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Expert: No Rush to U.S. by Panicked Mexicans

Thursday, 12 Mar 2009 08:49 AM

By Dave Eberhart

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Leonardo Martinez-Diaz, Political Economy fellow in the Global Economy and Development program at the Brookings Institution, tells Newsmax that it is unlikely that fearful and/or impoverished hordes of Mexicans will seek sanctuary in the U.S.

Martinez-Diaz, deputy director of Brookings’ Partnership for the Americas Commission, says that although some nervous members of the U.S. Congress had just questioned Homeland Security officials about contingency plans for such an onslaught, that “short of a major ecological catastrophe, I don’t think it would happen.”

The former research associate with the Global Economic Governance Program at Oxford University advises Newsmax that there is, however, an immigration impact connected with the current economic crises ongoing in both the U.S. and Mexico. “I haven’t followed these numbers recently, but in general, we know that Mexican migration to the U.S. tends to follow the U.S. business cycle quite closely.

“So we can safely expect migration to fall, with a small time lag. In the last crisis [1995], many people left Mexico because Mexico’s economy was tanking, but the U.S. was doing fine. Now Mexico is in trouble, but things in the U.S. are worse. So the calculation has changed for many migrants.

“However, as soon as things appear to get better in the U.S., numbers will pick up. Immigrant networks are very good at communicating this information back and forth cross the border.”

Newsmax joined in a Brookings-sponsored no-holds-barred Q and A session with the expert Wed. afternoon. Here are some excerpts:

Q. What do you think should be the U.S.’s involvement in helping the Mexican economy?

A. An important and sensitive political question. In 1995, you will recall that the U.S. helped put together a multi-billion rescue plan for Mexico. President Clinton used an obscure fund to make this happen, as Congress refused to give him the money. Clinton paid a big political price, but it worked out in the end. The package helped Mexico get out of the crisis, and the U.S. got its money back with interest, early.

What is different now? Things are not as bad this time. The Mexican banking system is in much better shape, so a banking bailout is unlikely. What the U.S. can do is two things: provide an emergency swap line to lend Mexico dollars quickly in case of an emergency. This swap line is already open. And, two, it should use its influence in the IMF [International Monetary Fund] and World Bank to help Mexico get emergency financing if it needs it.

Q. Will corruption increase as Mexicans become more and more desperate for income?

A. Corruption has long been a concern in Mexico. In the past 15 years, progress has been made in this area. There are more watchdog agencies, transparency has increased (a Freedom of Information Act has helped), and citizens are more likely to demand their rights and not pay bribes. However, the crisis could set this back.

Already, there are indications that less people are reporting income taxes, and the amount of tax evasion could increase significantly - same with other kinds of taxation. This will add to the government’s fiscal headaches.

Q. Can you quantify the severity of the knock-on effect of loss of remittances on top of decreased trade, etc...? What are your growth forecasts for this year and next and when do you expect the recovery to begin?

A. Remittances fell by about 3 percent year on year. This is the first time they have fallen since records began to be kept in 1996. On the upside, the falling value of the peso means that these remittances are stretching farther. On the downside, as Mexican workers lose their jobs in the U.S., remittances will fall further.

On growth, the latest forecasts are a 1.5-2.5 percent contraction in the Mexican economy for 2009. A lot depends on what happens here.

Q. I’ve already heard some commentators say that we should be watching Mexico as a possible “failed state,” because of the economy, the political instability, the drug violence. Is it really that dire?

A. “Failed state” has been used a lot lately. Mexico was put in the same category as Pakistan in a recent study by the U.S. military. However, this is quite overblown, in my view. The drug violence is indeed quite serious. Over 4,000 people were killed last year alone. However, about 60 percent of that violence took place three Mexican states, and most of that violence took place in three border cities. In other words, the violence is very concentrated geographically, and it is being contained.

Drug violence is not disrupting the major financial and business centers. Also, the Mexican government has lots of resources at its disposal to fight the cartels, and there is little threat of disrupting the government. That said, things will probably get worse before they get better. The Merida Initiative could help at the margins.

Q. What type of impact will the current situation in the U.S. and Mexico have on free trade agreements like NAFTA and others? What’s Obama going to do in relation to these agreements?

A. As you recall, NAFTA was in the headlines a lot during the campaign, especially talk of renegotiating NAFTA. The crisis will have a negative impact on trade in general, not just NAFTA. Already, there are indications that countries are becoming more protectionist - raising tariffs and increasing anti-dumping measures.

The “buy American” provision in the stimulus package was widely seen as a protectionist move. In this context, the talk of renegotiating NAFTA will become more complex. Before, the focus was on labor and environmental standards; now, we’re talking about the meat of the agreements - tariffs and other barriers.

Q. Drug sales in the United States generate an estimated $15-$25 billion for Mexican drug cartels each year, paid in the form of bulk cash and in arms. Many say this allows the cartels to continue their fight against the Mexican government. What policies can the U.S. government change or enact to stop this unintentional funding of the drug cartels?

A. Ultimately, the only way to deal with the drug problem is to cut consumption. After years of fighting the “war on drugs” with few results, many in Washington are rethinking the options. We need better drug education programs (a re-designed DARE). Drug courts have also been touted as a good, innovative solution. The other policy that could help is controlling the flow of arms south, as well as the availability of guns along the border. The Obama administration has already endorsed this idea.

Q. Do you expect any significant reversal of the trend towards integration between the U.S. and Mexico as a result of the crisis? How is Mexico’s role in the global supply chain likely to change?

A. As I mentioned, the crisis could offer non-U.S. investors an opportunity to expand their holdings in Mexico and use it as a launching pad into the U.S. market. Brazilian banks want to enter Mexico if Citi leaves, as we said. Non-U.S. car companies could expand their capacities in Mexico as Detroit declines. And perhaps other investors, which before chose China, might be lured into Mexico as a result of a declining peso, which makes investments cheaper and Mexican exports more competitive.

In short, the Mexican economy could become less dominated by U.S. investment, but it will remain U.S.-oriented.

Q. With the infamous violence in Mexico, tourism has fallen off. How much? How destructive to Mexican economy?

A. Tourism is a major source of foreign exchange for Mexico, and it’s a major industry. Numbers are down compared to other years, in large measure because of the crisis in the U.S., which has led U.S. tourists to tighten their belts. American tourists are by far the largest category of tourists to Mexico.

The security situation and the lurid news stories have not helped. The famous tourist destinations (Cancun, Puerto Vallarta, and Acapulco) are largely untouched by the violence, so they will suffer less. Tourism in border towns will suffer most, because as I mentioned, this is where the real violence is taking place.

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