The Iron Taxman Cometh
>> Collecting taxes - or impuestos - in Mexico isn't easy. But Francisco Gil Díaz has made it his mission to change that. And soon.

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THE KITCHEN IN THE NORTH WING OF Mexico's Palacio Nacional makes a mean cappuccino. So says Francisco ("Paco") Gil Díaz, the country's new finance minister, before the first of four he'll down on a Thursday in early June. The cappuccino, served in a tall glass mug by a waiter with a black tie and a club foot, is perfectly layered: espresso, milk, froth, and a light sprinkling of cinnamon. If only Mexico's finances were so well-ordered.

Gil, AM'69, PhD'82, moved into the palacio's third-floor office suite in December when Vicente Fox Quesada of the National Action Party (pan) was sworn in as the nation's first democratically elected president, ending 71 years of rule by the Institutional Revolutionary Party, or pri. Fox, a charismatic rancher and a former Coca-Cola manager who is enormously popular among Mexican voters, appointed Gil to realize one of his platform's top priorities: fiscal reform, including cutting government costs, increasing tax revenues, and reducing the federal government's dependence on volatile oil income. (Revenues from Pemex, Mexico's state-owned oil monopoly, account for 40 percent of the government's income-and are second only to manufactured exports in contributing to the nation's gross domestic product, or gdp.) Diversifying Mexico's trade ties is another of Fox's priorities. About 90 percent of Mexico's exports go to the United States, and as the yanqui economy slumps, so slouches its southern neighbor.

"We just have to be cool and take it as it comes," says Gil, a 6-foot-4, lean 57-year-old with a high forehead and a neatly trimmed mustache which he manages to keep free of cappuccino froth. "We can't divorce ourselves from what's happening. Our links to the U.S. and Canada [from the North American Free Trade Agreement] will take us up and down. We're much more dependent on the U.S. economy than we've ever been. But despite the slowdown, we have a record amount of foreign direct investment."

Gil's hazel eyes both dance and scowl behind his tortoise-shell spectacles as he discusses Mexico's economy. Despite having recently revised this year's gdp growth estimates from a projected 4.5 percent to between 2.5 and 3 percent, far below last year's high-flying 7 percent, he has reason to keep firmly optimistic. This is the first time in decades that a change in Mexico's presidency hasn't been accompanied by an all-out economic crisis. Indeed, the peso is at a three-year high, interest rates have declined steadily, and in May Citigroup made the largest single foreign investment in Mexican history, with its $12.5 billion purchase of the Banacci financial group.

He also has reason to be cautious. Probably the biggest challenge ahead for Gil is to increase government revenue so that Fox can follow through on his campaign promises to expand social programs. High on Fox's agenda are education and welfare for the country's poorest poor in areas such as Chiapas. That impoverished southern state grabbed international headlines in 1994 when Zapatista rebels took up arms during the so-called "tequila crisis," when Mexico's peso-and economy-bottomed out the last time the presidency changed hands.

But Gil is stuck in a catch-22: he can't spend money the government doesn't have, and Mexicans are notorious for evading their impuestos, or taxes. At 11 percent of gdp, Mexico has one of the lowest tax-collection rates in Latin America-Brazil collects three times that rate. One recent report estimates as much as 40 percent of the population is off the tax rolls. A quick glance out Gil's windows down onto the Zócalo, the huge square in the center of Mexico City's historical district, tells you who, aside from wealthy and middle-class evaders, a good number of that 40 percent might be: street vendors hawk boiled cobs of corn, roasted bananas, and prayer books adorned with images of Our Lady of Guadalupe, while several indigenous conchera dancers in feathered headdresses move in time to beating drums, passing a basket for change. Gil has also inherited an arcane tax code with gaping loopholes and a collection system that's terribly confusing for those who do pay.

All of this is icing on the cake compared to his biggest obstacle to boosting tax revenue: a Congress divided among three parties, which means it's weighted toward the opposition. The vast majority of Gil's 1,000-plus-page budget and fiscal reform package, which he presented to legislators early this year, went over well enough-a sign, he says, of Fox's ability to achieve consensus. In it, he proposes simplifying income-tax collection, eliminating thousands of jobs from the government's tangled bureaucracy (starting with his own ministry), tightening controls on customs, and privatizing or selling off government shares in major business sectors, including water and sewage treatment, banking, air travel, electric energy, and insurance for government workers.

What did not go over well at all-with anyone-was his proposed 15 percent value-added tax on food and medicine. He might as well have suggested making tortillas from barley. Immediately Congress balked. Opponents charged that the tax would hit the working poor the hardest. A poll by the Mexican newspaper Reforma reported that 53 percent of Mexicans said they wouldn't have voted for Fox if they'd known about the tax. When the Congress adjourned this spring, the tax bill was stalled in committees.

Gil has never been one for popularity contests. After 32 years in public service, he's more concerned with balanced ledgers than winning pals. Ten years ago, as undersecretary of revenue and the nation's chief tax collector, he systematically cracked down on tax evaders, throwing the worst offenders-including an Argentine rock star-in jail. He became known in the media as the "Iron Taxman," a "fiscal terrorist," and "Rambo." When he overhauled the country's customs system in the early 1990s, simplifying a 17-step process into three steps and firing hundreds of corrupt officials, he went up against Mexico's organized crime, which issued a death threat for his boss, the then-Finance Minister Pedro Aspe.

During Gil's only stint in the private sector, as general director of the Mexican long-distance company Avantel from 1997 to 2000, he harangued the government for doing nothing to promote competition against Telmex, Mexico's telecommunications monopoly, openly denouncing federal bureaucrats in the media and suing the government repeatedly. "In [the late U of C economist and Nobelist George J.] Stigler's terms, the government was captured by the industry, and the industry was a monopoly," he says now, still fuming that Avantel had to pay 75 percent of its revenues as switch fees to use Telmex lines.

Although Gil doesn't worry about popularity, the Fox administration does. It believes the problem with the stalled bill is one of misunderstanding-which means it's surmountable. "We haven't communicated the benefits of our plan well enough to the public," Gil says. He counters the argument that the working poor will bear the burden by noting that 40 percent of the highest earners in Mexico absorb 75 percent of the nation's tax burden. His plan also substantially reduces income tax on the lower rungs of the income ladder and increases the standard deduction to 50,000 pesos ($5,250). And he's increased the roles of Progresa, the social program that pays impoverished families to keep their children in school-where they'll be fed well-to cover 20 million people.

In May Gil's ministry launched a PR campaign to communicate the benefits. Any commuter who grabs a metro map in the rumbling subway station below the Zócalo can flip it over for a quick rundown of "Beneficios que La Nueva Hacienda Pública propone, para los obreros -los brazos que construyen nuestro México" ("Benefits that the New Public Finance is proposing for workers-the arms that construct our Mexico"). In good political fashion, it promises better schools, medical services, and work opportunities for all.

"It probably is not a perfect plan," Gil admits, "but there isn't anything I would change about it."

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DOWN THE HALL FROM THE OFFICES where Francisco Gil Díaz pores over his spreadsheets and PowerPoint presentations is the atrium where in 1929 a paint-splattered Diego Rivera applied the first brushstrokes of what would become his masterpiece mural, México a Través de los Siglos (Mexico through the Centuries). Painted on three walls like an oversized triptych, the mural depicts Diego's view of Mexican history-its Aztec past, its conquest by Cortés, the Mexican Revolution, and Diego's own communist vision of the future, with Karl Marx standing triumphant over the likes of industrialist J. P. Morgan and a bloated Franciscan monk.

"There we see the man in white is Hueytlatoany, the Aztec chief and tax collector." Miguel Castro, a stout man with a shock of white hair who gives official mural tours, points to the staircase's northern wall, on the other side of which Gil and his advisers go about their business. A former college professor, Castro reserves his opinion of Hueytlatoany's present-day counterpart. "It's too soon to tell," he says. "It's only been six months, and it was so much for pan even to get into office."

At the top of the stairs, a young Mexican woman who's showing her city to Japanese friends is not so forgiving. "Gil?" she says, shaking her head and making a face. "I know the Mexican economy isn't good, but I don't like what he wants to do."

Outside on the Zócalo, a small group of indigenous migrant workers from Chiapas are camped out under banners whose hand-inked block letters proclaim "Huelga" ("Strike"). Their flyers, bearing two run-on sentences in Spanish, protest a 1993 Mexico City law against street vendors who hawk wares without a license. "The city of hope is open only to foreign capital, the International Monetary Fund, and the World Bank. Only foreign products like pizza, hot dogs, hamburgers, Sanborns [department store], and Kentucky Fride [sic] find their space."

Clearly one doesn't have to go far to understand that Gil doesn't work in a vacuum. Though he may be a darling of Wall Street for his Chicago School training and staunch open-market outlook (upon Gil's appointment, the Wall Street Journal reported that many Wall Street economists had openly campaigned for him), most political analysts say his lack of olfato politico-political smarts-may be a detriment. U of C economics professor Larry A. Sjaastad, AB'57, AM'58, PhD'61, a member of Gil's dissertation committee, counters that Gil is "apolitical," rather than politically inept. "He's a chameleon. He spent decades in the pri government, but that's because it was the only game going. I think Paco's better able to adapt to political environments than most people realize."

Gil just shrugs at all the talk about his political savvy. What's important, he says, is that his training was rooted in real problems, much like what he faces now.

"Chicago was strongly empirical. We were thinking about real life, real problems. I remember a class with Milton Friedman on price theory. I didn't take it for credit but just to be able to learn from him. We almost did not go into the material on the syllabus. Instead he'd bring newspapers, and we would discuss what was happening in the world."

It's not far off to say that Gil's reform of the tax system has been more than 20 years in development, since long before his 1982 defense of his dissertation, Three Essays on Taxation, in which he examines Mexico's tax code and explores taxing business by sectors, deferred taxation of capital gains, and real-estate valuation. Gil found his way to Chicago after earning a bachelor's degree in economics at the National Autonomous University and crunching numbers at the Banco de México, the country's central bank. His mentor there, Leopolos Orliz, encouraged his young protegé to consider graduate school in the States. Orliz was a friend of Arnold C. Harberger, AM'47, PhD'50, then a professor of economics at Chicago, who would later chair Gil's dissertation committee. Indeed, Harberger's 1969 Brookings Institute article, "Taxation of Income from Capital," would serve as a major source for Gil's dissertation. Orliz, says Gil, "taught me that what matters is personal relationships between economists abroad"-a lesson he still takes to heart.

And so, in 1964, the 23-year-old Gil, the eldest of seven children of a fisherman-cum-Remington-typewriter-distributor from a small town near Mazatlán, and Margarita White de Gil, his young wife of two years from Mexico City, found themselves in a flat at 61st and Ingleside, where they would live for the next two years. While Gil studied, Margarita supported their household (the first two of their four children were born during their years in Chicago) by modeling at Marshall Field's and Carson Pirie Scott and teaching cooking and comportment classes.

The Chicago coursework was rigorous, to say the least. "I learned more during those first four weeks than I'd learned in four years at college," he jokes now. When Gil completed his master's coursework two years later, the family moved back to Mexico City, where Gil returned to the central bank and began teaching economics at the Autonomous Technical Institute of Mexico, or itam, where he continues to teach. Marguerite opened a chain of five beauty shops in Mexican department stores (which she continues to manage despite a stroke three years ago). Gil spent the next two decades teaching, working at the central bank, and slowly but surely-in what some would say is true Chicago style-plugging away at his dissertation. Quips Sjaastad, "I think Paco holds the record for the longest time taken to complete an econ Ph.D." During the 1970s, he directed itam's economics department, completely revamping the program in the image of the U of C's quant-heavy curriculum.

"Paco changed the way Mexicans study abroad for economics. A lot of people here don't think of it as the University of Chicago," says Rafael Macedo de la Concha, Mexico's attorney general, only half-joking. "It's the University of Francisco Gil Díaz."

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IN THE DRIZZLY EARLY-MORNING LIGHT the tezontle, the deep-burgundy volcanic rock from which the palacio is constructed, looks almost black. A remnant of Spanish colonialism originally built in the 1520s from the stones of the razed Aztec city of Tenochitlán, the palacio became the seat of the United States of Mexico in 1825. Inside Gil's office, the walls are paneled with ornately carved walnut, and shelves are lined with leather-bound books containing the leyes, or laws, of Mexico dating back to the early 1900s.

Throughout the day advisers file in and out for meetings at a large oval conference table. CDs of Mozart and Gregorian chants provide a soundtrack for their work. "I'm a very disorganized listener," says Gil. "I know I like classical music, but I can't name anything I like." The wallpaper on his computer monitor is a full-screen photo of his three beaming grandchildren in Miami. A table next to his desk is covered with framed family photos. The majority of the advisers who gather in Gil's office are surprisingly young looking. Most are itam alumni with economics graduate degrees from the States, and all of them are dressed impeccably-in glen plaid or, like Gil, pinstripes, some with their initials embroidered on the breast of their starched white shirts. French cuffs are clearly the preferred fashion.

The first order of the day is a meeting on banking. There's an illiquid savings and loan that needs to be dealt with and a bank in which Vizcaya, a Spanish financial group, has expressed interest in becoming majority shareholder. The adviser who runs the meeting provides a packet of background information on each of seven banks to be discussed. The meeting moves quickly: the adviser gives Gil the gist of the problem at hand, Gil asks for his recommendation, the other advisers nod in agreement, and Gil says "Let's do it." The one time a debate erupts-as the group discusses how to get the best return on the government's shares in Vizcaya's prey, and one adviser feels they're moving too quickly-Gil comments, "You would like how my grandfather worked, Jermoso. He waited so long to make a move, he ended up poor."

During the meetings, the minister leans his chair back on two legs jingling his watch fob and sipping bottled water or a cappuccino. Every 90 minutes or so, his chief of staff quietly enters the room and hands him an index card with the next piece of business on the day's agenda, signalling the finance minister to wrap up discussions.

After the banking meeting, a Wall Street economist arrives to counsel Gil and Undersecretary of Finance Agustín Guillermo Carstens, AM'83, PhD'85, on the slowing U.S. economy and to offer an outsider's view of Mexico's economic reforms-which he says are pivotal in the nation's efforts to no longer be considered "one of those countries" by foreign investors.

When that meeting adjourns, the advisers file back in for a preliminary outline of Pronafide 2002-2006, or the National Finance and Development Program, the ministry's four-year macroeconomic plan to achieve 3 percent inflation by 2003, a balanced budget by 2004, and 7 percent annual growth by 2006. Gil and his staff are still puzzling out how, precisely, Mexico can meet those goals-exactly how many jobs need to be created, how much more tax revenue is required, where interest rates need to be to keep investment pumping, how low oil prices can drop before wreaking havoc on the government's pocketbook.

Gil's typical day lasts 12 hours, beginning with an early-morning workout on the treadmill in his office suite. This Thursday he breaks for lunch from 2:30 until 5 o'clock, a meal which doubles as his weekly "house-cleaning" meeting with other government officials, including the attorney general, the treasurer, and the director of Mexico's social-security program. They discuss T-bills and privatization over chicken breasts stuffed with asparagus mousse. After lunch, it's more meetings.

On weekends Gil flees the noise of the world's third-largest city for his home away from home in the Valle del Bravo ("Valley of the Brave," he translates with raised eyebrows and a flash in his eye), a town founded by Franciscan monks. There he spends afternoons mountain biking or, in winter, downhill skiing. In his free time he reads novels by the French writer Christine Arnothy. "They're frivolous," he says, "but they help me keep up my French conversation skills." To keep himself on his toes in the itam economics department, he teaches books he hasn't previously read-most recently, the World Bank tome Mexico: A Comprehensive Development Agenda for the New Era, which one young adviser lugged into Thursday's first meeting as if preparing for an oral exam.

Does Gil feel overwhelmed by the task ahead of him? "Nope," he replies. This is what he's been working toward his entire career. If events go the way he thinks they will, by 2006 the Mexican economy will have the tidy clarity-and the punch-of a well-made cappuccino.

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