime unit should beanother important step on the road. The flip-side of poorenforcement tends to be corrupt enforcers, and we applaud theAttorney General’s ongoing efforts to rid its ranks ofcorruption and develop dedicated long term anti-narcotic forces.We in the Treasury have been providing training and technicalassistance to both the Attorney General’s office and theother investigative authorities to support their efforts.

The High Level Contact Group which Presidents Clinton andZedillo set up in March of 1996 has further aided our efforts toinvigorate and improve our partnership against drugs. The closercoordination which this set in train has shown through inimproved day to day coordination between the US and Mexicanauthorities and has resulted in significant in-roads againstnarco-traffickers across our borders.

In the last month alone we have seen numerous major seizuresof illicit goods at the border. Over 1100 pounds of Marijuana wasseized in Douglas, Arizona, and well over 1900 pounds of the samedrug, along with 4 vehicles, was found in a ranch by the borderin the same state. A coordinated investigation with severalMexican agencies has also resulted in the capture of over 25,000rounds of ammunition, which were about to be illegally exportedfrom the US to Mexico. We recognize that illegal trafficking is atwo-way trade; the challenge is to have cooperation and two-waytrade in information to match it.

Conclusion: a brave and difficult new world

Winston Churchill was right. Democracy is the very worst formof government known to man: except for all the others. WhenCongress convenes in September you will be heading into newterritory finding out how to forge a consensus, but hold on toyour priorities. It will be difficult. But as I’ve said,building a broader coalition for change also makes it moreenduring. We know that from our own experience: almost everylasting reform of our public sector has been passed withbipartisan support.

It is asking a lot to manage this transition from one kind ofsociety to another at the same time as steering the economythrough the challenges of the new global economy. It is askingmore -certainly than any of today’s developed economies hadto achieve in a comparable time period. But as President Clintonsaid here in May, the Athe electricity of change is surgingthroughout our hemisphere, and nowhere more hopefully than inMexico.