Foreign Relations, 1977–1980, Volume XXIII, Mexico, Cuba, and the Caribbean

130. Memorandum of Conversation¹

Washington, February 14, 1977, 11:10 a.m.–12:25 p.m.

SUBJECT

• Meeting Between President Carter and President of Mexico Lopez Portillo

PARTICIPANTS

• President Jimmy Carter

  • Vice President Walter Mondale
  • Secretary of State Cyrus Vance
  • Assistant to the President for National Security Affairs Zbigniew Brzezinski
  • Under Secretary of State for Economic Affairs-designate Richard N. Cooper
  • Assistant Secretary of State-designate Terence A. Todman
  • U.S. Ambassador to Mexico John Joseph Jova
  • NSC Staff Member, Robert A. Pastor

• President of Mexico Jose Lopez Portillo

  • Secretary of Foreign Relations Santiago Roel Garcia
  • Mexican Ambassador to U.S. Hugo Margain Gleason

President Carter: The two countries are so closely linked that there is no way to separate their future. During this visit there are many things to discuss. I think the most important is the economic future of our two countries. We must deal with the problems of inflation, unemployment, the expansion of trade, and the required financial base in Mexico and in the U.S. We are eager to help in any way we can and hope that you can help as well.

President Lopez Portillo: I agree that the most important aspect of our relationship is the economic aspect. For Mexico, unemployment and inflation have special importance. Both are linked to what happens in the United States. When inflation is high in the United States, the situation in Mexico is worse. As a result of inflation being so much higher in Mexico than in the United States, Mexico was forced to devalue recently.

This resulted from a long political process and is causing a difficult political situation. The last 100 days of the previous administration saw a deterioration of the situation which has put me in a very delicate position. The attitude of the IMF and the behavior of some wealthy Mexicans made matters worse. The IMF imposed more discipline on the Mexican economy, which is good.² But if the measures are too rigid and do not consider political and social factors, they can make matters worse and introduce distortions. Wealthy Mexicans did not help by sending money out of the country.

This is how I visualize Mexico’s problems. After World War II, Mexico entered into a period of stabilization and development based on industrialization by import-substitution. This meant a sacrifice of the rural sector. The emphasis was on price stability, monetary and political stability, but this was at the cost of ignoring the proper and just compensation of labor. The Mexican Revolution had to make the necessary adjustments to the Bretton Woods scheme. Labor and the rural areas were hit hardest. But in the 1970s, Mexico was no longer able to maintain price stability due to internal pressures. Once price stability was lost, pressure mounted on wages. Simultaneously, Mexico was forced to make loans to maintain Central Bank reserves, in an attempt to keep the peso at parity with the dollar. We took enormous political risks to keep parity, and it deformed our entire structure. Everything revolved around the dollar rather than around development.

With the devaluation in September of last year, another of the three legs on which stability rested was lost. Now only political stability remains. The balance will be precarious if a way is not found to replace the two legs which were lost, particularly since unemployment and underemployment can be explosive.

The IMF is basically interested in controlling inflation, relying primarily on monetary measures to reduce demand. This may work well in industrialized countries, but in developing countries, it creates more problems than it solves. We need a system that controls inflation not by curbing demand but by increasing supply.

For example, the export of oil might help to control inflation by reducing our balance of payments deficit. But in order to develop and export oil—especially refined—Mexico needs external financing and would have to import equipment, technology, and raw materials. Since the Mexican oil company, PEMEX, is a government corporation, any imports would increase the trade deficit and the government’s budgetary deficit, leading to more inflation and a continuation of a vicious cycle.

The same is true for other raw materials which Mexico would like to process. To control inflation in the ways required by the IMF, there must be a limit on government expenditures and a narrowing of the trade deficit, and therefor a reduction of the activities of the State. This framework presupposes counterbalancing private investment. However, in Mexico those who have money to invest think in different terms. They are not prepared to take risks. They wish only to speculate and send their money out of the country.

Due to Mexico’s commitments with the IMF, the government cannot undertake the necessary investments. The private sector is not contributing. Thus, there is nothing left but foreign investment, which must be sought as long as it fits the ideals of Mexican society. In other words, everything revolves around finances.

President Carter: The explanations given were very helpful for an understanding of Mexico’s problems. Obviously, it is better to have both economic and political stability in both countries.

We have some possibility of helping each other. The U.S. Government has little control over the private sector but it does have some influence in the IMF, the World Bank, the Inter-American Development Bank and others. The use of this influence would help Mexico acquire long-term loans to get through the present crisis.

We need products which Mexico can export later, such as oil. This is certainly one area where investment can bring benefits to both countries. When Mexico decides how much it wishes to export, the United States Government and private oil companies would be glad to help Mexico increase its production. I understand that Mexico is reluctant to relinquish control over production, processing and refining. I also believe that long-term financing and more rapid production would benefit both countries. The decision on how much to produce is, of course, Mexico’s to make. But once you make that decision, the U.S. Government and private lenders will be eager to help, and both countries will no doubt benefit.

Two things have recently occurred to improve the situation. The first is that your demonstrated leadership, with your business and economic background, is considered very favorable to an improvement in Mexico’s economic situation. In addition, the constant display of cooperation between our two countries will help to create stability, especially when others are convinced that cooperation between the two countries will be permanent. With efforts by our two countries, expansion in the area of tourism and trade can benefit both sides.

I hope that your discussions with members of the Cabinet will form the basis for a common approach to these important issues, which cannot be separated. I wish to insure also that there will be mechanisms for improving communication and that you and I will have a mechanism where we can communicate directly. My preference would be to have the Secretary of State as the main channel of communications between the two countries. I hope the Secretary of State and the Mexican Foreign Minister will keep in close touch with each other. But, if any problem arises, I invite you to get in touch with me directly.

President Lopez Portillo: I was deeply satisfied with the global analysis you made and with your statement about the interrelationship of various problems. I am also convinced that the economic problems are tied to two of the biggest problems the U.S. has in our relationship—migrant workers and illegal drug traffic. If those problems are seen and dealt with as a package, they can be solved more easily and better than in isolation.

I am aware of the importance that Mexican oil has for the United States and the contribution it could make to getting Mexico through the present crisis. However, as Mexico tries to decide what to do about its oil development it has to think also about its responsibility towards future generations. Mexico must orient its plans for utilization so that some is left over for the 21st Century since other sources of energy are unlikely to be adequately developed before that time.

Mexico realizes that it must use oil to help resolve its present problems. Fortunately, Mexico has many other resources, both renewable and nonrenewable. The development of all will depend on finance and labor. That’s why I believe that Mexico’s problem is not just long-term, but short-term, not just underdevelopment but underadministration. Therefore, I am committed to improving administration.

At the same time, I am convinced that Mexico needs to strike a balance with outside sources to solve its financial problems. The factors which you mentioned would help. If monetary, financial and trade problems are linked, a solution is possible. I will be pleased to talk to your associates on more specific matters, but feel it is important here to agree to visualize the problem as a whole.

For Mexico, the most important problem is the large trade deficit it has with the United States. What is needed now is to permit Mexico to sell more to the United States, and to avoid any new restrictions. Mexico has a similar trade problem with Central America with one critical difference. We have a favorable trade balance with Central America and have invited the Central American countries to sell more to Mexico, but they have nothing to sell. Mexico does have things to sell to the United States.

I hope that we will consider this matter and find reasonable ways to implement it. One approach would be to use the complementarity of our two economies. I realize that it will pose short-run problems for specific interests in the United States. But in the long run, it would be good for both of us. Solution of other problems depend on what can be done in the trade area. They must be seen together. Mexico has agricultural products that are not available in the United States at all or during certain seasons. There must be a way to reach agricultural agreements which would help to reduce the risks to farmers. Mexico also has manufactured products which should be looked at carefully. For example, the sale of Mexican-made shoes in the United States would help both countries since Mexico imports many basic materials from the United States to manufacture shoes.

Further analysis would show other ways in which both sides can benefit. What is needed now is political backing for this approach. When one side wins all the chips, then the game cannot continue. This is what has happened in trade along the U.S.-Mexican border. Trade must be linked to finance and to improving the monetary situation. If Mexico could sell more, there would be more work in Mexico and thus less migration of Mexicans to the U.S. and reduction of the drug traffic. If we visualize these problems as a whole, they could be solved more easily.

I realize that these problems are not subject to short-term solutions, but I feel that the basis can be laid. This approach opens new vistas, and by strengthening political stability in my country, it reduces the risk of what I call a “South American solution” or Fascism, which is spreading throughout Latin America. If the economic situation deteriorates and the people see no hope, then strong and repressive governments come to power. I want to maintain a democratic government and system in Mexico. It is important that this problem be handled carefully.

President Carter: The subjects raised are sensitive and most important: including undocumented workers, illegal traffic in drugs and weapons, border problems, population growth, management of scarce water supplies, air pollution across the border, matching of transportation systems across the border, competitive imports, the need to protect farmers, and others.

All of these problems are interrelated. It would be difficult for us to establish an in-depth discussion of all of these issues for every country. But relations with Mexico are so important that it may be well to form in-depth discussion groups at the sub-cabinet level to deal with an agenda which the two of us would establish and report back to us through our Cabinets. These personally which we would study and then meet again to discuss. Most of the work by these sub-Cabinet level experts could be done without delay if you agree.

President Lopez Portillo: I agree entirely and enthusiastically. I wish to thank you very much for this suggestion. I also appreciate your comment and the attitude that the problems of our countries deserve such treatment. I favor the establishment of the working groups, and hope they can begin work immediately. There are many items to be considered on the agenda. But of special importance is the political will.

I consider it important that there be a global conception of the whole matter since in the past, urgent matters have taken precedence over important matters and introduced distortions. That’s why I believe these Working Groups can have a beneficial impact.

President Carter: I will send a personal letter to you listing proposed agenda items. On receipt of a response from you, we will choose the individual experts to participate in this Working Group. Secretary Vance, could you comment?

Secretary Vance: I consider the approach outlined an excellent way to proceed. Once we put the mechanism together, I look forward to working with Foreign Secretary Roel.

President Carter: You and I will be talking again tomorrow. Meanwhile, I will begin working on the letter describing the questions that I think ought to be addressed.³ I will make the letter frank and personal and would prefer that it not be given any publicity.

President Lopez Portillo: I agree fully. If there is no sincerity and frankness, then there can be no solutions. Some things are very difficult to deal with but when they are said with intellectual honesty, sincerity and good will, then there is no real problem. My only interest is to serve Mexico and to build good relations with the United States. You can count on my sincerity and frankness, and I hope to be able to count on the same from you.

Foreign Secretary Roel: I had a very good meeting yesterday with Secretary Vance regarding the policies of the two Presidents. I thought it might be interesting to tell an anecdote. During the Presidential campaign, we could not understand the U.S. press comment asking about “Jimmy Who.” In any event, a group of political analysts connected with the Lopez Portillo campaign was asked for an analysis of the U.S. elections, and they predicted that President Carter would win. They also said that President Carter would be a very friendly person and it would be good for Mexican-U.S. relations. My meetings with Cyrus and this meeting with you, President Carter, proves that the political analysts were right.

President Lopez Portillo: I told you he is a good diplomat.

President Carter: If we ever have any differences, I’m sure our wives could solve them. Perhaps Dick Cooper could comment.

Under Secretary Cooper: I was very impressed with President Lopez Portillo’s presentation of the economic situation in Mexico and on the approach to solutions. I agree fully with the President’s analysis. I feel it worth mentioning that in Mexico because many enterprises, such as Pemex, are government enterprises, their activities directly affect the Mexican budget and its trade deficit in a way which would not occur if they were operating in the private sector, as in the United States.

President Lopez Portillo: Mr. Cooper’s remark is very important. Experts should analyze most carefully the nature and components of the Mexican deficit. The accounts of the Mexican Government have been very distorted. For example, when the telephone company was in private hands, it got loans easily. However, the moment it became public, it began to be viewed differently and to have problems because of the new accounting system. The Federal Government in the U.S. has a more reasonable situation, but the U.S. is very decentralized. This is one reason why I wish to re-organize and decentralize the administration of the Mexican government, particularly in these areas which account for more than 50 percent of the public budget.

President Carter: During my campaign, I also spoke of the need to reorganize the government. I believe that the problems between the two countries will be solved if we approach them in the right spirit and harness the strength of our two countries to work in that direction.

1. Source: Carter Library, National Security Affairs, Staff Material, North/South, Pastor, Country, Box 28, Mexico, 2–3/77. Confidential. Drafted by Pastor on February 23. The meeting was held in the Oval Office. The time of the meeting is taken from the President’s Daily Diary. (Carter Library, Presidential Materials)
2. In telegram 14623 from Mexico City, November 17, 1976, the Embassy transmitted a summary of Mexico’s economic difficulties, negotiations with the IMF, and recent devaluations of the peso. The Embassy wrote that the second devaluation “shocked all sectors of the economy into realizing how serious the Mexican economic situation could actually be.” (National Archives, RG 59, Central Foreign Policy File, D760429–0515) Mexico’s stabilization agreement with the IMF was ratified by the Mexican Government on December 30, 1976. (Telegram 16258 from Mexico City, December 30, 1976; National Archives, RG 59, Central Foreign Policy File, D770001–0274)
3. See Document 133.