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A number of outgoing Bush administration officials have issued warnings that Mexico is or may become a major security challenge for their successors. Absent is a hardnosed review of the nature of the threat Mexico's drug gangs have actually been posing to the US and its nationals. This report fills some of the most glaring gaps.

In early January, The Dallas Morning News cited unnamed 'US officials' as stating that several Mexican cities, such as Ciudad Juárez (Chihuahua), have become 'failed cities' controlled by the drug cartels. The US ambassador to Mexico, Tony Garza, told the paper that the violence in Mexico would worsen and that threats from drug gangs, particularly against US officials, businessmen and journalists, would become more common. Another unnamed official is cited as saying that, according to intelligence sources, attacks against US nationals might include car bombs placed near consulate offices or embassies, or attacks on 'specific individuals'.

Shortly afterwards, at the Center for Strategic and International Studies (CSIS), National Security Adviser Stephen Hadley was describing the situation in Mexico as posing a 'potential threat to the future of a democratic Mexico' and asked whether 'the level of effort and commitment [the Mexican authorities] are making   [is] proportional to the threat that the problem poses to the future of that government.'

At about this time the media noted that the 2008 Joint Operating Environment report issued in December by the US Joint Forces Command included a passage saying that 'the growing assault by the drug cartels and their thugs on the Mexican government over the past several years reminds one that an unstable Mexico could represent a homeland security problem of immense proportions to the United States.' It also mentioned Mexico as one of two states in danger of 'a rapid and sudden collapse' (the other state cited is Pakistan).

The report says, 'The Mexican possibility may seem less likely, but the government, its     politicians, police, and judicial infrastructure are all under sustained assault and pressure by criminal gangs and drug cartels. How that internal conflict turns out over the next several years will have a major impact on the stability of the Mexican state. Any descent by Mexico into chaos would demand an American response based on the serious implications for homeland security alone.'

On 16 January, CIA director Michael Hayden said that the drug-gang violence made Mexico a challenge for the incoming Obama administration's foreign policy as great as Iran — even greater than Iraq. It is worth noting that National Intelligence Director Mike McConnell, at Haydn's side, said that the US had not drawn up plans to deploy ground forces in Mexico, and that its strategy was to boost support for Mexican forces.

These warnings of the Mexican threat built upon earlier pronouncements about the spread of drug-gang violence to the point that US nationals were being affected, both in Mexico and in the US itself. State Department travel alerts stated mentioning that many US citizens had been kidnapped and killed in Mexico in the last year. John Walters, director of the US Office of National Drug Control Policy, said that Mexican drugs gangs 'not only engage in crime and violence in Mexico, but they come across and kidnap, murder and carry out assassinations.'

The drugs war
The violence, far from abating as a result of the Calderón government's massive offensives, has increased. Killings attributed to the war between rival drug cartels began to escalate four years ago: in 2005 they increased by 36%, in 2006 by 25%, in 2007 by 20%. Then, in 2008, they shot up by 110%, to 5,630. The momentum has carried on into this year: in the first 25 days of January the newspaper El Universal, which carries the most widely followed tally of such killings, reported 400 drug-war fatalities.

The Calderón administration had been assuming that the intensity of the intercartel war would decline when one of the two major contenders — the so-called Federation built around the Sinaloa cartel, and the previously dominant Gulf cartel — emerged victorious. Also widely held was the assumption that the victor would be the Federation, which might explain the public perception that the government had been concentrating its repressive efforts on the Gulf cartel. The discovery that a number of highly placed law enforcement officials were in the pay of the Beltrán Leyva wing of the Sinaloa cartel has raised doubts about whether that second assumption was the product of disinformation.

In any case, all assumptions were rendered obsolete by divisions within both camps in 2007-08. The Gulf cartel has split into two factions, respectively headed by Heriberto Lazcano (leader of Los Zetas) and Eduardo Costilla. The Federation has also split into two main groups, one headed by Ismael Zambada
(Pací­fico) and Joaquí­n Guzmán (Sinaloa), the other led by Arturo Beltrán Leyva. The latter has struck an alliance with Lazcano, a particularly deadly combination, as Arturo Beltrán Leyva used to be in charge of the security of the Federation leaders and his defection has made them extremely vulnerable. Beltrán Leyva's own team of gunmen has begun to act jointly with Los Zetas in some of the most strongly contested areas. Indeed, the Beltrán Leyva-Lazcano alliance can explain much of the ferocity of last year's fighting, which has taken the form of a new two-sided struggle for control of crucial 'plazas', combined with confrontation between past allies who until recently shared control of some of those 'plazas'.

It is not clear how many of the minor players have aligned themselves with one or the other new majors, but at least one other big shift has taken place: in early 2008 a revitalised Juárez cartel began to take distance from the Federation and to reassert itself in 'plazas' where it had previously lost ground.

The heaviest fighting between the cartels has been taking place in the most important 'plazas', the points of entry to the US. At the top of the list are Ciudad Juárez in Chihuahua, Tijuana and Mexicali in Baja California, and Nuevo Laredo in Tamaulipas. Last year the death toll was highest in Chihuahua (36% of the countrywide total),   Baja California (12%) and Sinaloa (17%). Also heavily contested are the main points of entry of Colombian drugs to Mexico, particularly Acapulco in Guerrero, Cancún in Quintana Roo, Manzanillo in Colima, Michoacán, and Mexico city.

In most of these districts there is an additional indicator of the likelihood of continuing violence, the overlap of areas of influence of several cartels. Five are present in Mexico city, four in Chihuahua, Tamaulipas and Michoacán, three in Quintana Roo. Particularly acute is the situation in cities where rival cartels have operation centres side by side: Tijuana, Guadalajara, Nuevo Laredo, Tamaulipas, Matamoros, Acapulco and Navolato (see the tables on pages 4-5 for a statistical 'map' of intercartel violence).

The new alignments of drug cartels does not bode well for the prospects of a swift end to the violence. Another contributory factor is the weakness of the government in two areas. The first is the lack of reliable police forces, both at municipal and state levels, where wholesale purges are continuing, and at federal level where, apart from the need to weed out all residues of cartel infiltration from the upper echelons, it is reckoned that it will take another four years for the full implementation of the new public security system law to produce a well-trained, vetted and truly professional police force.

The other is the strain placed on the armed forces by continuing mobilisation in antidrug operations. It is well known that actual mobilisation is considerably below the publicised 36,000 troops, and the sapping of military morale is eloquently illustrated by the fact that, according to defence ministry data submitted to congress, 18,000 soldiers deserted last year (taking the total number of desertions since 2000 to 150,000). Desertions from elite units such as those that provided the manpower for Los Zetas reached 177 in the last three years.

Perhaps the only real source of comfort for the authorities is that, as drug-gang violence has been increasing, major common crime has remained steady or declined. The total number of reported homicides has remained fairly steady, not departing much from an annual average of 6,500 since 2004. Reported kidnappings for ransom actually fell from 489 in 2003 to 347 in 2006, before rising again, to 476, in 2007.

Impact on US nationals
That the drug-gang violence in Mexico has continued to escalate sharply throughout 2008 and into this year is clear enough. Much less clear is that it has been shifting to include US nationals as targets. In fact, deaths of US nationals in Mexico caused by other than natural causes have been remarkably few. The State Department does not carry specific statistical series on this, but dumps raw data into its Report of Non-Natural Death Cases Abroad. The picture that emerges from sifting through that data is surprising. All such deaths amounted to 178 in 2006, 229 in 2007 and 85 in the first half of 2008. Victims of homicide accounted for only 22% of the total in 2006, 14% in 2007 and 21% in 2008. Most notable is the fact that   the State Department data highlights some homicides as 'executions', the term used in Mexico for killings by drug gangs. Since July 2005 there were only four 'executions' recorded; two in early 2007 and two in mid-2008 (see tables on page 7).

The State Department does not carry statistics on kidnapping of US nationals abroad. US consulates in Mexico do not have the full picture because many relatives of victims prefer to report kidnappings directly to the FBI. The FBI office in Laredo reported 10 cases in 2007 and three in 2008; the one in McAllen, Texas, has 24 cases of kidnappings and disappearances in the border area still open; the US consulate in Tijuana has reported more than 20 cases in 2006-08, a figure close to the 27 reported by the Asociación Esperanza contra las Desapariciones Forzadas y la Impunidad, a Mexican NGO for kidnappings carried out by Mexican gangs on both sides of the Californian border (see table on page 7). The only indication of substantial spread of Mexican gang activity into the US comes from Phoenix, where police reported an increase of almost 50% in extortive kidnappings in 2005-07 and said the victims had 'ties' with Mexican smuggling gangs. As to attacks on US installations, in October 2008 there was an attack on the US consulate in Monterrey. One attacked fired a handgun at the building, another threw a hand grenade (that did not detonate). This did not match the 'signature' of attacks by drug gangs, who tend to use assault rifles and rifle grenades.

Predictions that illegal immigration accompanied by gang violence would continue to grow have not proven accurate. In one of the black spots along the US border, the Tucson sector of Arizona, arrests of illegal immigrants by the Border patrol between 1 October 2008 and 15 January 2009 were down to 16,000, or 67% fewer than in the same period a year earlier. This is attributed by US authorities to an increased presence of the Border Patrol and the greater use of advanced technology. The violence has deterred some US nationals from visiting Mexico. Tourist arrivals in 2008 fell by between 13% and 21% in border hotspots   such as Tijuana, Ensenada and Ciudad Juárez, and were next to nil in Nuevo Laredo.

NOTE: For related tables, please see PDF.

MEXICO-US | Soldiers kill US national. On 22 August the state police of Guerrero reported that,  in response to an anonymous call, they had found an abandoned van on the Acapulco-Zihuatanejo highway. Inside was the lifeless body of a man whose document identified him as Joseph Stephen Proctor, a US national. Next to him was an AR-15 rifle and two spent bullet cases. Proctor's body had visible gunshot wounds on his arm and forearm. An army lieutenant had later stated that his patrol's vehicle had been fired upon from the van and that, when they returned fire, the van had flipped over. There was no explanation of why the police had been alerted by an anonymous call and not by the military patrol.
The federal chief prosecutor's office (PGR) promptly announced that it was taking over the investigation into the case. By mid-September the defence ministry wrote to the US embassy informing it that two soldiers had been charged with homicide by a military prosecutor. The ministry said that Proctor had failed to heed an order to halt and had consequently been fired upon by one soldier, who hit the car but not the driver. Proctor's vehicle was pursued and intercepted, and two soldiers fired a shot each, wounding Proctor, who nonetheless kept on driving until he crashed his vehicle three kilometres down the highway. There was no mention of Proctor opening fire on the soldiers or of the discovery of a rifle in the van. An autopsy report showed that Proctor had been shot from both sides, and that one bullet had pierced his lung.

MEXICO-US | Diplomats' children evacuated. A State Department travel warning reports that from 10 September the US consulate-general in Monterrey 'will become a partially unaccompanied post with no minor dependents of US government employees.' The reason: 'Given the increasing level of violence that is occurring all over Monterrey, school children are at a significantly increased risk.' This is an allusion to a shooting, on 20 August, close to the American Foundation School, which has been attributed to a failed kidnap attempt in which, the US authorities said, US nationals were not targeted. Consular employees and their families, save those assigned to border posts, are barred from travelling by car across the border and to destinations further inland.

MEXICO | Migrants massacred by Zetas. On 24 August a marine unit, responding to a tip-off, uncovered  a mass grave in San Fernando, Tamaulipas, containing the bodies of 72 illegal migrants who had been killed, according to one of the two confirmed survivors, by members of Los Zetas for having refused to join their organisation. The same tip-off led the marines to arrest one of the killers that same day and kill another three in a shoot-out. A further seven of the killers were located and arrested in the ensuing days. The bodies of another three, identified by one of the survivors, were found next to a highway on 30 August. A Tamaulipas state prosecutor and a municipal police chief assigned to investigate the mass grave disappeared on 24 August; their bodies were found on 7 September. These last two episodes, as well as the initial tip-off, point to a tangled web of account-settling between rival cartels.
The San Fernando mass grave is not the largest narcofosa ('narco-grave')found so far (one with 77 bodies was found last May in Taxco, Guerrero), but it is unique in that the victims were all illegal migrants and that all the killings took place in one go.
Other major narcofosas found this year: 51 bodies in Benito Juárez, Nuevo León (July), 19 bodies in Hidalgo (August), 15 bodies south of Matamoros, Tamaulipas (July), 12 bodies near Cancún, Quintana Roo (June), and 10 bodies in Nuevo León (July). In all of these cases, as well as in other smaller narcofosas in previous years, bodies of rival cartel members, murdered officials and kidnap victims had been deposited over months, even years.

When Chávez visited Iran in September 2009, the two governments signed more than 200 agreements for cooperation in the fields of food and health, housing, trade and uranium prospecting. The centrepiece is a commitment to invest US$760m in each other's energy sectors.

Venezuela's state-run energy company Petróleos de Venezuela (Pdvsa) is to invest US$760m in the development of phase 12 of Iran's giant South Pars natural gas field in the Persian Gulf. Iran has, for its part, pledged to invest an equivalent US$760m in the development of the Venezuelan oilfield Dobokubi, as well as the development of Block 7 of the Ayacucho heavy oilfield.

Energy forms a natural crux for the two countries' economic relationship. In October 2009, the two countries announced the establishment of a new oil company, Beniroug, which would make investments and activities in third countries, including Cuba, Sudan, China and Bolivia.

A more tangible sign of Iran's investment clout is the recent handing over of some 4,000 three-bedroom apartments to low-income Venezuelans. The project, implemented by the Iranian construction firm Kayson Group, is building a 10,000 unit public housing development for the Ministry of Housing, following a deal signed in 2006. Kayson is also responsible for building auxiliary facilities for each township, including schools, kindergartens, libraries, parking facilities, with a floor area of over 16,000 square metres.  

Kayson, a mass producer of housing, claims to be able to build one housing unit per hour. For Iran, the project will also enable it to boost exports with some 6,000 tones of manufactured building products shipped to Venezuela, as well increased job opportunities and non-oil revenues.
 
That deal, realised in bricks and mortar, contrasts with opaque investment projects in other sectors. The Banco Internacional de Desarollo (BID), a subsidiary of Iran's Export Development Bank, was founded in 2007 in an office building in the Caracas financial district. Yet its direct impact is limited.
The objective of the bank is to provide banking services under a universal licence, and it quickly aroused the suspicions of US authorities. In October 2008, the Treasury Department's Office of Foreign Assets Control imposed economic sanctions against both banks for providing financial support to the military organisations responsible for Iran's nuclear programme.

The BID is one of three joint Iranian-Venezuelan financial institutions - part of a strategy to form a new financial architecture between the two countries, according to Chávez . It supports small- and medium-sized enterprises in both countries, as well as strengthening its financial intermediation capacities for big businesses through its credit and loan facilities. In an interview with Latin American Newsletters, a bank official said the bank was a “normal bank engaged in normal lending. We just do commercial banking - you can have savings accounts, current accounts, car loans - we're just an ordinary local bank." However, the BID claims only 300 customers. The suspicion remains that this entity is of purely symbolic significance.

Iran is persisting with financial sector cooperation. A separate joint development bank was announced in April 2009, to be based in Tehran and which is to have US$1.2bn available in initial investment funds and finance projects in areas such as infrastructure, housing and technology. Ahmedinejad's late-November visit to Caracas saw the inauguration of a new binational development fund, capitalised at US$200m and due to receive   another US$200m to fund joint projects.  

The attempt beyond pure politics to cooperate at the economic level will be hamstrung by inadequate implementation and follow-through. While on paper some of the deals look massive, the reality is less impressive. Iran's efforts to establish an automotive manufacturing presence in Venezuela is typical. The joint venture, Venirauto, started assemblage of the Samand saloon car made by Iran-Khodro Company   - badged as the Centauro in Venezuela - and the hatchback, the Turpial, in 2006, and has sold 5,000 vehicles so far. The aim is to increase production to 26,000 units, and establish a body and paint shop to go with the assembly plant.

The project is struggling to meet this ambition. Delivery of parts from the Khodro plant in Iran is way behind schedule and the plant has been plagued by poor industrial relations. In December 2008, workers went on strike over the company's refusal to negotiate a collective contract, amid complaints over low pay and poor safety. The plant is producing well below its capacity and lacks a dealer network to market the vehicles.

Scepticism about the depth of Iran's economic relations with Venezuela appears confirmed by reports that the weekly flight between Caracas and Tehran via Damascus, operated since 2007 by the Venezuelan state-controlled airline Conviasa and Iran's national carrier, Iran Air, are mostly empty by the time they reach Tehran. A report in Spain's El Paí­s newspaper in November 2009 said the flight's 286 seats are usually half empty, and that most of the passengers disembark at Damascus, rather than Tehran. Cargo loads are also too low to justify the flight.

NEWSPRINT: The Mexican government imposed a provisional anti-dumping duty on newsprint from the US and Canada on 3 August. The anti-dumping duties vary between 5.5% and 18% according to the companies providing the newsprint. The Mexican paper industry complained in 2002 that Canadian and US papermakers were dumping newsprint on the Mexican market at prices that were below the cost of production. The economy ministry recognised that there was a case to answer in November 2003 after studying data for 2002. The lower anti-dumping duties are being levied on Bowater, Graphic Communications and other US companies. A 15.2% duty is being levied on paper from Abitibi and 18% on newsprint from Bowater Canada, Norske Skog and other Canadian providers of newsprint. The companies singled out for the measure have 30 working days to respond before the duties will start to be levied. 

CHILE: Just as Chile was hailing its free-trade agreement with Mexico, signed in 1999, as one of its most successful, apple growers in Mexico demanded that the government take action against competition from Chile. At the beginning of August apple growers in Chihuahua appealed to President Vicente Fox, who was on a visit to the state, to take action against what they said was the virtual dumping of Chilean apples on the Mexican market. The Chihuahuan growers claim that Chile is exporting apples at prices below what it costs them to get their apples to their local markets. The apple growers claim that Chilean exporters are able to lower their costs by understating, for customs purposes, the value of their shipments. The Mexican growers claim that each box of apples should have a customs value of between US$6 and US$7. Overall trade between Mexico and Chile has grown by 35% since 1999. Mexico is now Chile's sixth biggest export market and the biggest in Latin America, worth US$921m a year.

GAS: Tidelands Oil & Gas, a US company, announced that it was building two new gas pipelines to take fuel from Texas to Mexico. Currently Mexico imports about 30% of the gas it uses from the US. The new trans-border pipelines will link US and Mexican networks at Progreso and Mission. Tidelands currently operates one trans-border gas pipeline. Currently seven trans-border gas pipelines link the Texas network with the Mexican network. There are also two trans-border links in both Arizona and California.

The Banco de México indicated that it is considering cutting interest rates. It made this signal by taking out a standard line from its monthly report on monetary conditions in Mexico. The standard line, that was dropped, after the bank's monetary policy meeting on 22 September, was that the bank did not see any room for interest rate cuts in the immediate future. The markets were quick to see the implication of an interest-rate cut. Interest rates have been stuck at 7% for the past four months.

Most local economists say that the central bank has changed its view because of what is happening in the US economy. The US economy appears to be slowing quite sharply, though the US Federal Reserve Board is not panicking. On 20 September the Fed decided to hold interest rates at 5.25%. The Fed's next interest rate meeting is in late October, just before the mid-term elections in the US. 

The Banco de México's announcement did not entirely surprise the financial markets even though the last move in Mexican inflation had been upwards. In August the headline inflation rate hit a seven-month high of 0.51%. This was almost twice the rate of July (0.27%). The August rate pushed up the headline inflation rate for the past 12 months to 3.5%. The Banco de México prefers to track what it calls core inflation. This strips out volatile food and energy prices. On this measure, inflation in Mexico in August fell from 0.28% in July to 0.12% in August. 

Unlike the US Fed, the Banco de México has under its constitution to deliver only price stability. The US Fed has to promote employment (and therefore economic growth) as well. So the expectation in Mexico is that any pick up in inflation precludes the chance of a looser monetary policy. The central bank argues that what matters is the core inflation rate not the headline rate, which is often affected by the weather (producing shortages or gluts of particular foods) and international politics (which can inject a fear premium into energy prices).

What happens in the US economy is crucial to Mexico. Two of the most dynamic elements in Mexico's economy are non-oil exports and capital investment, principally by companies that want to increase their exports to the US. If the US economy tanks, non-oil (as well as oil) exports to the US will fall and investment in Mexico will diminish as well. 

In 1990-91 when the US economy contracted by 1.3% over two quarters, US imports of goods and services fell by 5.4% over three quarters. In 2001, when the US economy contracted by 0.2% over three quarters, imports of goods and services fell by 8.2% over five. 

The big worry for Mexican policymakers is that a US slowdown occurs simultaneously with a slide in the international oil price. This looks as though it will happen. The export price of Mexican oil fell sharply at the end of September. On 26 September the price of Mexican oil was US$48.12 a barrel. This was 26% lower than the record price, hit on 7 August, of US$64.85 a barrel. Oil export revenues in the first eight months of the year were up by 38%.

Even the 26 September price is still 32% higher than the price in the 2006 budget. The finance ministry is forecasting that the price in 2007 will be US$37.50. This looks conservative, given OPEC countries reluctance to see the price of their oil fall below US$50 a barrel. 

Mexico's total exports are equivalent to about a third of the country's GDP. That is comparatively high for a Latin American economy. What keeps Mexican economic policymakers awake at night is the narrowness of Mexico's export markets: 85% of Mexico's exports go to the US. Only Malaysia and Canada are more susceptible to the effects of a slowdown in the US.

The current state of the US economy gives these same Mexican policymakers a nasty turn of déjí  vu. In 2000, the US economy began to turn down in the second half of the year and was heading towards recession by the time President Vicente Fox took office on 1 December. 

The effects of leads and lags meant, however, that President Ernesto Zedillo went out on an economic high, with growth of 7% in 2000 and record levels of employment. President Fox's first year produced a near recession in Mexico and a savage fall in employment: at least 700,000 people working in the formal economy lost their jobs in Fox's first two years. 

Two things preserved the Mexican economy from a slump. The first was the strength of the oil price. The other was the mix of monetary and fiscal policies in the US which encouraged US consumers to keep spending. 

The oil price produced revenues that provided a safety net that allowed the government to keep spending. Mexico's economy only started to generate jobs and grow again from 2003, when the US started to recover. Even so, it took until September 2005 for the employment situation to get back to where it was when President Fox took office. By June this year the government was claiming that it had created 740,000 new jobs since Fox took office. This time, Calderón will not have the prop of rising oil prices.

Furthermore, even Fox's comparatively feeble performance on job creation may be overstating the actual position. The official statistical agency, Inegi, reports that manufacturing employment is still nowhere near where it was when the Tequila Crisis hit in 1994. Its manufacturing employment index takes 1994 as 100: it currently stands at 85. In 2000, the index had recovered to 100. Maquiladoras, which export to the US, still employ almost 10% fewer people than they did when Fox came to power in 2000. 

Just as in 2000, the Mexican economy appears to be hitting a cyclical peak this year. GDP growth in Mexico at the moment is running at just over 5%. If the US does suffer a hard economic landing in 2007, Mexico will be shaken by the bump. 

It is President-elect Felipe Calderón Hinojosa's misfortune that the US authorities are unlikely to respond as they did in 2000 and 2001 by cutting US interest rates to their lowest levels for 45 years and launching recklessly expansive fiscal policies. That mix of US policies allowed the Banco de México to lower its rates as well without triggering capital flight. 

The Mexican government, crucially, could keep its social programmes going because of the booming oil revenues. Ironically, Josefina Vázquez Mota, Calderón's campaign manager in the presidential elections, managed these programmes, when she ran the government's great spending ministry, the Secretarí­a de Desarrollo Social (Sedesol).

The problem for Calderón's economic policymakers is first, that the US is unlikely to fight a recession in the same way that it did in 2000 and second, that the oil price is heading lower. From 2000 to 2003, the US Federal Reserve, with its expansionary monetary policy, and the government through its fiscal policy, which verged on the irresponsible, produced a consumption boom in the US. The problem with this boom is that it sent the US economy out of kilter. Household savings are now negative and if property prices slide further, US financial markets could see withdrawals, depressing both consumption and the economic mood yet further. 

To be fair the boom in the US appears to have transformed US corporate balance sheets. The macro-economic situation created by the boom is that two of the three elements in the US economy (households and the government) need to rebuild their balance sheets and reduce their indebtedness. When these two elements are hunkering down, it is hard to see the third element, the corporate sector, deciding that now is the appropriate time to increase its consumption and thus ramp up investments. 

What all this will mean for Mexico is that there will be less demand for Mexican goods, and equally importantly, services. We analyse the economic effects of a slowdown in the US on Mexican immigration in the Nafta Report. Here, we will only note that while 500,000 Mexicans successfully join the US labour force every year, fewer than 150,000 find jobs in Mexico. 

A significant change in immigration trends (either fewer migrants going to the US or more US migrants returning home) poses a major economic and social threat to the Calderón administration

President Felipe Calderón Hinojosa appointed Fernando Francisco Gómez-Mont Urueta on 10 November as the new interior minister to succeed Juan Camilo Mouriño, who was killed in a plane crash on 4 November. Gómez-Mont is a surprise choice for several reasons. Although he comes from the same traditionalist wing of the Partido Acción Nacional (PAN) as Calderón, he is not close to the president and thus breaks Calderón's habit of appointing his chums (cuates) to senior government posts.

Gómez-Mont is a longstanding member of the PAN, and his father was one of its founders, but he has been more active as a lawyer than a politician. Until his appointment he was the main partner in a leading law firm, Zinser, Esponda y Gómez-Mont. In this role he has defended a number of controversial people and made some enemies, notably Ricardo Salinas Pliego, the controlling shareholder in TV Azteca, the second most important broadcasting company in the country. TV Azteca was prominent in a government-inspired campaign that culminated in July 2008 with the ejection of Santiago Creel, Calderón's unsuccessful rival for the PAN's 2006 presidential nomination, from the leadership of the PAN in the senate.

A bigger handicap for Gómez-Mont is that he has served only one term in the lower house of congress and finished that term 15 years ago. This is a weakness because traditionally the interior minister negotiates with congress to get the government's bills into law. Gómez-Mont's main claim to fame is as the PAN's longstanding representative on the country's various election-monitoring bodies, culminating in a stint on the Instituto Federal Electoral (IFE).

One of Gómez-Mont's chief tasks will be to pull the various factions of the PAN together for the mid-term elections in 2009. Delivering some victories in the war against organised crime (which the government appears to be losing) is essential if the PAN is to retain its position as the biggest party in congress. Since Calderón was elected in 2006, the powerful opposition Partido Revolucionario Institucional (PRI) has won virtually every important election: on 9 November the PRI continued its run by sweeping away the PAN and the leftwing Partido de la Revolución Democrática (PRD) in municipal elections in the central state of Hidalgo.

Gómez-Mont had been out of favour with the dominant clique in the PAN for most of the past decade. This clique was neo-panista and dominated by rightwing businessmen rather than the Roman Catholic social conservatives who led the PAN before its election victories in states and municipalities were officially recognised in the 1990s. Gómez-Mont's father, Felipe, who served in congress three times for the PAN as well as setting up a prosperous law firm, was an archetype of the old style Panista: Fernando is the youngest of Felipe's 13 children.

The PAN's ruling clique in the late 1990s and early 2000s was unhappy at Gómez-Mont's constructive engagement with the last two PRI governments and with his legal work defending - mostly successfully - prominent politicians against corruption charges. His client list starts with a controversial former President, Carlos Salinas de Gortari, moves on to his equally controversial brother, Raúl and includes bankers and also the trade union barons, such as Rogelio Montemayor, who ran the oil workers' union.  

Although Salinas probably did not win the 1988 presidential election fairly (no-one will ever know for sure because the ballots were deliberately burnt in 1991), he was the first Mexican president to allow the PAN to win executive power: previously the PAN had just been represented in federal and state congresses.  Carlos went into exile in Ireland during the administration of President Ernesto Zedillo, while Raúl was jailed on corruption and murder charges which were subsequently dropped.

In 1991, Gómez-Mont was elected to congress as a Panista and chaired the justice committee. He then went on to represent the PAN on the various election-monitoring agencies up to and including the current one, the IFE. Gómez-Mont's great achievement was to introduce voter cards with photographs: these cut down on fraud.

Politically, Gómez-Mont is close to Diego Fernández de Cevallos, the PAN's presidential candidate in 1994. Fernández is something of a maverick. In the 1994 election he was running strongly in the opinion polls but then all but stopped campaigning. He nevertheless finished a strong second. He then had a controversial career as a senator and a property developer in Acapulco.

In July 2008, Fernández criticised the Calderón government's failing policies, most notably its war on organised crime and attempts to reform the state oil monopoly, Petróleos Mexicanos. Fernández argued that the government's failures were undermining the PAN's electoral appeal. Calderón responded to this criticism by bringing Gómez-Mont and another Fernández supporter, Juan Miguel Alcántara Soria, onto the PAN's executive committee in mid-August. Alcántara also got a senior job in the Procuradurí­a General de la República when that was shaken up.

Some political commentators argue that the PAN, which has been performing dismally in elections, now appears to have three factions. The traditionalist wing has split into two factions: one is headed by Calderón and the other is headed by Fernández. The third faction, the neo-panista wing, is headed by former president Vicente Fox.

Fox, in a pointed insult to Calderón and Mouriño, went ahead with a conference of 100 prominent panistas at his ranch in Guanajuato on 6 November to discuss the future of the Right in Mexico. Ricardo Salinas Pliego, the owner of TV Azteca, is close to Fox.

Gómez Mont's big problem is likely to be his lack of political experience. His predecessor, Juan Camilo Mouriño, was much more of a political animal and was being groomed by Calderón as his successor. The interior minister is traditionally the second most important job in the Mexican government.

The interior minister handles negotiations with congress, in which no party has had overall control since 1997, and has a major role in law and order policy, though this aspect of the interior minister's job has diminished with the rise in importance of the Procuradurí­a General de la República and the Secretarí­a de Seguridad Pública. The problem is that the heads of both these ministries have failed to lower the death toll from the government's war against organised crime.

Private secretary: On 25 November government officials announced that President Felipe Calderón Hinojosa had a new private secretary, Luis Felipe Bravo Mena. The appointment is further evidence that Calderón is continuing to move away from his previous policy of surrounding himself with cuates (chums). His new private secretary was Mexico's ambassador to The Vatican. He has been president of Calderón's Partido Acción Nacional and served in congress. Bravo Mena is from the political generation above Calderón and should provide experience and political knowhow to complement the new interior minister, Fernando Gómez-Mont.

• Calderón shaken

Calderón has clearly been deeply upset by the death of Mouriño. Even Calderón supporters in the Mexican media thought that the president's eulogy of Mouriño, who after all had been interior minister for less than year, was over the top.

• Bravo Mena consulted?

The rumour in Mexico City is that Calderón's new private secretary, Luis Felipe Bravo Mena   was consulted by the President before Gómez Mont was appointed.

On 23 February, the world's richest man, Carlos Slim Helú, tore into a business battle with Mexico's two main broadcasters, Televisa and TV Azteca. The broadcasters retaliated, claiming that Slim was a danger to national security.

For the broadcasters, Slim's economic power is simply too great. His wealth is equivalent to 6% of GDP and he controls companies that account for half the capitalisation of the Mexican stockmarket. Televisa is alarmed by Slim's alliance with Dish México which is challenging Sky, which is controlled by Televisa's main shareholder, the Azcárraga family. Televisa claims that Telmex, by going into business with Dish México, which is controlled by MVS Communicaciones, is breaching the terms of its telecommunications licence. Telmex says that it is only doing Dish México's back office operations, issuing bills and managing accounts. Telmex, however, makes no secret of its desire to get into broadcasting but notes that it has not been allowed to by the federal government.

The row, essentially, is over the convergence between telecommunications and broadcasting. Telecoms is dominated by Slim's companies, Telmex and Telcel. The broadcasters, especially TV Azteca, which controls Iusacell, a mobile telecoms company, want to get into the telecoms business, but claim that Slim's (effective) monopoly means that they cannot get in on profitable terms, yet Slim is making inroads into their core business.

On 18 February Slim's master company, Grupo Carso, announced that it had cancelled all its adverstiing with Televisa. On 23 February TV Azteca announced that it had cancelled all advertising from Slim's companies. Carso says that it took the decision to cancel the advertising after Televisa increased its prices by 20%. Analysts say the broadcasters' move is in retaliation against Telmex and Telcel's refusal to allow Iusacell to connect its subscribers to the Telmex and Telcel networks at a reasonable price.

The withdrawal of Carso's advertising cut Televisa's TV ad salesbook by 4%, or M$870m (US$71m), the TV company says.  This looks like an underestimate. In 2009, Slim's telecoms companies spent MS$2.5bn on TV advertising, 70% of which went to Televisa. Telcel alone is Televisa's third biggest advertiser. The other big Slim companies which have cancelled their ads are: Sanborns, Banco Inbursa and Sears.

Iusacell and other telecoms companies are alarmed by the interconnection price Telcel was able to extract from Telefónica to connect subscribers from its Movistar network to people on Telcel: M$0.95 (US$0.08)  a minute. Telcel says that this is the cheapest interconnection rate for any Organisation for Economic Cooperation and Development (OECD) country. Iusacell and co say that the rate is twice that suggested by the regulator, the Comisión Federal de Telecomunicaciones. 
 
The big worry is what may happen in the 2012 elections when, controversially, all TV advertising will be purchased centrally. Some political commentators argue that the two main networks could refuse to carry the ads, and thus influence the result.

Slim moves into oil in Colombia: On 22 February Slim announced that he was investing in Colombian oil exploration. This is his first foray into the upstream oil business. Slim has an enviable reputation being among the first to spot business opportunities (and a fortune of US$54bn to prove it). In Mexico, oil exploration is still a state-owned monopoly, through Pemex.

Slim's vehicle is Tabasco Oil, in which he has acquired a 70% stake. It has a concession to explore for oil in eastern Colombia and has promised to invest US$6m in the project. Geoprocesados, which had set up Tabasco, has long worked with Pemex on seismic evaluations of potential oilfields.

Slim's new art museum: On 1 March Slim opened his new art museum, Museo Soumaya (named after his late wife) in Mexico City. President Calderón attended the opening. The museum will display the choicest items from Slim's 66,000 piece collection. The museum complex, which includes four residential buildings, three office buildings, a Five Star hotel, a theatre and a shopping mall, cost US$800m to build.  The museum holds works by Picasso, Rubens, Rodin, El Greco, Van Gogh, Monet, Cézanne, Renoir, Matisse and Leonardo da Vinci. It also has works by the Mexican masters: Diego Rivera, José Clemente Orozco and Rufino Tamayo.

• On 1 March Mexico's anti-trust agency, the Comisión Federal de Competencia (CFC), recommended that the authorities should offer Telmex a limited broadcasting licence in return for Telmex and its associate mobile company, Telcel, reducing their interconnection charges. If Telmex got a broadcasting licence it would break the duopoly currently enjoyed by Televisa and TV Azteca. The CFC argues that changes to interconnection charges should precede the broadcasting licence.
  

Nicaragua's leftwing opposition, the Frente Sandinista de Liberación Nacional, swept the municipal elections on 7 November. No sooner had the scale of the party's victory been confirmed than its leader, Daniel Ortega, orchestrated an effort to redraw the constitution that, if successful, would clip the wings of incumbent President Enrique Bolaños.

It was a bad night for Bolaños. While the Sandinistas were busy bagging the majority of the country's 152 municipalities (they took at least 90, including the all-important mayoralty of Managua, which was won by Dionisio Marenco, and 15 of the 17 department capitals) his small Alianza por la República (Apre) managed to muster a mere five mayoralties, including one departmental capital. It was, however, the main opposition party, the Partido Liberal Constitucionalista (PLC), that suffered the biggest setback. The party that brought Bolaños to power, before breaking ties acrimoniously after he pursued PLC supremo Arnoldo Alemán on corruption charges, performed miserably at the polls.

The PLC's woeful performance can be attributed to a number of factors. Its vote was split by the presence, for the first time, of the Apre, which broke off from the PLC in 2002. The PLC took 41 mayoralties (53 fewer than before) and only one departmental capital. Abstention hit a record high of 52%. The low turnout, especially among PLC supporters, suggests that the party's decision to stick by Alemán, despite the fact he is serving 20 years on corruption charges, is deeply unpopular. A number of polls taken over the last few months clearly shows that the electorate has had enough of Alemán. The same polls also show that voters are fed up with Ortega. This is not as irreconcilable with the electoral results as it might appear. The Sandinista support base is much more committed than that of the PLC; Nicaraguans who are liable to vote for the PLC in presidential elections are simply not interested in municipal elections.

Ortega insists that the municipal elections will dictate the outcome of the presidential elections in 2006 and that success in Managua will be a stepping stone to the presidency. There are good reasons to suspect this will not be the case. The Sandinista candidate, Herty Lewites, won Managua in 2001 and Ortega was later crushed in the presidential elections. Ortega also lost the two elections before that. As in El Salvador, where the left-wing opposition Frente Farabundo Martí­ para la Liberación Nacional (FMLN) has a vice -like grip on the capital San Salvador, the Sandinistas have failed to transform local success into national power. However, there is no doubt that the Sandinistas are enjoying their moment in the sun. Buoyed by their success in the municipal elections, the Sandinistas immediately came up with a constitutional reform bill in parliament, which would trim back the president's powers. The bill proposed that the president should submit his ministerial and ambassadorial choices to parliament for approval and that parliament be given powers to remove officials considered to be incompetent. In a legislature largely hostile to Bolaños, this would give the opposition considerable latitude to pick and choose the cabinet.

The bill would also allow parliament to propose the candidates for the banking superintendent, the chief prosecutor and the human-rights procurator and nullify Bolaños's veto. It proposes that the assembly may override a veto with a simple majority vote, rather than the customary two-thirds. An alliance between the Sandinistas and the PLC would be more than sufficient to achieve this. The same two parties clubbed together to gain the 56 votes required for the constitutional reform bill. However, it will need to be approved in a second sitting before becoming law.

The most significant reform proposal is that concerning the veto. On 12 November Bolaños partially vetoed the law on the judicial career because it included provisions that maintained the political stranglehold on judicial appointments enjoyed by the PLC and the Sandinistas. If the constitutional reform bill were passed, the two parties would be able to come together to override the veto.

The reform bill, which has the imprimatur of Ortega, could be the first step towards the parliamentary system for which the veteran Sandinista leader has been campaigning. On the other hand, it might be no more than a bid to limit Bolaños's powers in the run-up to the presidential elections, which the Sandinistas are now confident of winning. In the event of this, Ortega, who has already declared that he will run for the presidency, is unlikely to favour a parliamentary system.

Impeachment?
One good piece of news for Bolaños is that the opposition's preoccupation with the constitutional reform bill means that efforts to impeach him have been put on hold for the time being. A senior member of the Sandinistas, Edwin Castro, said on 11 November that there was not time to set up a special parliamentary commission in compliance with a request by the comptroller-general to investigate corruption allegations surrounding Bolaños before the legislature's current sitting ends on 15 December.

It looks increasingly unlikely that Bolaños will be investigated at all. Ortega seemed to confirm this when he suggested in the wake of the municipal elections that the Sandinistas would be unlikely to back any effort to impeach the president.

Haiti's president-elect René Préval has come up with an approach that he feels could go some way towards solving the acute migration problems shared by Haiti and the Dominican Republic. As a signal of his intent to improve relations between the two countries he made Santo Domingo his first port of call after being declared winner of Haiti's presidential elections.

Dominican President Leonel Fernández greeted Préval, whose first term in the second half of the 1990s coincided with his own, with a hug when he touched down on 2 March for talks. Préval said he wanted to visit the Dominican Republic before his investiture to demonstrate the importance he attaches to establishing close ties between the two countries. "It is a way of saying we are convinced about our friendship," Préval said.

Relations between the two countries have been very tense over the last year with the Fernández administration conducting an aggressive immigration policy, under which thousands of Haitians are being "repatriated". Préval expressed his concern about the current situation and suggested that it could be resolved by allowing dual citizenship for Haitian migrants. He said he would submit a bill to the national assembly when he takes office legalising dual citizenship status in his country, something which the Haitian Constitution currently precludes.

Préval's proposal was dismissed by the Dominican foreign minister Carlos Morales Troncoso, one of the fiercest advocates of the current "repatriation" programme. Troncoso said that, regardless of whether Haiti altered its constitution to allow dual citizenship, the issue was non-negotiable as the supreme court ruled in December that only children born to legal foreign residents in the Dominican Republic have the right to Dominican citizenship.

Pelegrí­n Castillo, a Dominican legislator, said that dual citizenship would pave the way for the "Balkanization" of the Dominican Republic. He proposed toughening rather than relaxing legislation required for naturalisation as a Dominican, including having knowledge of the Dominican constitution and history of the country and "feeling" Dominican. He did not propose how these criteria would be assessed. Others suggested that dual citizenship would prompt Haitians to move en masse to the Dominican Republic, obtaining the right to vote and thus enabling Haiti to "annexe" the country.

Ironically, while Haiti struggles to get its migrants recognised in the Dominican Republic, the Dominican authorities are desperately pushing for an estimated 75,000 illegal immigrants in the US to be granted US citizenship.

The Siméus scenario

Another reason why Préval could be keen to change the constitution to allow dual citizenship is to appeal to the large Haitian diaspora in the US. Dumarsais Siméus, the Haitian-American businessman, was constitutionally barred from running in February's elections because he possessed dual citizenship. Changing the constitution would allow the Haitian diaspora, which provides more than 30% of Haiti's GDP through remittances, to vote in elections and run for office.

* Other issues covered by Préval during his visit included ways in which the Dominican Republic could help Haiti boost tourism and create jobs. Fernández said it would look into ways in which Haiti might be able to benefit from DR-Cafta, the free-trade agreement the Dominican Republic has signed with the US and five Central American nations.

Rumours that Fidel Castro was to make a much-anticipated public appearance at the Workers' Day march in Havana on 1 May were proved wrong, and the day came and went with no sign of the Cuban leader. Instead of the speech-making for which he is famed, Castro is now communicating with the Cuban people through articles in the state press. With seven missives printed to date of around 1,200 words each, he is proving himself to be as prolific a writer as he is a speaker.

The focus and tone of the articles give clues as to the sort of role that Castro may now play in the Cuban regime. They are resolutely international in scope, and deal with grand themes such as global energy supply, particularly biofuels, and climate change. Castro avoids discussing domestic matters in them presumably because, following the successful transition of power to his brother Raúl in July last year, he does not plan to resume his old role as a president with stifling control over every aspect of the revolution.  

It is likely that instead he will play a more symbolic part as head of state, as a sage who is seen to provide guidelines on the broad ideological direction of the government's policy, thereby giving it legitimacy. Meanwhile Raúl is clearly in charge of the day-to-day running of the government. At any rate, this is how the state media, and by extension the government, want to portray the power balance.  

For example, on 20 April both Fidel and Raúl held separate meetings with a top Chinese official, Wu Guanzheng, a member of the nine-man Standing Committee of China's Communist Party Politburo. The report about the encounter published in the Communist party mouthpiece, Granma, established that it was Raúl who, flanked by several high-ranking members of the Cuban government, signed the co-operation agreement with the Chinese official. Fidel's meeting, by contrast, was reportedly less business-oriented and more diplomatic, with Guanzheng delivering a letter to him from the Chinese President Hu Jintao.  

Posada Carriles freed
The predictably anti-US vibe of Castro's articles was given extra potency by recent developments in the Luis Posada Carriles case. On 19 April the Texan court trying Posada on immigration fraud charges released him on bail. In response, Castro argued in an article that "the impunity and material benefits with which any violent action against Cuba has been rewarded for the past half century" motivated two Cuban army recruits to try to hijack a plane and escape to the US on 3 May.

The federal judge in charge of the case then went a step further on 8 May and dismissed the charges altogether, just three days before Posada was due to go on trial. Judge Kathleen Cordone explained her decision, saying she had thrown out the case because Posada had been subjected to "a criminal investigation" during a citizenship interview which had been poorly translated by an interpreter.  

She said Posada should not have faced questions about his alleged bombing of a Cuban airliner in 1976 nor a string of Havana hotel bombings in 1997. "The realm of this case is not, as some have suggested, terrorism," she wrote. "It is immigration fraud... The government's tactics in this case are so grossly shocking and so outrageous as to violate the universal sense of justice."

Others condemned the government for not dealing strongly enough with the suspected terrorist. The head of the Cuban interests section in Washington, Dagoberto Rodrí­guez, said, "The White House has done everything possible to protect the hemisphere's (Osama) Bin Laden for fear that he might talk and reveal the connection between the US government and his terrorist activities."  

Members of the US opposition have also expressed their shock at Posada's release. Democrat congressman Bill Delahunt wrote to the Attorney General, Alberto Gonzales, to ask why Posada was not detained as an alien who has "engaged in terrorist activity" under the Patriot Act, a law passed after the attacks of 11 September 2001 which is invoked regularly in other cases of suspected terrorism.

There is still a chance that Posada will have to stand trial in the US. FBI agents visited Havana last year to investigate whether he was involved with financing the 1997 bombings that targeted Havana hotels, and a grand jury has met in Newark, New Jersey, to decide whether to indict him on those charges. According to the Miami-based Nuevo Herald newspaper, "The New Jersey investigation is in the final stage and could bring charges of financing actions that violate the Neutrality Act, according to sources linked to the case."

• In the 1980s Luis Posada Carriles was acquitted in Venezuela of the 1976 bombing of a Cuban airliner that killed 73 people, but escaped from prison while awaiting retrial. He has never been tried for the 1997 hotel bombings which killed one Italian tourist.

On 17 July Haiti's lower chamber ratified President René Préval's third choice for prime minister, Michí¨le Duvivier Pierre-Louis. The vote - of 61:1 with 20 abstentions - came as a relief, as the country has been without a prime minister for over three months and Préval's previous two choices of candidate had been rejected. Pierre-Louis's ratification depends on her approval by the senate, however, which is by no means guaranteed.

Ever since former prime minister Jacques Edouard Alexis was ousted from office on 12 April over his handling of violent riots at rising food prices [RC-08-04], Haiti has been in a state of institutional paralysis. Both Préval's previous nominations, Ericq Pierre and Robert Manuel had been blocked by a new majority congressional faction, the Concertation des Parlementaires pour le Progrí¨s (CPP), which controls 53 of the 99 seats and includes 20 dissidents from his ruling coalition. 

While both Pierre and Manuel were officially rejected for technicalities, in failing to meet certain constitutional requirements, Pierre subsequently claimed that his refusal to pay off CPP deputies was the reason for their no-vote, while Manuel's supporters speculated that deputies had accepted bribes from drug gangs and criminal groups to vote against him.

However Pierre-Louis, an economist and former advisor to President Jean-Bertrand Aristide [RC-08-06], would appear to meet the constitutional criteria. It is also the case that, unlike Pierre and Manuel, she made efforts to win support from other parties, holding meetings with various legislators. Nevertheless some sectors have expressed concern over allegations that she may be homosexual, apparently on the grounds that this could affect her “morality".

• Senate approval

Michí¨le Duvivier Pierre-Louis's final ratification as prime minister has yet to be approved by the senate later this week. A newly formed bloc of 10 senators have already said, however, that their vote will depend on negotiations over issues including the make-up of government (which parties are to be included and which ministries they will be assigned); a proposed privatisation scheme; and the handling of a number of judicial cases. 

In the second quarter of 2009 the economy grew by 1.9% year-on-year. This was, almost certainly, the best performance in the region, though it is a far cry from the 11% GDP growth registered in 2008. The only major economic sector to contract in the second quarter was banking services. This suggests that the banking sector has been affected by the problems affecting the global financial system. Manufacturing also contracted in the second quarter. In the first half of 2009, the economy grew 2.4% year-on-year. This in an impressive performance given the fact that export activities such as the production of fresh fruit for foreign markets; the Zona Libre de Colón, air traffic and the use of the Panama Canal all contracted. The latest monthly economic activity figure (Imae) suggests that the economy is now contracting very slightly. The Imae for June showed a fall of 0.05%. Such a slight dip suggests that the economy will power away again in 2010.  Most international economists are bullish on Panama, suggesting that the expansion of the Canal will keep the economy growing strongly. The consensus is for real annual GDP growth of 6% between 2010 and 2014.

Inflation: In the year to August consumer price inflation was only 1.8%. The consensus forecast for inflation over the next five years is that it will average 2.5%.

The pro-business government of President Ricardo Martinelli is facing the prospect of unrest following a deeply unpopular change to the 1963 mining law which repeals the ban on foreign government investment. Protests from civil society groups and the indigenous sector - the latter up in arms given many concessions lie within its territory- have already prompted some hasty reassurances from Martinelli. This suggests that just as he was forced to backtrack last July over his attempt to weaken union and environmental legislation (Ley Chorizo) [RC-10-09], the mining issue, which has also reportedly caused tensions within his coalition, could well prove another misjudgment.

Martinelli first announced his interest in changing the law in March 2010, in a bid to boost investment in the largely dormant metallic mining sector [RC-10-05]. While an October 2010 report by the economy ministry (MEF) put Panama's copper reserves at some 47.2bn pounds, worth an estimated US$141.6bn in situ and its gold reserves at US$8.3bn in situ, there is only one mine currently in commercial production - the Canadian-owned Petaquilla Gold. Critics specifically link the law's changes, which were approved by congress on 10 February (see sidebar), to plans by Canada's Inmet mining company to secure financing from two foreign governments (Singapore and South Korea) for the Cobre Panama mine, Panama's second largest copper reserves (20bn pounds) located some 120km west of Panama City in the Colón province.

With a recent poll by Dichter & Neira showing 67.7% of respondents oppose the development of mining activity in the country, the main outcry over the changes to the law concerns the copper reserves in the Cerro Colorado (25bn pounds/US$75bn) which lies in the Ngí¤be Buglé comarca, one of five indigenous political regions. There have been protests in various parts of the country, including in the provinces of Chiriquí­ and the Bocas del Toro, both in the comarca - the latter notably the site of the deadly July violence which forced Martinelli's repeal of the Ley Chorizo [RC-10-10].

While on 14 February Martinelli issued a public assurance that reserves which lie within indigenous territory would not be developed, this has failed to provide much reassurance given his June 2010 decree eliminating much of the political autonomy of the Ngí¤be Buglé comarca. Following the decree, which returned decision-making powers to the central government, the national electoral authorities (TE) held regional elections in October 2010. This was widely considered to be an attempt by Martinelli to install local officials more likely to back the development of the Cerro Colorado and other projects which are deeply unpopular with indigenous groups [RC-10-11].

• Divisions at the top?

While the 71-seat legislature approved the change to the mining law by a convincing 42 in favour and 15 against, the local press cited as evident of divisions at the top the fact that Vice President Juan Carlos Varela, who is president of the Partido Panameñista (PP) - the main coalition partner in Martinelli's Alianza por el Cambio-, refrained from signing the ministerial resolution dated 26 October 2010, allowing the initiative to be put forth in congress. This follows other signs of strain within the coalition, which notably surfaced over the issue of presidential re-election [RC-11-01].

Argentina's attempts to mete out justice for its worst-ever terrorist atrocity - the bombing of the AMIA Jewish mutual association in July 1994 - collapsed in chaos on 2 September. The attack, in which 85 people were killed, is widely thought to have been carried out by the Iran-backed Hezbollah militant group. However, it was accepted that for an attack of that scale to be carried out, a so-called 'local connection' was needed.

Justice undone
Argentina has long believed that it had found its local connection. Carlos Telledí­n, a mechanic in Buenos Aires, has been in prison since shortly after the attack for allegedly preparing and supplying the minivan used in the explosion. Four members of the city's police force, including the former commissioner Juan José Ribelli, were accused of cooperating with Telledí­n.

However, the illusion that the imprisonment of these men represented a fair outcome was destroyed by the three judges of Tribunal Oral No3, when they announced their verdict after a three-year trial of the local connection. Not only did the court not find any proof that Telledí­n, Ribelli and co were involved in the bombing, but it also revealed major irregularities in the original investigation. Indeed, so significant were these irregularities that those responsible for prosecuting the men could now be brought to trial themselves.

The court found that Telledí­n might have provided engine parts for the attack, but that he did so unknowingly. It also failed to find any substantive evidence implicating Ribelli and the other convicted policemen. A further 17 policemen suspected of involvement were also cleared. Having exonerated the suspects, the court turned its attention to their conviction. The judges heaped opprobrium on Juan José Galeano, who, they said, 'directed his investigation to incriminate [those convicted], claiming to be meeting the demands of society while at the same time satisfying dark interests of unscrupulous officials'. The court also called into question the role played by the former head of the state intelligence service, Hugo Anzorreguy, and the interior minister under former president Carlos Menem, Carlos Corach.

An uncertain future for Galeano
The judges were particularly stunned that Judge Galeano, who made his name in being responsible for the initial investigation into the attack, had paid Telledí­n US$400,000 to implicate Ribelli and the other policemen. The feeling is that Galeano and certain members of the Menem government had not just gone too far in trying to find those responsible for the bombing; they had intentionally gone after the wrong suspects in order to protect the real perpetrators.

As a result, the spotlight has fallen on Galeano, who tried to dodge any investigation by tendering his resignation. President Néstor Kirchner, who has spent his first 16 months in power repeating his commitment to finding justice for the AMIA attack, refused the offer. He wants Galeano to face a full investigation into his conduct, which at the very least will see his career end in public disgrace.

The question now for Argentina is whether or not it will be able to carry on its investigation into the AMIA attack. All Kirchner's good intentions do not alter the fact that many of the trails that could have led somewhere have long gone cold; much of the evidence has disappeared; and such mistakes have already been made that ten years after the attack there seems little left for investigators. Going after Galeano, Corach, and even Menem would be a start, but no one seriously believes this would be possible.

As expected, Antonio Palocci is economy minister no more. Whether he resigned or was fired remains unclear, but as of 27 March he was replaced by Guido Mantega, until then the head of Brazil's development bank and an erstwhile planning minister.

Plus ça change

Palocci's departure came as no surprise. He was squarely implicated in a scandal surrounding the violation of banking secrecy laws and had little choice but to go. The timing of his departure suited Lula, who needed to reshuffle his cabinet before the end of the month to release members of the government who intend to stand for election in October. Sources in Brasí­lia suggest that Lula was beginning to view Palocci as a liability and was happy to see him go.

The government's main concern was that investors would not see it the same way. Palocci had gained plaudits both at home and abroad for his handling of the economy, in particular his move to free up the central bank. 

The bank has been able to tackle high inflation through high interest rates, even when Lula himself was questioning the wisdom of the now-vindicated policy. With inflation under control the bank has started easing interest rates at just the right moment for the president as the election approaches.

Mantega's first task as replacement was rapidly to convince the business community that he is no different from Palocci and would continue his policies. 

The evidence so far is that Mantega will prove true to his word, although this is not without its complications: Palocci endured a torrid relationship with Lula's chief of staff, Dilma Rousseff, and there is evidence she does not see eye-to-eye with Mantega either.

President Tabaré Vázquez is confident that Argentina and Uruguay could resolve their differences over the pulp mill being constructed on the banks of the River Uruguay before the end of the year. Vázquez expressed his optimism after meeting the King of Spain, Juan Carlos de Borbón, who is mediating the dispute, during a visit to Spain on 18 September. He said that the two countries could reach an agreement at the Ibero-American summit of heads of state on 8 and 9 November in Chile. 

The timing is significant: the summit is less than two weeks after the presidential elections in Argentina. President Néstor Kirchner is reluctant to jeopardise support for his wife Cristina Fernández by agreeing to a controversial compromise with Vázquez before the elections. The opposition is trying to derive political capital from the dispute by accusing Kirchner of failing to stop the construction of the pulp mill, which is being built by the Finnish company Botnia, while simultaneously antagonising Uruguay by refusing to allow Mercosur's supranational institutions to consider the dispute. On 19 September the main opposition candidate, Elisa Carrió, said that if she were to win the election, her first action would be to fly to Montevideo, embrace Vázquez, address the Uruguayan congress, re-establish close ties between the two countries and then continue negotiating the conflict.

The two countries presented their cases before the International Court of Justice (ICJ) at The Hague on 12 September but, given that no ruling is likely to be made before 2009 by which time the pulp mill will have been functioning for over a year, a bilateral agreement seems likely. Fernández, who has shown a marked predilection for foreign policy, will not want the dispute souring the early part of her mandate, should she win. She will, however, need to placate Argentine environmentalists and inhabitants of Gualeguaychú.

Uruguay's case before the ICJ was strengthened on 29 August when Vázquez inaugurated storage facilities and improved docks to serve the mill. As Vázquez cut the ribbon a group of Argentine protesters demonstrated 200m offshore. They crossed the River Uruguay in dinghies from Gualeguaychú. The Argentine government has filed a complaint to the ICJ claiming the mill violates a bilateral river protection treaty. Argentine protesters are now effectively guilty of "violating Uruguay's territorial waters".

Strike
Hundreds of workers staged a four-hour strike in Montevideo on 23 August to demand "vital changes" in Uruguay's economic policies. Aside from the usual demands for increases in salary, pension and education and health budget, the leader of Uruguay's main trade union Plenario Inte sindical-Convención Nacional de Trabajadores (PIT-CNT), Luis Puig, accused the government of selling 4m hectares of land to foreigners in the last six years while small domestic producers have to wait years to get hold of a tiny plot of land.

Although industrial output tanked in January, the government is sticking to its optimistic annual GDP forecast of between 2% and 3% in 2009.

In January industrial output fell by 8.9% year-on-year, according to the National Statistics Institute (INE). According to the Sociedad de Fomento Fabril (Sofofa), however, which represents private sector manufacturers, output was down10%.  Strangely, adjusting for seasonal differences (there was one more working day in January 2008 than in January 2009), the Sofofa figure actually showed a lower fall in industrial output than the INE one.

What both agree on is that the economy is reeling from a collapse in external demand, a drop in construction activity and lower domestic consumption. It is worth noting that the INE figure was far worse than independent economists had been forecasting: they had expected a year-on-year drop of the order of 5.4%. 

The latest fall in the INE figure was the fourth consecutive month in which output has fallen and the biggest year-on-year drop in industrial output for a decade.  The problems in industry are already having an effect on jobs. Unemployment rose to 8% in November 2008 to January 2009. In the previous three-month period, the rate was 7.5%. Furthermore, a year ago, the unemployment rate in the November-January period was 7.2%. The acting finance minister, Alberto Arenas, argues that no-one should be surprised by the poor figures, given what is going on in the world economy. (Arenas is standing in for Andrés Velasco, after Velasco's infant daughter was badly injured in an accident.) 

The poor industrial output and unemployment figures suggest that the economy probably contracted in January, for the first time since March 2002. In December 2008, it grew 0.5%, the weakest year-on-year growth figure for the month since 1998. Arenas argues that though the first half of 2009 may be difficult, things will pick up in the second.

The government is hoping that effect of its US$4bn stimulus package on domestic demand will be felt by then. The bulk of the government money is due to be spent on so-called “high impact" projects, such as new roads and bridges.  The construction industry, in particular, needs all the help it can get. The authorised building area fell by 36% year-on-year, in January.  Equally worrying was the 1.2% fall in electricity generation. The main reason for this was a fall in production at thermal power stations. Hydro-electric power generation was up 11.2% year-on-year in January. 

• Central bank -  The central bank is likely to cut rates again at its next monetary policy meeting, which concludes on 12 March. At its previous meeting, the bank cut rates by a thumping 250 basis points to 4.75%. The consensus now is for a cut of between 75 and 100 basis points.
  

If the opposition candidate José Serra managed to win the presidency on 31 October, he would take power as a minority government, with a weak hand in congress. He would immediately have to cut complex deals in order to govern. One obvious option would be to court the PMDB, which opportunistically blows with the prevailing political winds. In contrast, if Dilma Rousseff can hang on, and her overall result suggests she is still the favourite, she will be at the helm of an unprecedentedly strong administration, with key alliances already well established, as per President Lula da Silva's ambitions for his successor.

Looking at the overall breakdown, Rousseff is still on form ahead of the second round. She won in 18 states, with Serra taking eight and Marina Silva winning one, the federal district of Brasí­lia. As expected, Rousseff dominated in the traditional PT heartlands in the north and northeast, but also in much of the southeast, including in Minas Gerais. Even in São Paulo, Serra's home town, his victory over Rousseff was a narrow 40%-37%. On the other hand he won in Matto Grosso and Matto Grosso do Sul, which elected PMDB governors. He also won in Acre (Silva's home state). These complex results underline the messy and often parochial nature of Brazil's large federal state system.

The government coalition took 11 of the 27 state governor races, against eight for the opposition, and should add to this tally in the run-offs. The PT took four states in the first round, including Bahí­a and Rio Grande do Sul. The PMDB took another four, including the country's third largest electoral college Rio de Janeiro (where the incumbent Sergio Cabral romped home), the Matto Grossos and Maranhão. The PSDB's five states include the two most populous, São Paulo (Geraldo Alckmin) and Minas Gerais, with a surprise victory in Paraná.

According to preliminary estimates, the PT/PMDB-led coalition will take about 59 seats in the 81-seat senate in 2011, giving it a strong three fifths-plus majority, enough to approve consitutional reforms. The PSDB and its allies will have about 22 seats. The PT, which made notable gains (to 13 senators, up from eight) will challenge the PMDB for the senate presidency in 2011. The PV will lose its one senator, the PSDB lost three and the DEM 14. In congress, the PT/PMDB coalition will also boost its majority to an unprecedented 366 of the 513 seats in 2011 (or more), an enviable position that Lula never enjoyed. Notably, the PT will be the largest party in the lower house in 2011, with 88 deputies, followed by the PMDB on 80, down from 90 currently. Again, this will prompt the PT to jostle with the PMDB for stewardship of the congress. (see sidebars)

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The newly elected senator Aécio Neves (49), an expected presidential candidate in 2014, will be a key figure to watch. He scored a hat trick on 3 October - he was one of the second most popular canidate for the senate (winning 7.56m votes), his successor as state governor in Minas Gerais, Antonio Anastasia, was re-elected and Itamar Franco, of the allied Partido Popular Socialista, also won a senate seat for Minas. Neves is the clear front runner for the PSDB nomination in 2014. Anastasia declared of him after the vote, “He will be a great president, he has all the requisites of a statesman: political leadership, charisma, social awareness and managerial responsibility". To this he might have added Neves' good looks, always a vote winner. Neves's celebrations were marred, however, by the death in Belo Horizonte of his 83 year old father, Aécio Ferrerira da Cunha, on the night of the election.

São Paulo assembly falls to PT

Another rising star in the PSDB, Aloysio Nunes, was elected senator for São Paulo with 11.2m votes, well ahead of the the PT's elected senator Marta Suplicy. Its worth noting that despite the PSDB victories in São Paulo, the state assembly will likely be controlled by the PT, which could make life difficult for the PSDB governor-elect, Geraldo Alckmin. 

No laughing matter

Francisco Everardo Oliveira Silva, alias the clown 'Tiririca', won a seat in congress with an astonishing 1.3m votes, more than any other federal deputy. The 45-yr old Tiririca ran as a complete outsider, with slogans like: “Vote for Tiririca, things can't get worse than they already are"  and “I  haven't a clue what goes on in congress, but I'll tell you once I'm there".  He took 6.3% of the vote in São Paulo, Brazil's richest state, on a Partido da República ticket. Tiririca may not be able to take up his seat, as he is accused of being illiterate. An electoral judge is examing a claim that Tiririca forged his candidate registration. If found guilty, he could not only lose his new seat; the penalty for forging documents for electoral purposes is a fine and a five year jail sentence.

The government is forecasting that the economy will grow 9% this year and by at least 6% in 2007. The finance minister, Nelson Merentes, is budgeting on inflation coming in at below 12% in 2007. This year inflation looks like exceeding 15%. The government had originally budgeted on inflation of 10% in 2006, but increased this target to 12% at the end of September.

The 2007 budget is equivalent to 32.7% of GDP. Merentes claimed that the government would not overdepend on oil revenues to finance spending in 2007. The government is budgeting on an average oil price of US$29 a barrel in 2007. Currently Venezuelan oil is fetching US$49 a barrel. The average price for the first 10 months of the year has been US$58 a barrel. The export price of Venezuelan oil has fallen by almost a third in the past three months.

Despite this, the government is bringing forward the Christmas bonus for public sector employees to November. This is just before voters decide whether to give President Hugo Chávez another six years. The bonus is the equivalent of three months' pay. The cost of this largesse is likely to be around US$3bn.

The financial sector is benefiting from the boom. In the third quarter, banks' profits rose by 22% (year-on-year) and bad loans were extraordinarily low at less than 2% of total loans. Only Chile's banks have made fewer dud loans.

Inflation: In October inflation improved to 0.7 %, less than half the 1.9% rate recorded in September. This brought the 10-month rate to 13.4%. The 12-month rate is 15.5 % already above the 2005 rate of 14.4% .