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How U.S. Can Rebuild Mexico

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Walter Russell Mead, a contributing editor to Opinion, is a senior fellow at the Council on Foreign Relations. He is the author of "Mortal Splendor: The American Empire in Transition."

Cinco de Mayo 2000 finds Mexico engaged in its freest, most competitive presidential election ever. But the United States is suffering from Mexico fatigue. Since the struggle over the North American Free Trade Agreement, neither U.S. politicians nor voters want to think about U.S.-Mexico policy.

That’s a mistake. There are some things the United States, Canada and Mexico could do together that would dramatically change Mexico’s economic outlook and do for Mexico what the European Union did for countries like Portugal and Spain: give ordinary Mexicans something like a first-world standard of living.

In 1862, on the first Cinco de Mayo, 4,000 Mexican soldiers under Gen. Ignacio Zaragoza defeated 6,000 crack French troops at the city of Puebla and, temporarily, saved Mexico City from French occupation.

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But Cinco de Mayo, like July 4, marks the beginning, not the end of a revolutionary struggle. A year later, the French were back at Puebla, captured the town and installed the poor, misguided Archduke Maximilian as “emperor” of Mexico--under French protection. It wasn’t until June 1867 that Mexican troops finally deposed and executed him.

Since the outbreak of the debt crisis almost 20 years ago, Mexico’s economic struggles have followed the pattern of its war against France: spectacular victories followed by retreats and long, grinding campaigns. Over the years, Mexico has faced economic shocks, rallied support for difficult and painful reforms, briefly enjoyed the fruits of victory, only to fall into crisis again.

Despite continuing reform and the beneficial effects of its close ties to the supercharged U.S. economy, Mexico remains shaky. Gross domestic product grew 3.7% last year; but per capita GDP was only 14.2% of the U.S. level, real wages are 26% below the levels of 1981 and hundreds of thousands of Mexicans still cross U.S. borders illegally each year seeking work. Add corruption associated with 71 years of mostly one-party rule and the rising influence of narco-traffickers, and it’s no wonder that insurgent presidential candidate Vicente Fox of the National Action Party has chosen as his campaign slogan: “Ya!”

The best English translation: “Enough, already!”

Mexico, it sometimes seems, has everything you need to be rich, except luck. It’s got the resources, especially oil; it’s got a free-trade agreement with the world’s largest economy; and, most important, it has a large population of energetic, hard-working and mostly young people.

Still, to prosper, Mexico needs more, and the United States is going to have to help. The first thing Mexico needs is massive private investment in infrastructure: in highways, water-treatment facilities, hospitals, power plants and airports. Europe did this with taxes: German taxpayers funded infrastructure programs in Spain. That won’t happen here: U.S. and Canadian taxpayers have zero desire to spend hundreds of billions of dollars on Mexico’s roads.

This means persuading private capital to invest in Mexican infrastructure projects. So far, efforts have been disappointing. Corruption makes projects more expensive than they should be, and Mexico’s poverty makes it hard to make money from infrastructure. Tolls on privately funded roads have to be set so high that few Mexicans can afford them. The same is true of such projects as water-treatment plants: Not many Mexican householders and municipalities can afford the cost of the clean water they need.

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That doesn’t have to stop us. One answer comes from history books. Back when the Mexicans were still fighting the French, the U.S. government encouraged rail companies to build transcontinental rail lines by awarding them land along their routes. Giving construction companies the right to develop land beside, say, the exit ramps of a new freeway, or beside a new airport, would help make these investments profitable.

To cut down on corruption, these programs could be run by tripartite NAFTA boards: Mexico, the United States and Canada would each name some of the board members. Giving Mexico an equal say with its NAFTA partners preserves Mexican pride; giving a majority of seats to non-Mexican partners limits the ability of Mexican politicians to steal the money.

To cut costs further, NAFTA countries could jointly guarantee the bonds of companies investing in approved infrastructure projects. This lowers total costs and makes the investments more profitable.

In exchange for loan guarantees, the U.S. and Canada would get two things. First, they could oversee and audit the operations of the projects. Second, companies getting these contracts would promise to buy a percentage of their equipment and materials from factories in the United States and Canada.

In other words, at no direct cost to taxpayers, the U.S. and Canada would guarantee that, say, 30% of the equipment and raw materials for these projects would be made in Canada and the United States.

Furthermore, the contractors could be required to observe appropriate labor and environmental standards.

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Labor hated NAFTA, but it won’t hate this. With more jobs in all three NAFTA countries, new infrastructure in Mexico, improved environmental and labor standards and little or no cost to U.S., Canadian or Mexican taxpayers, what’s not to like?

We can do more, and maybe save money as well. In the next 30 years, more than 70 million Americans will turn 65. Many will have a hard time affording a comfortable U.S. retirement. One cheap and relatively easy part of the solution is to let retirees follow the sun over the border by extending their Medicare coverage to Mexico, where the cost of living is low.

By reimbursing Medicare-eligible patient expenses--perhaps at a discount to high U.S. rates--in inspected and approved health-care facilities in Mexico, and by negotiating with the Mexican government to ensure adequate legal protection for retirees and their property, the United States could open the doors for millions of aging baby boomers to enjoy affordable and comfortable retirements south of the border.

The effects on Mexico would be transforming: If 10% of the new retirees go to Mexico, the annual economic boost of their spending and Medicare payments alone would be roughly equal to 50% of Mexico’s current GDP.

There’s one more thing the United States could do for Mexico, and this, too, costs little or nothing. Increasingly, many Mexican businessmen are talking about “dollarization”: getting rid of the Mexican peso and making the U.S. dollar legal tender in Mexico. The main reason for doing this is to bring down interest rates. A weak, inflation-prone peso forces Mexicans to pay higher rates than Americans.

This isn’t just about business. High interest rates mean Mexican families can’t do something Americans take for granted: get a mortgage. Helping Mexico dollarize means allowing millions of Mexicans to join the middle class and build their own homes. That, in turn, would create new jobs in Mexico and support Mexican economic growth that doesn’t depend on exports to the U.S. The costs, again, are minimal and the benefits huge.

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This Cinco de Mayo, let’s stop the Mexico-bashing. Mexico pessimism is wrong. Infrastructure investment, Medicare transportability and dollarization could create millions of Mexican jobs, raise wages and living standards, cut illegal immigration, improve the environment, advance labor standards and create new jobs in the U.S. and Canada.

No giant sucking sound; no new taxes.

As surely as it once beat the French, Mexico will someday win its war on poverty and join the first world. With a little help from its friends, that could happen far sooner than most people think. *

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