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President Carlos Salinas de Gortari firmly asserted his control over the political system, surprising many by his decisiveness in ordering the arrest of corrupt leaders. In July, an opposition party, the National Action Party (PAN), won the governorship of North Baja California state, the first time in over sixty years that the government has recognized an opposition party gubernatorial victory. On the economic front, Mexico increased its efforts to privatize the economy and received some debt relief through the Brady plan.

Politics. In July, Ernesto Ruffo Appel (PAN) decisively won the governorship of the important border state North Baja California, leading a PAN ticket which also won the mayoralties of Tijuana and Ensenada, the state's two most important cities. Pro-PAN citizens guarded the polls to prevent the government party, the Institutional Revolutionary Party (PRI) from stealing the election as it has done on the past. As the votes were being counted, President Salinas ordered PRI officials not to engage in electoral alchemy, thus insuring a fair vote count.

In Michoacán state legislative elections that same month, however, the PRI beat the Democratic Revolutionary Party of Cuauhtémoc Cárdenas although it only won half of the posts. Cárdenas was unable to hold together the coalition he used to beat Salinas in Michoacán in the 1988 presidential election; some observers, however, believed that PRI committed fraud.

In several unexpected actions, Salinas demonstrated his control of Mexico. In January, he used the army to arrest Joaquín Hernández Galicia ("La Quina"), the powerful and corrupt boss of the state petroleum workers' union, and insure the safety of oil trucks from possible union violence. "La Quina" and his union had long been major obstacles to the modernization and efficient operation of PEMEX, the government oil monopoly. In February, Salinas ordered the arrest of Mexico's leading financier on charges of fraud. The government also arrested or dismissed a number of corrupt government officials. Salinas began wresting control of the 1.1 million member teachers' union controlled by Senator Carlos Jonguitud Barrios. The union struck in April, demanding a 50% wage increase, but only received a 25% increase, still far above the limits specified in the Plan of Economic Stability and Growth. The wage concession bought teacher allegiance to Salinas' faction.

Economy. Although the nation continued in its seventh year of economic depression, there were encouraging signs. In the first half of the year, the gross domestic product rose 2.4%, industrial production increased 5.2% and automobile sales rose 45%. The inflation rate had dropped to approximately 16% and domestic interests rates declined from 50% to 38%. Over two billion dollars of capital was repatriated, indicating growing confidence in the economy.

Continuing economic problems included the fact that $84 billion in capital was still stashed abroad, an amount that, if brought back to Mexico, would revitalize the economy. Mexico continued to be a capital exporter with the government spending about half its income in debt service and with debt payments being larger than new foreign loans. The underground economy now constitutes about 38% of the gross domestic product, harmful because it indicates a lack of confidence in the government and because it denies desperately-needed tax revenues.

Debt Reduction. Led by U.S. Treasury Secretary James Brady, international banks, Mexico, and the United States agreed in July to a plan to reduce the Mexico foreign debt by 35%. Under the Brady Plan, banks would buy new Mexican debt at a 35% discount, exchange current bonds for long-term, fixed 6.5% bonds, or provide new loans over the next four years equal to 25% of the current bonds. The key to the Plan is the willingness of lenders to participate; no much progress had been made by November. To help Mexico meet it current obligations until the Plan is effective, international lending institutions advanced $6.9 billion in new loans.

Social Problems. Mexico City, the world's largest and most polluted city, received special attention during the year. Japan made a one billion dollar loan for anti-pollution efforts in the city. For three months, beginning in late November, one-fifth of the city's automobiles will not be allowed to use city streets, enforced by the color of the license decal on car windows. Urban crime and violence rose in tandem with the depth of the economic crisis and the inability of the government to hire and retain honest police personnel. Mexico City was particularly hard hit by criminal violence and police corruption.

Domestic drug abuse and international drug trafficking increased during the year. Until recent years, Mexico had a minuscule drug problem. Colombian cocaine traffickers ade alliances with Mexican marijuana and heroin traffickers to transship cocaine through Mexico to the United States when Caribbean transit routes became more difficult because of interdiction efforts. Inevitably, this increased the domestic supply of illicit drugs, making cheaper and more readily available. Poor people, however, are sniffing glue. The government is devoting enormous resource to fight the drug trade. Some 60% of the national attorney general's budget is spent in anti-drug measures and 25% of the Mexican military is assigned to eradication campaigns. Drug education programs have been stepped up.

Economic Policy. Salinas moved rapidly to privatize as much of the economy as quickly as possible, ridding the state of some of its most inefficient enterprises. The government sold its interests in Mexicana Airlines, and prepared to sell its shares of TELMEX, the telephone company, and CONASUPO, a government agency which sold subsidized food and consumer goods. The sale of CONASUPO represents a major and controversial departure in government policy, for the agency was created to be one of the principal means by which the government guaranteed prices to producers which subsidizing the poor. However, Salinas decided that private enterprise could accomplish the same ends more efficiently. Many feared that privatizing CONASUPO would further higher prices for the fifty percent of the nation below the poverty line. Also controversial was the government's decision to privatize the bankrupt Cananea Copper Company, site of a major labor strike instrumental in the coming of the Mexican Revolution.

The government liberalized trade and investment laws. Tariffs were reduced to a maximum of 20%. New foreign investment legislation in May will allow foreign investors to use special trusts through which they can own up to 100% of an industry. A tax amnesty was granted to those willing to bring their capital back to Mexico.

The agricultural sector continued to lag far behind the rest of the economy. Droughts and inefficiency had so severely damaged agriculture that the government was forced to spend $3 billion to import food. In August, President Salinas announced a new agriculture policy designed to increase price supports and improve efficiency.

Relations with the U.S. Presidents Salinas and George Bush fostered improved relations between the two nations. Salinas met with Bush in Washington in October and addressed a joint session of Congress. The two leaders agreed to liberalize trade relations and cooperate in seeking solutions to joint problems. Salinas vowed to prosecute vigorously his nation's attack on drug traffickers, a principal concern of the Bush administration. In August, Miguel Angel Felix Gallardo, one of the Mexico's leading drug traffickers was arrested.