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President Jean-Bertrand Aristide has personally agreed to the `confidence-building' measures proposed by Caricom leaders. These are not just taking his promises at face value: they have set a deadline — Caricom's next intersessional meeting, to be held in March in Antigua — for the measures to be in place.

Aristide held a lengthy meeting on 31 January in Kingston with four Caricom leaders (PJ Patterson of Jamaica, Patrick Manning of Trinidad & Tobago, Kenny Anthony of St Lucia and Perry Charles of the Bahamas), in the presence of observers from the US, Canada, the OAS and the EU. The menu he agreed to is not new. It includes:

-Appointment of an independent prime minister.
-Installation of a neutral electoral council.
-Reform of the police.
-Demobilisation of armed gangs.
-Release of jailed members of the opposition.
-Lifting of restrictions on demonstrations.

For some of these measures Caricom has set a tighter deadline. Patterson has said that all people whose release has been judicially ordered will be set free within the week, and that arrested demonstrators should be processed within 48 hours at most. Also immediate is to be the review of rules that allow demonstrations only in specific areas.

As regards the armed gangs that act as the government's shock troops, though, Aristide has only been asked to set in motion before 15 March a scheme whereby weapons are surrendered in exchange for jobs under a UN-supported programme. Aristide left the meeting announcing to the press that Caricom would not be imposing sanctions on Haiti; Patterson hinted that this was not a foregone conclusion.

Next on Caricom's agenda is a second meeting with representatives of the opposition, due to take place sometime this month. For now, the opposition remains adamant that it will not take part in any elections with Aristide in office.

The two-day strike against the government's economic policies held on 28-29 January was claimed as a success by its organisers, inasmuch as it brought the country to a standstill. It also left a toll of nine dead, dozens injured and about 500 arrested — and the disquieting emergence of armed bands which have been linked both with the Mejí­a reelection campaign and with local drug traffickers.

Most of the casualties (all of the fatalities) were among the strikers shot in clashes with the police and army units sporting the camouflage gear that marked them as Iraq veterans, or with the bandas blancas sporting caps with the PPH reelectionist logo, and bystanders caught in the crossfire. At least one protester was injured when the homemade bomb he was carrying exploded. As the strike entered its second day, the senate was giving first approval to the ley de lemas allowing parties to field more than one candidate — a piece of legislation President Hipólito Mejí­a wants rushed so that it can be applied in the elections now just over three months away [WR-04-02].

Until recently, the government of prime minister Bharrat Jagdeo had only been accused of encouraging a trigger-happy approach to law enforcement. Now it is being accused of running a death squad which targeted suspected criminals and fugitives — and as a result home affairs minister Ronald Gajraj has been barred from entering Canada, and two other governments have urged prompt action.

It started with the 5 January murder of Shafeek Bacchus. His brother George, convinced that he had been the real target, claimed publicly that he had worked as an informant for a hit squad that acted on Gajraj's instructions. George Bacchus repeated his allegations to the US embassy. 

The first repercussion was an announcement by Canada that it was revoking Gajraj's visa. Then US ambassador Roland Bullen said his government expected an independent inquiry, and British high commissioner Stephen Hiscock followed up saying, `We believe that the integrity of the government is something that is at question here. We hope that the government would find a way of dealing with these allegations.' The government says it is awaiting a formal statement by Bacchus (who has gone into hiding). Gajraj has disappeared from public view.

DOMINICAN REPUBLIC | `Unsustainable' debt with power companies. Frank Marino Hernández, director of the think-tank IDEA, has pointed to the government's debt with the electricity firms -- about RD$25bn (US$550m at the current exchange rate) -- as one of the underlying causes of the country's chronic power crisis. Since 1999, he says, the government has been falling behind in the disbursement of the subsidies meant to compensate for keeping the electricity rates low. The rates were to have been made more `transparent' over the past four years, but this did not happen. Of the outstanding debt, US$400m or so is owed to the generating companies, and about US$100m to Unión Fenosa — and the debt is increasing at an unsustainable US$40-48m a month, according to Marino.

GUYANA | Debt relief cleared. The IMF, the World Bank's International Development Association (IDA) and the Paris Club have agreed that Guyana has met the eligibility requirements for debt reduction under the enhanced Heavily Indebted Poor Countries (HIPC) initiative. This means that US$413.6m will be written off. The Paris Club has just approved the bilateral component of US$90m.

GUATEMALA | Fiscal adjustment looming. Finance minister Antonieta de Bonilla has been softening up the public for a tough fiscal adjustment. First she announced that, without corrective action, the fiscal deficit could climb to 4.7% of GDP, and that fiscal reform would be required in the short term. This, she said, was the main reason behind President Oscar Berger's policy of seeking a `fiscal pact'. Later, however, she announced that she would be recommending a 20% cut in budgeted spending for this year, to keep outlays down to Q24bn. This, with revenues at Q19.5bn, should hold the deficit down to 2% of GDP. 

COSTA RICA | FTA deal with US. The US has finally approved the `market-opening language' put forward by Costa Rica, clearing the way for a Cafta deal with all Central American governments. Costa Rica has agreed to open its insurance market to external competition by 2011, and to deregulate `value-added' telecoms services.

The state of Veracruz is breaking new ground with the passage of an antikidnap law that tries to discourage the crime by blocking the payment of ransom — apart from stiffening the penalties for convicted kidnappers. Federal law enforcement chiefs are hoping that others will follow suit, though there is little evidence that this approach has worked elsewhere in Latin America.

The state antikidnap law, passed on 28 January, raises to 50 years imprisonment the penalty for kidnapping and mandates the freezing of the assets held by the victim and close relatives, so as to `inhibit' the payment of ransom. Chief federal prosecutor Rafael Macedo hailed this as `an important precedent' and claimed that in other countries such provisions had worked; all that was required was to implement the law `with courage, energy and conviction.'

The case most frequently cited as a success story for the strategy of blocking ransom payments is Italy, where it has been used against politically motivated and Mafia kidnappings, which even at their peak never came close to the high levels recorded in Latin America since the 1980s.  

In Latin America, Colombia introduced similar legislation only to have it thrown out by the constitutional court, on the grounds that it interfered with the right to dispose freely of one's assets for an unreproachable purpose such as rescuing a relative. A recent attempt to reintroduce antiransom legislation has been criticised as tantamount to penalising the victims, and liable to reduce even further the number of kidnappings reported to the authorities.

As elsewhere, the Veracruz law is a response to a few high-profile abductions, such as those of federal congressman Mario Zepahua and the son of one of his colleagues, Pablo Pavón (both of them from the Partido Revolucionario Institucional, PRI, which rules in Veracruz).

Farmers in the northeastern Mexican state of Tamaulipas have been voicing their concern that President Vicente Fox will bow to a `nudge' from US President George Bush Jr that the time has come for Mexico to start repaying the accumulated arrears on its `water debt' — just when, for the first time in three years, they have been allocated enough water to grow profitable crops.

Mexico is obligated by treaty to send to the US, annually, 525m litres of water from the Bravo river (known as Rio Grande in the US), in exchange for the 2.2m litres it takes, at the western end of the border, from the Colorado river. Before Fox took office, Mexico had accumulated a `water debt' of 1.9m litres. Fox began to meet the established yearly quota, but argued that the prolonged drought ruled out, for now, the repayment of the arrears.

At the recent Monterrey summit, Bush noted that heavy rainfall in 2003 had replenished Mexico's reservoirs — which is true for many, but not for those of Falcón and Amistad, from which the US quota, and the water for Tamaulipas, are drawn. For Tamaulipas farmers, even meeting the annual quota has meant that they had to do without, limiting their sowing to such hardscrabble crops as sorghum. For this year the government has formally allocated to them 970m litres, which could allow them to switch to maize — but they are wondering if that water will actually arrive at the farms. They complain that the Mexican states upstream of the distribution reservoirs, and particularly Chihuahua, are able to siphon off their share without hindrance. In this they have the sympathy of the Texas government — otherwise the chief claimant of Mexico's water arrears.

HARD-CURRENCY INFLOWS | Remittances second only to oil. Remittances by Mexican expatriates last year reached an unprecedented US$11bn (of which US$3.33bn arrived in the last quarter). This represents an increase of 35.1% on 2002 -- though it is worth keeping in mind that the central bank attributes this not only to an increase in the number of people sending money home, but also to `improved accounting coverage'.

Only oil export revenues surpassed remittances: boosted by improved world prices, they reached US$16.28bn. Foreign direct investment (FDI), at its lowest in seven years, brought in US$11bn, and tourism, an estimated US$9.2bn.

The result: the current account deficit was down by 34.2%, to US$9.2bn.

EMPLOYMENT | Decline in manufacturing. The latest figures on employment in manufacturing show a 3.9% year-on-year decline in the first 11 months of 2003, with a slight steepening of the curve in November. The fact that the number of hours worked fell by 4.3% reveals an accompanying decline in productivity.

The situation in the maquila (assembly) sector was somewhat better. In November employment in this sector was down 1.3% on a year earlier, but the number of hours worked were down by only 0.3%. Most of the job losses took place in maquiladoras farther from the border: the federal district (-44.5%) and the state of Mexico (-26.1%), Durango (-18.4%) and Aguascalientes (-17.7%). In northern states, most immediately responsive to change in the US economy, employment in the maquila sector actually increased, if slightly.

President Lula da Silva's chief of staff, José Dirceu, said last week that congress should look seriously at the possibility of legislating to curtail press freedom in cases involving the national interest. What prompted this was the reopening of a two-year-old murder case now allegedly involving a slush fund of the ruling Partido dos Trabalhadores (PT) with a trail leading all the way to the party's then-president: none other than Dirceu.

At the time, the case was notorious enough. On 20 December 2002, Celso Daniel, mayor of the city of Santo André in São Paulo state, was abducted and murdered. Daniel had just been appointed coordinator of Lula's presidential campaign, and many thought he stood a good chance of becoming finance minister in a Lula government. The PT's initial reaction was that the killing had been the work of a rightwing `paramilitary' group. The police concluded that it had been perpetrated by common criminals.

The slush fund claims
Last December, at the request of Daniel's relatives, São Paulo state prosecutors reopened the case. They soon arrested a man and charged him with masterminding the assassination: Sérgio Gomes de Silva, also known as Sombra (`Shadow'), Daniel's former security chief and now a businessman, who had been with the mayor at the time of his abduction.

Celso's brother João Francisco has testified that the mayor was killed when he tried to `clean up' a kickback racket he himself had set up, to raise funds for the PT's campaign chest. The kickbacks were extorted from concessionaires of municipal services: bus lines, refuse collection, works contracts, traffic ticketing. One bus line operator has testified that she and her peers were jointly contributing about US$100,000 a month. The problem which the mayor was trying to correct, according to João Francisco Daniel, was that some of the go-betweens had been pocketing part of the money. Investigators say that some of the money passed through Sombra's bank accounts.

João Francisco Daniel claims to have heard from Gilberto Carvalho, at the time the late mayor's chief of staff (now Lula's private secretary), that he had carried cases full of cash directly to Dirceu.

Plot to discredit the PT?
The government, while asserting that it wants the matter cleared up quickly, has turned down a number of requests to set up a congressional public inquiry commission (CPI in the Portuguese abbreviation) with full powers to subpoena testimonies and lift banking secrecy. It says that the reopening of the case is a political smear campaign by the opposition Partido da Social Democracia Brasileira (PSDB), which at the time of the killing (as now) ruled São Paulo state. The PSDB has been trying to collect the requisite number of signatures to endorse a motion to set up a CPI — but has been stuck since late December just short of the mark. Dirceu also accuses `sectors of the prosecution service and the press' of irresponsibly spreading falsehoods. He said last week, `The constitutional rights of innumerable citizens are being violated by [them]. Congress needs to study this most grave situation.'

New ally in trouble too
It is not only the ruling party that has come in for a spot of embarrassment; so too has its most recent ally, the Partido do Movimento Democrático Brasileiro (PMDB). When PMDB senator Amir Lando was appointed social security minister in President Lula da Silva's recent cabinet reshuffle (WR-04-03), the seat he vacated fell to his alternate, Mário Calixto Filho, also of the PMDB.

No sooner had Calixto been sworn in on 26 January than the news began to circulate that he had been convicted of having committed electoral fraud in the state of Rondônia — which carries a one-year bar on holding elected office — and is facing no fewer than 140 investigations, including one by a federal congressional committee on money laundering, on suspicion of having salted away some US$380,000 in havens abroad. Calixto, who claims to be the victim of political persecution, must this week submit arguments against the application of the ban.

In Delhi last week, on his first visit to a major G-20 partner, President Lula da Silva launched a call to `change the economic geography of Planet Earth'. It was not just rhetoric; he followed up with a practical proposal for the whole of the G-20 — the launch of negotiations for a group-wide preferential tariff agreement when Unctad meets in Brazil in June.

Though the Financial Times cited `many observers' as deeming the idea `unrealistic', Lula's proposal came just after the signing of a preferential tariff agreement between Mercosur and India, and the commitment to start discussing a free-trade agreement later this year. India is not at present one of Brazil's main trading partners: two-way trade last year reached only US$1.2bn. This, however, represents a 250% leap since the beginning of the decade, and Brazilian businessmen are projecting, on the strength of the deal with Mercosur, that the traffic will reach close to US$5bn by 2005, and keep on growing fast for years thereafter.

Overcoming obstacles
The rhetoric is worth noting as well: it is the script for the drive that has already taken Lula to the Arab countries and will take him soon to China. Addressing a seminar in Delhi on `Prospects and possibilities of sustainable development', Lula said that a key objective was to `avoid the perverse effects of globalisation [designing] social policies that can guarantee nutritional sovereignty and create decent, productive jobs' in the developing world.

`It is not enough,' he said, `to grow. Growth must mean income and wealth distribution.' Countries like India and Brazil, he went on, `don't want to remain exporters of agricultural products and raw materials, but to enter the path of science and technology.' [An illustration of this aspiration was provided by the list of sectors considered by the businessmen present as promising areas for Indo-Brazilian trade: motor vehicles, aeronautics, telecommunications, foodstuffs, construction, chemicals, petrochemicals, pharmaceuticals, computing, tourism, healthcare, agribusiness, mining, oil and gas.]

Lula advocated a partnership between the public and private sectors to produce `the interaction [needed to overcome] the obstacles placed on trade relations by those two giants, the US and the European Union.' He added, `If we know how to work in the 21st century, this will be the century of the so-called emerging countries, like India, Brazil, South Africa, China, Mexico and Russia, hitherto considered second-class nations.'

The already tense relations between Chile and Peru, fueled by the media on both sides, took a turn for the worse when Chilean marines shot dead a man, presumed to be Peruvian, as he crossed the border and refused to obey the order to halt. This triggered charges of excessive use of force by both the Peruvian government and the Chilean congress, and an anti-Chilean demonstration by the ultranationalist Batallón Humala in Lima.

The incident took place on 25 January, just before midnight. The marines say they spotted a person entering Chilean territory along the beach, ordered him to halt, to no avail; fired warning shots, also to no avail; then shot him down. Their version is being challenged, particularly after it was discovered that they had misreported the delay in getting the injured man to a hospital.

It has since transpired that only a few days earlier the Chilean defence ministry had ordered all border posts to adopt stricter measures to prevent entry by illegal immigrants. This was apparently prompted by an intelligence report saying that Bolivian politician Evo Morales and a group of followers would attempt to march on the border. The instructions, however, specifically recommended avoiding knee-jerk responses to provocations, and prohibited border guards from opening fire unless fired upon.

Though the Chilean government officially dismissed the matter as `a police affair', the president of the Chilean senate's foreign relations committee, the Socialist Ricardo Núñez, was scathing in his criticism of the marines' action. `I don't believe,' he said, `that the Peruvian citizens had placed at risk the security of the country. I believe that it is perfectly possible to apply other procedures, such as detaining the person and trying him for clandestine entry, according to the provisions of Chilean law.'

In Lima, a group of about 50 reservists of the `1st batallion' of the Movimiento Nacionalista Peruano (MNP) headed by retired Major Antauro Humala, staged an angry demonstration in front of the Chilean consulate-general. That same group had had to be restrained by the Peruvian police back in April 2001, when the Chilean navy first installed that border post: after marching through the streets of Tacna they had headed for the border, intent on demolishing the border post. This incident persuaded the Chilean authorities to resite the post, but it was left in the hands of the marines (now it is being suggested that it would be safer to hand it over to Carabineros, the paramilitary police, who man the rest of the borders).

Porous, dangerous borders
Illegal immigration from both Peru and Bolivia has been escalating of late. Arrests of illegal immigrants in Iquique shot up from 45 in 2002 to 255 in 2003. The newspaper La Tercera cites estimates that put the number of Bolivian entrants at 2,000 a year, and that of Peruvians working illegally in Arica at more than 5,000.

Only five mountain passes across the Andes are authorised crossings monitored by Carabineros. There are other minor passes where the only obstacles to entry are the landmines laid by the Chilean military, some of them sensitive enough to be set off with a pressure of only five kilos. One risky way of avoiding this particular danger is to walk along the track of the La Paz-Arica railway. An alternative is the numerous paths used constantly by highland pastors for whom the borders might as well not exist.

Hard as it is to hear beyond President Hugo Chávez 's loud denunciations of a wide range of perceived threats, several Venezuela watchers believe they can perceive a change of tone in his government's stances, possibly related to a growing conviction that it is now the opposition that is being viewed abroad with growing suspicion. One area where this is happening most visibly is in the effort to play down continuing incidents along the `hot' border with Colombia.

On 29 January there was another armed confrontation on that border, between a 30-strong detachment of Venezuela's national guard (GN) and, to quote the official statement `a column of armed men; about 50 to 100 men.' These were tentatively identified as Colombians, but beyond that the local GN commander, General Castor Pérez, seemed far more interested in talking about the GN patrol's search for kidnapped Venezuelans reported in the area.

Even more prominence was given by the GN to the resumption of antidrugs operations in the Perijá mountains, which run along Venezuela's northwestern border with Colombia. The head of the GN's antidrugs command, General Ismar Lozada Cardozo, emphasised that the US was providing satellite images to help target coca and opium poppy fields, and that aerial fumigation would, `as in the past, be part of the mission.' Lozada spoke warmly of the `close partnership' Venezuela had developed with the US, as well as Colombia, Canada, Spain and Italy, in the antidrugs effort. This was a change from the recent talk of CIA plots.

A meeting has been scheduled for within a fortnight between the defence ministers of Colombia, Jorge Alberto Uribe, and Venezuela, General Jorge Garcí­a Carneiro. When the former announced this in Bogotá last week, he pointedly refused to rise to claims made by Chávez about an influx of weapons and explosives from Colombia to Venezuela. He said the matter would be added to the agenda of the bilateral meeting, adding, `The arms flow is towards Colombia from other countries, but we will listen, and if anything must be done, President Chávez can be assured that we will do it.' The meeting, to take place in Venezuela, will focus precisely on how to contain problems along the 2,219-kilometre common border.

Meanwhile, Venezuelan Vice-President José Vicente Rangel, usually as vocal (if somewhat more cerebral) as Chávez , took himself off to the inauguration of a new customs office on the Colombian border, `to reaffirm the disposition towards dialogue with the Colombian nation and the Colombian state, because we harbour no reservations about it.' In a parallel initiative, Caracas has launched a campaign to revive bilateral trade with Colombia, after the slump caused by the recession, exchange controls and a string of Venezuelan measures that had greatly irritated the Colombians.

Asunción was in a flap during the first half of last week as a result of reports about a plot to assassinate President Nicanor Duarte, which the government confirmed late and sketchily. Opposition politicians have stated unequivocally that they do not believe the story.

First to receive the news were the Asunción media, who headlined their 26 January offerings with reports, based on unnamed sources, about Brazilian intelligence warning Duarte that six Brazilian hitmen had entered Paraguay armed with surface-to-air-missiles, intent on killing him. Duarte was at the time on holiday in Brazil, as a guest of his peer Lula da Silva. Brazilian ambassador Luis Augusto de Castro said that his own foreign ministry had received no information about the matter.

Later in the day Duarte's private secretary, José Marí­a Ibáñez, confirmed that such a warning had been received. Only in the evening did Duarte himself tell the public, `We have classified information; I can't enter into details.' He did add, however, that days earlier US ambassador John Keane had advised him to heighten his security precautions. The last such assassination in Paraguay was that of Vice-President Luis Marí­a Argaña in 1999.

ARGENTINA | Opposition grows within IMF. On 28 January, much later than originally expected, the IMF's board approved the first review of Argentina's performance under its three-year US$13.3bn standby agreement signed last September. It granted a set of waivers requested by Argentina and cleared for disbursement a tranche of US$358m. There is growing opposition to continuing to `carry' Argentina (on the grounds that it is not seeking a reasonable agreement with its creditors): leaks, which began to flow profusely in the days before the board meeting, indicated that eight of the 24 board members, among them three European G7 members, abstained from voting on Argentina's review -- which is the IMF directors' way of signalling displeasure. When the standby deal was approved in September, there were only three dissenters.

Most influential in swinging the vote Argentina's way was the US, even though deputy managing director Anne Krueger, a Bush administration appointee, has been openly airing the dissenters' views (which reflect the stance of many creditors). The IMF board has warned Argentina that, come the next review, `the restructuring of [the] sovereign defaulted debt remains the most critical task' and said that it expects a `deepening [of] relations with private creditors.' There was also something for the creditors (and their friends on the board) in the communiqué issued on 28 January: it said the target is `a collaborative, comprehensive and sustainable debt restructuring.'

BRAZIL | Bank issues growth warning. The central bank delivered an extra dampener on growth expectations last week when, after having decided to keep the benchmark interest rate unchanged [WR-04-04] it issued a warning that inflation continues to be a threat. It worries aloud that some price increases between December and January may not be isolated events but `an accommodation of inflation to higher levels'. Hence, its policy will be to `preserve the successes achieved so far.' 

This has been read by business associations as spelling no further reduction of interest rates, and hence little additional stimulation of growth, for some time.

It was a very bad week for President Alejandro Toledo. His friend and former legal adviser César Almeyda was arrested after the discovery of his past dealings with the late General Oscar Villanueva, reputed bagman of the corrupt network set up by former security adviser Vladimiro Montesinos during the Fujimori years. Also, Vice-President Raúl Dí­ez Canseco finally decided that he could no longer hold on to his post after having relinquished his place on the cabinet as a result of allegations of nepotism. Interior minister Fernando Rospigliosi admitted that the administration was facing `a crisis and a governability problem' as an opinion survey showed Toledo's approval rating at its lowest ever (7.2%), 90.9% of respondents believing that he will not complete his term, and 92% wanting him to cut it short.

"Vlé pa Vlé, fou'l alé." [`Whether he wants to or not, he must go.']

Protesters in Port-au-Prince, demanding the resignation of President Jean-Bertrand Aristide.


"It's all about drugs and thugs."

Unnamed US ambassador on his posting to an Andean capital, cited in a report by the New York-based Council on Foreign Relations (CFR).


"We are victims two times over in this situation [...] they're trying to kill the mayor a second time."

José Dirceu, on the revisited murder of mayor Celso Daniel, which implicates Dirceu in running a political slush fund.

LATIN AMERICAN REGIONAL REPORT: ANDEAN GROUP - NOW AVAILABLE

Bolivian President Carlos Mesa's honeymoon period seems to be coming to an end, despite his year-end promises to meet the various demands of the protest movements that led last year to the resignation of his predecessor, Gonzalo Sánchez de Lozada. We look at the latest political and economic developments in the landlocked country. We also consider an analysis carried out by the US-based Council on Hemispheric Affairs (Coha) on the referendum on the revocation of Venezuelan President Hugo Chávez 's mandate. Coha suggests the referendum is unlikely to solve the country's problems. Elsewhere, in Peru, conspiracy theories abound as former spy chief Vladimiro Montesinos goes on trial; Ecuador concocts Plan Colombia countermeasures, and Colombian President Alvaro Uribe takes flack over paramilitaries. An annual subscription to Latin American Regional Report: Andean Group (12 issues) is priced at US$225 (Discounted rates available to academics/NGOs). For details, please call LAN on +44 (0)20 7251 0012 or email: [email protected]

Trade Finance and Euromoney Seminars present: 6th Annual Trade Finance in the Americas Conference Thursday 26th & Friday 27th February 2004 Biltmore Hotel, Miami, USA To register or to receive a brochure: Email [email protected] Telephone: +44 (0)20 7779 8999 Visit: www.euromoneyseminars.com/tamprog

Latin American Weekly Report (Online) ISSN 1741-7422. Published weekly (50 issues a year) by Intelligence Research Ltd, 61 Old Street, London EC1V 9HW, UK. Telephone +44 (0)20 7251 0012, Fax +44 (0)20 7253 8193, Email: [email protected]. Website: www.latinnews.com EDITOR: Eduardo Crawley, [email protected]. Subscription rates will be sent on request. COPYRIGHT © 2004 in all countries. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, electrical, chemical, mechanical, optical, photocopying, recording or otherwise, without the prior written permission of the publishers. REFERENCES: Back references and cross-references in the current series will be made thus: WR-04-01 will indicate Latin American Weekly Report, Issue No.1, 2004.

Mexico's Convención Nacional Hacendaria (national fiscal convention), rarely convened, last week brought together representatives of the federal government, state governors and legislators, to work out a new federal distribution of fiscal resources. The Fox administration hopes that it will provide a new and effective opportunity to make its case for fiscal reform.

The core problem for the states is that 90% of their resources come in the form of transfers from the federal government -- and they feel they do not get enough. Shortly after Vicente Fox took office, the opposition state governors created an umbrella body, the Conferencia Nacional de Gobernadores (Conago), to represent their demands for a new shareout of power and resources. In time Conago also attracted the governors of the ruling Partido Acción Nacional (PAN). Conago has been calling for a `new federalism' to replace the highly centralised system set up by the Partido Revolucionario Institucional (PRI) in its 70 years in power. It took losing that power for the PRI to embrace this cause. Now President Vicente Fox is adopting the `new federalism', with a couple of twists.

One is that the redistribution of power should not go too far. As Fox put it, `We must strengthen all federative entities [meaning the states] but none of them must be stronger than the Mexican state.' His finance minister, Francisco Gil, says much the same to introduce the second twist: the aspirations of states and municipalities are `legitimate' but it is necessary to `prevent the strengthening of the local governments from weakening the federal republic.' Moreover, adds Gil, `given the stringent budgetary limitations faced by the federal government, greater participations [in fiscal revenues] are only possible if one starts by increasing fiscal receipts.' In other words, unless the fiscal reform proposed by the Fox administration is adopted there can be no improved shareout.

Nature of the problem
Mexico's tax receipts are notoriously low. Over the past 13 years they have averaged 10.7% of GDP. In 2002 they reached 11.8%. According to the government, in 2003 there was another increase, to 12.8% — but this can be only a rough estimate, since final GDP figures for 2003 were not yet in when this calculation was made. According to the tax authority, the increases in the past two years have come chiefly from improved collection.

The bulk of fiscal tax receipts comes from three taxes: income tax (ISR), value-added tax (IVA) and the special tax on production and services (IEPS). The first two depend directly on the performance of the economy. The third, which includes revenues from the sale of oil and derivates, depends very much on the world oil price, and its yield has been quite erratic in recent years.

One big problem is that about 80% of the tax receipts are tied up in outlays the federal government finds hard to eliminate or reduce. Another — the key target of the Fox administration's fiscal reform proposals — is that existing exemptions to these three key taxes amount to about 6.3% of GDP. Just what the convention will come up with in its scheduled half year of deliberations is anyone's guess. Finance minister Gil is clear about the starting-point: `We are still far from sufficient agreement on the means to achieve [fiscal reform].'

It was a bad week for the presidential aspirations of Marta Sahagún, wife of President Vicente Fox, and at least partly this may have been of her own doing — though there was also at work a strong element of old-fashioned political cunning marshalled by seasoned practitioners.

Perhaps the worst for Sahagún was the Mexican rebound of an article published in the British press, which portrayed the accounts of her charity, Vamos México, as somewhere between sloppy and dubious. She claimed that she had been misrepresented; her husband publicly denied that the charity had received any money from the government — which was not explicitly claimed in the article. What the article did note was that the line between working for the charity and working for the government, on Fox's or Sahagún's staff, was hazy.

At the end of last week Sahagún made public a list of donors to Vamos México and some account details. The former showed that Mexico's biggest state concern, the oil company Pemex (the government's chief source of revenue), was a donor — as was also a shareholder in a bankrupt company (at the same time as he was negotiating the firm's liabilities). The latter, that in its first 15 months of existence (late 2001 to end-2002), Vamos México received M$153m (about US$14m), but distributed only M$46m (US$4m), the rest going on running expenses. Among the assets held by the charity are M$3.6m (US$330,000) worth of jewellery. Congress may investigate further.

Politics with a twist
The revelations about Vamos México, long seen by the opposition as a vehicle for Sahagún's political career, may damage her chances more than the clever (and humorous) oblique attacks mounted on her from within her own party and from the Partido Revolucionario Institucional (PRI). The first was the announcement that a committee had been formed by leaders of the ruling Partido Acción Nacional (PAN) to promote Sahagún's candidacy as mayor of Mexico city. This sent a double message: that she was abandoning her still undeclared presidential bid and, more slyly, that the PAN leadership thought she was good enough for the mayoralty, but not for the presidency.

The news made headlines which overshadowed Sahagún's announcement that she had never heard of this committee. Even Fox appeared to have been confused; when questioned, he delivered his stock answer that he would support her in any political venture she embarked upon.

The contribution from PRI president Roberto Madrazo came packaged as praise of the kiss-of-death variety. He proclaimed that he saw in Sahagún one of the candidates with the greatest chances in the 2006 presidential contest. He went on to `confide' that Sahagún had recently supped with Mexico's Catholic primate, Cardinal Norberto Rivera, and confirmed to the prelate that she was indeed determined to seek the presidency. The subscript: Sahagún, like the PAN generally, is in cahoots with the church.

A far blunter attack came from Mexico's outspoken former ambassador to the UN, Adolfo Aguilar Zinser, on a speaking tour in Lima. He said, `It would be a cruel joke for Mexico and the Mexicans to have achieved democratic change to end up only with the prospect of seeing the President promote his wife as his successor.' In a similar vein, the secretary-general of the PAN, Manuel Espino, said, `Marta Sahagún should say she will not seek the presidential candidacy. This is what is most convenient for the country's social and political health.'

The recent Bush temporary immigration proposals [WR-04-02] have revived hopes among some 60,000 members of an earlier such scheme that they might finally lay their hands on the social security contributions docked from their pay while in the US. Last week they were promised attention by the government, but only after about 1,000 of their number briefly `occupied' President Vicente Fox's San Cristóbal hacienda in Guanajuato.

The protesters, many of them now elderly, took part in the braceros (`harvesters') programmes introduced by the US to make up for rural labour shortages during World War II and the Korean War of 1950-53. Their contributions were not kept in the US; they were transferred to Mexico's Banco Nacional de Crédito Rural (Banrural) — but, according to the former braceros, they were never distributed. Some months ago the organisation that represents them, the Alianza Braceroproa, called for a trust fund to be set up with the contributions and the interest accrued since 1942. The government paid no attention.

On 7 February, to make their point, close to a thousand former braceros (mainly from Oaxaca, Baja California and Veracruz) converged upon Fox's hacienda and walked past the guards to encamp in the central patio. Hours later, police arrived, plus a delegation headed by the undersecretary of the interior, Martí­n Huerta. When he promised them an audience with his boss in the capital, they peacefully walked back out.

INDUSTRY | Recovery lagging behind other sectors. Mexico's manufacturing industry has not been the first to respond to improved economic conditions in the US — indeed, according to Yeidckol Polenvsky, president of Canacintra, the association of manufacturers, it was the last. Taken as a whole, he says, the manufacturing sector has not yet experienced a recovery. Two subsectors, he says, have been stimulated by the upturn in the US: the auto industry and the maquiladoras (assembly plants). `However,' he adds, `we have many sectors of industry that are not integrated into the export industry, and require not only reactivation abroad but also on the domestic market.'

INVESTMENT | Losing out to competitors. Mexico is losing its edge as an attractive centre for regional operations, and will continue to do so unless reforms are implemented in areas such as energy, taxation and labour legislation. The verdict comes in a study by the leading private-sector think-tank, Ceesp. It says that investors are turning elsewhere because `the cost of establishing themselves [in Mexico] is increasingly higher, as profitability in other geographic areas has been rising.' The winners in this contest, says Ceesp, have been countries like Brazil, Russia, China and India. Mexico, it says, `has not qualified satisfactorily in [several international indicators] such as competitiveness, corruption and regulation.'

BANKING | Joining the Central Americans. Mexican banks are reportedly about to join an initiative launched last November in Central America: the Alianza Bancaria Internacional (ABI). Encouraged by the rapid growth of remittances by expatriates, ABI provides a regionwide network of more than 700 agencies of seven banks which honour each other's cheques and allow their clients to withdraw funds in either their own currencies or US dollars. Apart from Mexican banks, institutions from the US and the Dominican Republic are also said to be weighing the benefits of joining.

An upsurge of violence in Spanish Town, which left a toll of 12 dead, has led to renewed charges by politicians and media that the confrontation was between rival political gangs. Prime minister PJ Patterson has said that no available intelligence confirms this, but indicates instead that the cause was a turf war between criminal gangs.

The Gleaner published last week a report saying that the `dons' of Spanish Town have actually set up a sort of `alternative government' in the old capital, based on a multimillion-dollar extortion racket that preys on local businessmen, market vendors and taxi operators. The report claims, `Extortion proceeds, according to Gleaner sources, are used to bankroll the acquisition of high-powered weapons and motor vehicles that help to tighten the dons' grip on the town and cement the new "government within a government" structure.'

The partisan angle
Prime minister Patterson told the press that, given the knowledge that gang leaders and members were not even hiding, he could not understand why they have not been apprehended, particularly after he had given instructions to the police to bring them in. `I do not accept,' said Patterson, `that there is political protection for any criminals.'

This jars with two things. One is the Police Federation's overt stance that policemen should see their role as that of `peacekeepers', at best creating a buffer between the warring gangs but not getting involved in the war itself. Indirectly, this suggests the survival of politically affiliated gangs involved in a somehow `legitimate' contest.

The other is that the ruling People's National Party (PNP) only recently adopted a report filed by its policy commission in November last year, which says, `It is absolutely clear that the partisan distribution of work, its contribution to crime and violence as well as its corrosion of all aspects of democratic governance has been analysed to death, yet it still lives on. Why?' The commission provides its own reply: that past recommendations regarding `political tribalism' have been only partly implemented, if at all. `The main reason for this failure,' it says, `is clear: Despite all the words against tribalism, critical sections of party leaderships and followerships have hitherto been convinced that from a party electoral point of view, the benefits from tribalism, in terms of votes, outweigh the costs to the party and to national development.'

Political commentator Ian Boyne wrote last week, `There are still criminals associated with the political parties and criminal gangs still exploit their party political connections to carry out their illegal, drug-running activities.' He adds, however, that there is reason for hope, because these gangs `operate in a social and political environment which has changed significantly.' This is in line with the PNP policy commission report when it notes, `There is a deepening disconnect between the values, norms and behaviour of a 30% minority of the Jamaican electorate who privilege the claims of party support over the rights of Jamaican citizenship and the increasing majority who take a diametrically opposed view.'