Iron Taxman Cometh
taxes - or impuestos - in Mexico isn't easy. But Francisco Gil
Díaz has made it his mission to change that. And soon.
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
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.
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."
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
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.
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.
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.
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.
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
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
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.
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
probably is not a perfect plan," Gil admits, "but there
isn't anything I would change about it."
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.
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."
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
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."
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
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.
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."
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.
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.
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
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."
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.
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.
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."
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.
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.
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
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.
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.
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