IN MEXICO, A CALL TO LEGALIZE DRUGS

Escalating Violence Is Forcing Mexican President Calderon to Open
Discussion on a New Strategy to Fight Drugs: Legalization

A record number of homicides is forcing Mexican President Felipe
Calderon to discuss a new strategy in his country's war on drugs:
legalization. Calderon said for the first time earlier in August that
he was willing to rethink measures to fight trafficking after the
death toll in the war he started against the cartels in December 2006
reached 28,000. In the latest atrocity, 72 bodies were found on Aug.
25 at a remote ranch near the U.S. border.

Calderon's remarks have prompted a sharp debate inside policymaking
circles in both Mexico and the U.S. Former Mexico President Vicente
Fox and other Mexican politicians say that legalization would cut
funding to gangs and boost government revenue, while Director of the
White House Office of National Drug Control Policy R. Gil Kerlikowske
argues that legalization wouldn't solve anything.

The chances of legalization right now are slim. What's important is
that a once-unthinkable topic is being discussed. "It's a major shift
in the public discourse," said David Shirk, a professor of Mexican
politics at the University of San Diego. "The government recognizes
the current strategy is unpopular and there may be other options."

Calderon's willingness to consider legalization, even while saying he
disagrees with the approach, shows the deep fatigue Mexicans are
feeling over the struggle to eradicate the gangs. The increase in the
pace of killings has drawn comparisons with Colombia in the early
1990s, when cocaine kingpin Pablo Escobar waged a war of terror on the state.

Local business is frustrated. On Aug. 18 business associations in the
state of Nuevo Leon, which is home to the city of Monterrey, Mexico's
commercial capital, took out an ad in the newspaper Reforma demanding
that authorities act faster to stop the violence and urging that more
troops be sent to the state. The business community was reacting to
kidnapping and murder of Edelmiro Cavazos, a mayor of a town near
Monterrey. Violence is the biggest threat to the Mexican economy, say
57 percent of Mexican executives surveyed in July by Deloitte Touche
Tohmatsu. Earlier this year billionaire Ricardo Salinas Pliego, who
controls broadcaster TV Azteca and retailer Grupo Elektra, urged the
legalization of drugs in the U.S. and Mexico.

The government estimates that narcotics trafficking saps one full
percentage point from gross domestic product annually. Fox wrote on
Aug. 8 on his website that "radical prohibition strategies have never
worked" and that legalizing the production and sale of drugs would
curb violence, thereby bringing in more tourists and attracting
investment. In August, Jesus Ortega, head of the Party of the
Democratic Revolution, the No. 2 opposition party, and Fox's former
Foreign Minister, Jorge Castaneda, voiced support for legalization as
well. Several proposals to legalize drugs have been submitted to
Mexico's congress, although none is up for debate. Calderon, while
willing to consider the merits of legalization, has said it would be
"absurd" for Mexico to act alone.

What happens in the U.S. could affect the direction the debate takes
in Mexico. Marijuana is the primary source of drug revenue for the
cartels because of the ease of cultivation and high American demand,
according to the U.S. Drug Enforcement Administration. The U.S. State
Dept. estimates that Mexico's marijuana output rose 39 percent
between 2006 and 2008.

Fourteen U.S. states have approved laws allowing pot for medical use.
In November, California, the nation's largest state by population,
will vote on a referendum that would make it legal to possess an
ounce or less of marijuana and allow local governments to regulate
and tax sales. "If more U.S. states legalize, Mexico will take that
step." says Gabriel Casillas, chief economist at JPMorgan Chase (JPM)
in Mexico City.

Kerlikowske, who oversees U.S. drug control policy, says that even if
drugs were legalized, Mexico's gangs would still wreak havoc through
such activities as kidnapping, extortion, and theft. "The people
involved in trafficking are engaged in horrific acts of violence," he
says. "They're not going to suddenly turn around and apply [for jobs]
at IBM (IBM) or Microsoft (MSFT) because they lost one part of their
criminal enterprise."

Mexico, which spends about $8.2 billion annually on law enforcement,
would save between 5 percent and 15 percent of GDP if narcotics were
legal in all countries, says Luis Rayo, a finance professor at the
University of Utah who studies the drug trade. Those savings fall to
as low as 1 percent if drugs were legalized only in Mexico, he says.
"The ultimate solution is for all countries to simultaneously
legalize and regulate the drug trade. Mexico cannot succeed with
unilateral measures."

The bottom line: Mexico is publicly debating the idea of legalizing
drug use to weaken the cartels. It would be an effective step only if
the U.S. did the same.