(To watch the video on Youtube, click here.)

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

Wachovia Bank sign is seen at a branch in New York. Wachovia settled federal charges that it laundered nearly $400 billion in drug money from Mexican and Colombian traffickers in 2010.

Yesterday Global Financial Integrity released a new report, “Mexico: Illicit Financial Flows, Macroeconomic Imbalances, and the Underground Economy,” which provides an in-depth look at flows of illicit money from Mexico. The study finds that nearly $1 trillion in illicit capital left Mexico from 1970-2010, averaging about $50 billion a year this past decade. Illicit outflows have increased over time – in 1970 only $3 billion of illicit money left the country per year – and experienced particularly large upswings during macroeconomic crises. These flows decreased by more than 50 percent as a share of exports, though this is largely because exports overall increased dramatically as Mexico transformed from a relatively closed to open economy.

The report’s most interesting finding is that this illicit capital is not necessarily or mostly drug money. Instead it comes from Mexico’s large underground economy. In these markets the goods being traded are not necessarily in and of themselves illegal. What’s illegal is the under-the-table way that they are bought or sold. The report finds that the vast majority (80 percent) of the money leaving Mexico does so through a method called “trade mispricing.” This is when a company either undervalues exports or overvalues imports, and agrees with its trading partner (for many this is the same entity or owner) to transfer the balance to a bank account abroad. Just as when a restaurant doing cash business fakes the number of customers it receives to avoid paying taxes, companies doctor their trade records to allow money to flow out of a country untaxed.

In Mexico’s case, economic liberalization in the 1990s had the unintended effect of promoting this type of capital flight. The explosion of trade around NAFTA provided exporters and importers more opportunities than ever to manipulate the rules of the game.

Dealing with this challenge means tackling the informal economy, which both drives and is driven by illicit outflows. Mexico’s regulatory institutions need to catch up to the high volume of trade in the post-NAFTA era, strengthening auditing practices and tax authorities along the way. Another way of chipping away at the underground economy is to shrink the number of people working in it, by creating more formal sector jobs. This is good for workers, who get better social protections in the formal economy, and for businesses, which can get loans and other services needed to grow and expand. More formal sector enterprises will also generate much-needed tax revenue in Mexico (the country with the lowest rate of tax collection in the OECD and among the lowest in Latin America). These extra public funds will pay for more public schools, better roads and stronger police forces, benefiting Mexican society in the long run.

The United States also has a role to play in helping Mexico combat money laundering. As the number one destination of illicit funds from Mexico, U.S. banks could make it a lot harder to move money north by improving transparency and reporting more regularly on private deposits. Getting banks to do their part will require deeper cooperation between the United States and Mexico, with tougher rules and regulations on both sides of the border.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

A stuffed bear hangs from a cross of a child's grave at the children section of the San Rafael cemetery in Ciudad Juarez (Courtesy Reuters).

Latin America has the ignominious distinction of being one of most violent regions in world. Though not known for its wars or even (at least violent) border disputes, homicide rates average nearly 20 per 100,000 people. Central and South America are among the most murderous regions worldwide, behind only  Southern Africa. Six of the ten most violent nations in the world are in Latin America, with Honduras and El Salvador claiming the number one and two spots. The biggest headline-grabber this last year has been Mexico, which counted some 12,000 deaths in 2011 and over 40,000 drug related homicides since the start of President Calderón’s term (non-official estimates put these numbers even higher). Though Mexico is not the most violent in per capita terms, this escalation has deeply impacted the country.

But the region’s security outlook is not all gloom and doom. Ciudad Juárez, still Mexico’s most violent city, saw its homicides drop by almost half since 2010, to just under 1,700 this year. Given the well-documented inertial effect of violence (i.e. violence tends to breed more violence, ratcheting up the effect over time), this is a doubly encouraging trend. Further south, the Brazilian government rolled out its “Favela Pacification Program” beyond the original pilot (launched in 2008), sending Police Pacification Units (UPPs) to 19 favelas in Rio de Janeiro. Since last year, the city’s homicide rate dropped 13 percent and armed confrontations with police were down by a quarter. Meanwhile, Guatemala enjoyed a relatively peaceful year, with a slight (2.5 percent) decline in murders, bringing its homicide rate under 40 for the first time since 2004.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

A pharmacy employee looks for medication as she works to fill a prescription while working at a pharmacy in New York December 23, 2009 (Lucas Jackson/Courtesy Reuters).

The U.S. Substance Abuse and Mental Health Services Administration recently released the findings of its 2010 National Survey on Drug Use and Health (NSDUH). The report draws on data collected from face-to-face interviews of 67,500 people aged twelve years or older across the United States (the U.S. government has been conducting this type of research since 1971). Of the many findings in the report, some of the most interesting include:

Over 22 million Americans used drugs in the month before the survey; about 9 percent of the population over twelve years old and a slight uptick from 2008 numbers. City-dwellers (9.4 percent) were more likely to use drugs than those residing in more pastoral settings (3.7 percent), and Westerners (11 percent) got high more often than Southerners (7.8 percent). Men were almost twice as likely to use drugs than women, and they liked to smoke pot. And perhaps not unsurprisingly, young people—aged eighteen to twenty-five—were more likely to use drugs (21.5 percent) than other age groups.

The most popular drug was marijuana—consumed by over 17 million Americans—and its usage is trending upward. An estimated three million more Americans were toking up in 2010 as compared to 2007. Cocaine, ecstasy and meth use stayed flat or fell over a similar time period.

The trends for the non-medical use of prescription drugs are perhaps the most interesting and challenging for current drug policies. An estimated seven million Americans got high on prescription medications in the month prior to the survey; over five million using pain killers. The popularity of prescription drugs is evident in the increasing number of people trying them for the first time each year (some two million), and the doubling of emergency room visits for pain killer abusers from 2004 to 2008. Prescription pain killer abusers seeking publicly funded rehab also tripled from 2002 to 2009.

While the conventional wisdom holds that America’s drugs come from Mexico and Latin America, the study shows this is not wholly true. Prescription drugs were almost exclusively created, bought, sold, and consumed north of the border. Over half of those using and abusing prescription drugs received them from a friend or relative. Fewer than 5 percent got them from a stranger or the internet. Just a fraction of these sales then can be linked back to international cartels. When policymakers debate thorny questions of drug use and international drug enforcement, it’s wise to remember that cartels, though formidable, are hardly the only suppliers in a vast American drug market.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

Soldiers stand guard in their military vehicle outside a clandestine drug processing laboratory discovered in Zapotlanejo (Courtesy Reuters).

There are many theories out  there about why we have seen a huge uptick in violence in Mexico – now running close to 25,000 homicides a year. An interesting academic paper by Melissa Dell, PhD candidate at the Massachusetts Institute of Technology (MIT),  tests one particular theory – elaborated by Eduardo Guerrero among others — that the policies spearheaded by Calderón and the PAN more generally have actually caused the increase in violence.  To do so she uses statistical models to examine how PAN victories in close mayoral elections affect violence locally, and whether they have “spillover effects”, causing traffickers to divert their routes to neighboring municipalities.

She finds that when a new PAN mayor comes in after a close election, homicides become 9 percent more likely, and drug traffickers are much more prone to have confrontations with the police. The movement of drugs also shifts to nearby towns  — causing an increase in violence there — confirming the so-called cucaracha, or cockroach, effect.  Dell argues that government’s policy is behind these statistically significant differences, and specifically that  the PAN’s decisions — from top to bottom — to take on drug traffickers more aggressively than other parties is behind the surge.

This rigorous analysis is extremely helpful, and is the type of work that academics should be sharing with policymakers on both sides of the border. Yet we should also be mindful of the limitations.  For one, Dell only considers locally produced drugs – marijuana, heroin, meth – leaving out the biggest cash cow, cocaine. Her analysis also exclusively focuses on drugs and not organized criminal groups’ other businesses such as extortion, kidnapping and human trafficking (she does nod to these, but finds no adequate dataset to use). As the business model has changed, so too have the targets, bringing these criminal groups much closer to the general population –as customers and as prey.

This leads to the third limitation – the assumption that “more than 85 percent of the [drug] violence consists of people involved in the drug trade killing each other,” a figure repeated a number of times without any footnotes. Though this has also been the mantra of the federal government over the last five years, so far neither the Mexican government nor outside sources have provided any proof that this is true. Of the nearly 50,000 drug trade-related deaths since 2006, the Attorney General’s office has investigated less than 1,000 (and solved less than 350). Given the shifting commercial interests of the criminals (bringing them closer to innocent civilians), it seems doubtful that the deaths are  still almost all between the gangsters themselves, or that the percentage of bad guys killing bad guys hasn’t changed.  Indeed, as a recent Human Rights Watch report points out, there are many cases of misclassification, where the authorities presume that murder victims are linked to drug traffickers until proven otherwise (which they rarely are, since the Attorney General’s office investigates less than 2 percent of the killings). The rise in extrajudicial killings by the military, also laid out in detail by Human Rights Watch, further questions these claims.

Finally Dell makes the assumption –  repeated in the press and elsewhere – that drug-related violence picked up with Calderón and his “war against narcotraffickers.” But the data show that the uptick started earlier, under president Fox, increasing some 40 percent from 2004 to 2005, and another 25 percent from 2005-2006. This doesn’t necessarily disqualify a PAN-ista effect (given both Fox and Calderón hail from the same party), but it needs to be explored more, as the security policies of the two differed in some respects.

The paper provides some policy suggestions, particularly regarding how to best use scarce law enforcement resources (for starters, don’t set up roadblocks). But the other more ominous implication is that if drug traffickers are rational economic actors, and PAN victories are so costly for them (in terms of relocating their routes or bringing in competitors), it makes sense for them to invest up front – and buy more local elections. As we head into 2012, all should be worried about this conclusion.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

Mexican Gov. Enrique Pena Nieto answers reporters' questions at the National Press Club in Washington (Molly Reilly/Courtesy Reuters).

It seems the campaign book so popular in the United States has headed south of the border. After a recent tour through Washington, DC, and New York, former governor and likely PRI presidential candidate Enrique Peña Nieto just released Mexico, the Great Hope. An efficient state for democracy with results.

Arguing that the successive PAN administrations have left the country worse for the wear, Peña Nieto lays out his vision for a government based on guaranteeing citizens’ basic rights (such as security), getting the economy growing at its full potential, and reaffirming Mexico’s leadership as an emerging power on the world stage. He calls for a number of economic reforms, including opening Petróleos Mexicanos (PEMEX) to private investment (still maintaining state ownership), as well as widening the tax base and simplifying the tax code. On security, he favors a more comprehensive strategy geared first and foremost to reducing the violence.

Most of his positions are quite sensible. Mexico needs to (and is already starting to) focus on lowering the escalating levels of violence, as opposed to concentrating on taking down drug kingpins. Economically, opening up PEMEX would increase foreign investment and improve Mexico’s overall competitiveness, boosting jobs and growth in the process. Reforming the tax code would also go a long way to enhancing and diversifying government revenues and  hopefully make it easier to start up businesses. But these two  reforms are also politically difficult — having been on the legislative table for years now, and repeatedly stymied by Peña Nieto’s own party. If he wins, perhaps the former governor will be Mexico’s equivalent of a “Nixon in China” – able to change the dynamics precisely because of his party’s ties to PEMEX’s union – but that remains to be seen.

Much will also depend on the United States. For Mexico to reach its economic potential, the United States will have to grow as well, as the economies today are indelibly intertwined. A U.S. immigration reform – if it happens — also could change things for Mexico. For all its big vision, the book makes clear that there is much that needs to happen during the next presidential term in Mexico to fulfill  this “great hope.”

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

Photographs of missing people are on display at a square in Queretaro (Courtesy Reuters).

Last Wednesday, Human Rights Watch (HRW) released its report “Neither Rights Nor Security: Killings, Torture and Disappearances in Mexico’s ‘War on Drugs’.” The report is incredibly thorough – based on two years of research in the states of Baja California, Chihuahua, Guerrero, Nuevo León and Tabasco, and incorporating information from over 200 interviews. It charges Mexican security forces with routinely violating citizens’ most basic rights during President Felipe Calderón’s six years in office, and further argues that these horrific tactics are not incidental, but endemic to the government’s drug war strategy.

Some of the most worrisome statistics and findings include:

·       Formal human rights abuse complaints increased seven-fold, from 691 during the 2003-2006 period, to 4,803 from 2007-2010

·       Of some 3,700 military investigations into human rights abuses in the past four years, just 15 – less than one half of one percent — resulted in convictions

·      Formal complaints of “degrading treatment” – read torture — at the hands of security forces more than tripled since 2006

Based on witness testimonies and material evidence in specific cases HRW investigated they find:

·       Law enforcement – including the Army, Navy, Federal Police as well as local and federal judicial investigative police — participated in over 170 specific cases of torture – including beating,    asphyxiating, water boarding, electrically shocking and sexually torturing detainees

·       Others facilitate this torture –  medical examiners fail to document signs of physical abuse on detainees, and judges admit confessions and other evidence acquired through torture, even when the victim protests

·       Law enforcement played a part in 39 “forced disappearances” and 24 extrajudicial killings of civilians

After a meeting with HRW representatives Calderón agreed to investigate the findings, though he did say that the “main threat to the human rights of Mexicans is from criminals”.

Why have human rights violations expanded so drastically?  One explanation lies in the use of the military.  Armed forces are trained to kill the enemy on the battlefield, not police neighborhoods to ensure basic public safety. With some 50,000 soldiers now on the front-lines of the drug war, this disconnect can lead to abuses of the rule of law.

Another reason is the profound weakness of Mexico’s judicial system.  Most crimes – likely 80 plus percent — are never even reported. Of the few complaints filed, the Attorney General’s Office (PGR) investigates only one in every five; even fewer go to trial. In the end, only one to two of every hundred crimes end in a conviction. Once prosecutors do move forward with a case however, the chances of acquittal are slim, as roughly 9 in 10 of all suspects brought to court end up in jail. This has less to do with the stellar cases built around airtight evidence, and more to do with the underlying system, which is stacked against defendants – resulting in few safeguards and a de facto presumption of guilt.

Finally, Mexico doesn’t even have the laws needed in some cases to prosecute bad behavior. For instance, only eight of Mexico’s thirty-two states have laws against forced disappearances and only sixteen have formally criminalized torture. What it does have is opportunities to limit citizen rights – such as the arraigo procedure, which lets prosecutors lock up individuals for up to 80 days if they’re allegedly involved in organized crime, and vaguely defined “flagrancia” rules that dictate when police officers can make arrests without a warrant.

The spike in human rights complaints is worrisome on many levels. First and foremost, it reflects the government’s utter failure to protect thousands of citizens from itself. But more strategically, the abuses described in the report run counter to the state’s long-term aims.  In order to “win” the war on organized crime, Mexico’s government must have society’s support. Egregious human rights violations will just push away the one force the narcos can’t match. To end drug related violence, Mexico must construct a truly democratic rule of law, in which the means to and the ends are one and the same. To do so, the government must track and punish human rights abuses and abusers as fervently as it does those on its Most Wanted lists.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

Mexico's Former Interior Minister Blake Mora applauds during a discussion with victims of the violence in Mexico City (Courtesy Reuters).

Mexico’s interior minister, Jose Francisco Blake Mora and seven others, including Deputy Interior Minister Felipe Zamora and spokesman Jose Alfredo Garcia, died tragically today in a helicopter crash. They were  flying from Mexico City toward Cuernavaca for a meeting with prosecutors in Xochitepec, Morelos. His death comes just a week after the three year anniversary of the tragic death of one of his predecessors, Juan Camilo Mourino, who also died in a plane crash in November 2008. There is no evidence yet (in either case) that foul play was involved — though conspiracy rumors are sure to fly.

The interior minister is no longer the preeminent government post (once second only to the Presidency in terms of power), but it is still a vital Cabinet position, and one crucial for executive-legislative relations, for coordinating the work of various ministries and secretariats, and importantly for the government’s security strategy. While a blow to the government and its security team, Mora’s death won’t likely change the Calderón government’s broader drug war policy during this last year of his administration. Sadly, it will mean that the administration will now be searching for a fifth individual to fill Blake’s shoes.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

Young people rest on a sidewalk as a man cleans in Mexico City (Henry Romero/Courtesy Reuters).

An OECD report released this September shows that seven million young Mexicans between the ages of fifteen and twenty-nine are neither in school nor in the labor force. Among OECD countries, Mexico has the third largest “inactive” youth population, behind only Turkey and Israel. Mexico has been increasingly concerned about the security implications of  the vast number of  these “idle” youths — dubbed “Ni-Nis” (Neither-Nors). NiNis are thought to be especially vulnerable to recruitment by organized criminal groups, acting as lookouts, dealers, smugglers, or even hit-men.

Overall, the number of NiNis has decreased by more than 10 percent since 1990, questioning at first glance the ties to rising violence. But a more detailed breakdown of this rootless youth suggests these worries aren’t totally misplaced. Most of the decline reflects the changing prospects for young women – who are much more likely to work or study today than they were twenty years ago. For urban men – the population most likely to be recruited by gangs and organized crime groups – not as much has changed, as their share of the total NiNi population has only decreased by one percent over the past two decades.

A recent study conducted by investigators from CIDE and the Colegio de México shows too that NiNis are concentrated in Central and Northern states — including some of Mexico’s most violent ones. The largest proportion of inactive youths are in Chihuahua, Durango, San Luis Potosí, Guerrero and Zacatecas (and in cities such as Ciudad Juarez).  In municipalities in these five states the numbers have remained stubbornly high over the last twenty years. Also, while NiNis aren’t concentrated in the poorest states, they do come predominantly from poorer families. Seven in ten NiNis come from households earning below the national average. Their parents are also less educated than the average Mexican, suggesting a vicious cycle as they too spend less time in school than their occupied counterparts.

Some factors are working in Mexico’s favor. Demographics should lessen the challenge  a bit – as going forward each year fewer youths will hit the streets. A rebounding economy can help too – as unemployment levels fairly strongly affect the number of (particularly male) NiNis. But Mexico’s government and society still will have to find ways to engage these young people, to help them see beyond the next few years and offer them real alternatives to a life of crime.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

Peña Nieto, outgoing Institutional Revolutionary Party governor in the State of Mexico, is silhouetted against the national flag before delivering his sixth and final state report in Toluca (Courtesy Reuters).

I had the pleasure of speaking at and moderating a panel last Thursday at the Council of the Americas/Americas Society with Claudio X. González, Chairman of the Board of Kimberly-Clark de Mexico and on the board  of a number of top Mexican corporations, as well as Alberto Ardura, Managing Director and Head of Capital Markets for Latin America at Deutsche Bank. Some of the most interesting issues raised were the relationship between security and the economy, and the future of the energy sector.

Overall, the political and economic outlook was quite positive, despite the formidable challenges the next administration will face. Mr. González highlighted that Mexico presents something of a paradox – despite increasing insecurity, the economy is picking up. He credited this in large part to orthodox economic policies that have kept deficits and inflation low, leading to GDP growth in the realm of 4-5 percent (outpacing current market estimates). Mr. Ardura echoed this view, saying that the fifteen plus years of fiscally responsible policies have made Mexico’s economy the healthiest in the hemisphere, with some of the best macroeconomic fundamentals in the world (certainly among emerging markets).

Still, both panelists remained concerned about Mexico’s future competitiveness and growth. Despite its macroeconomic prowess, it has fallen behind Brazil, Peru, Colombia, and even less orthodox Argentina. The main holdups are security, the closed energy sector, education, and the concentration within so many sectors of the Mexican economy.  They felt that if the government could tackle a few of these major issues, it could pick up the speed of annual growth to five or six percent — transforming Mexico in the process.

The speakers were quite optimistic about the PRI, both on its ability to get things done if it wins the presidency (particularly if it wins a majority in Congress, ending legislative gridlock), and on substance — especially the possibility of opening the energy sector.

But some in the audience doubted the positive momentum, particularly the veracity of the new, more modern PRI that looks set to capture Los Pinos next July. Many (at the podium and in the audience) remained skeptical about whether the “dinosaurs” of the party would stand down, allowing these more comprehensive reforms to strengthen Mexico’s public institutions and jump-start its economy.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.