The President, speaking last year at the World Bank, called for enfolding "all the world's poor in an expanding circle of development."1 This year, he should stress that the type of environment that enables such development to occur is one that is shaped by limited government, good governance, the rule of law, sound economic policies, democratic freedoms, and free enterprise.

Embracing short-term, dependency-producing strategies that attempt to solve development issues with continued handouts from the United States and other prosperous nations is futile without institutional reform to reduce corruption, to lower taxation and government regulation, and to boost investment. According to The Heritage Foundation/Wall Street Journal 2002 Index of Economic Freedom, the world's freest economies have the highest levels of per-capita income.2 A recent study by Richard Roll, professor of economics at the University of California at Los Angeles, and John Talbott, President of the Global Development Group, investigated 14 institutional determinants of per-capita income and found that nine of these determinants explained at least 80 percent of the difference in the level of per-capita income among countries. Among those determinants, property rights (positively) and the existence of black markets (negatively) had the greatest effects.3

• Resist efforts to send money to failed states, authoritarian regimes, and enemies of Western democracy that refuse to reform. Because the United Nations gathers a broad range of governments from liberal democracies to authoritarian dictatorships--including aid recipients--under one tent, its development objectives reflect a view that demands few reforms while obligating more prosperous nations to provide assistance to poor nations. Discussions in past U.N. meetings on poverty eradication have included such schemes as currency transaction taxes in world financial markets and increased levies on developed nations to funnel more money into the U.N.'s unaccountable bureaucracy.
  
  
  The President should make it clear that he cannot ask Americans to throw away their hard-earned tax dollars in countries that fail to implement sound policies that will lead to economic development, particularly in light of evidence that aid without reform is futile. Donor nations should not be obligated to contribute to any general assistance funds that limit their ability to choose when and where their development dollars are best spent.

• Encourage Fox to continue his economic reforms and expand investment to help create more jobs and opportunities for businesses in Mexico. During his campaign for president, Vicente Fox promised to provide more employment opportunities for Mexicans at home by curbing monopoly licensing, making it easier for Mexicans to create new businesses, extending access to credit to small businesses and individual entrepreneurs, and strengthening property rights.4 Although NAFTA has stimulated the creation of new commerce by fostering a partial opening of Mexico's markets, however, most Mexicans' living standards remain much as they were in 1980.5 Much more needs to be done to bring the poorest people out of poverty and to promote the development of a broad middle class.6

  
  

  According to the 2002 Index of Economic Freedom, the Fox administration should be encouraged to follow through with these promised reforms:

1. Remove Mexico's restrictions on foreign investment in the oil and gas distribution, postal services, transportation, telecommunications, and agricultural sectors.
2. Facilitate entrepreneurship by streamlining procedures to obtain business licenses and property titles.
3. Strengthen the rule of law by fostering an independent judiciary.

If these reforms are carried out, more working-class Mexicans will be able to prosper and will less likely need to seek employment in other countries.

• Pledge greater cooperation with Mexico to improve border security, infrastructure development in border communities, and coordination among U.S. and Mexican agencies. In December 2001, the U.S. Director of Homeland Security, Tom Ridge, hailed a Smart Border Declaration with Canada, calling for more technologically advanced entry/exit procedures to speed the flow of goods and monitor and facilitate the flow of people using an Easy Pass system for pre-approved travelers, as well as to share intelligence information.7 A similar program is envisioned for the border region of Mexico, where existing technology and procedures were declared outdated by the director on a recent visit.8 But enhancing the movement of pre-cleared people and goods at border checkpoints is only one of many challenges and will not solve the problems of illegal migration, smuggling, or the fact that there are significant differences in the two border regions and populations.
  
  
  Whereas U.S. and Canadian citizens have similar incomes, education levels, and employment opportunities, this is not the case with Mexican citizens. Many Mexicans choose to migrate and stay in the United States illegally rather than wait for an approved visa. In fiscal year 2001, 1.2 million undocumented aliens were arrested crossing the border.9
  
  The persistence of drug trafficking and human smuggling also highlights the need for better planning and enhanced security along the porous frontier. Although some progress is being made in professionalizing Mexican law enforcement agencies, they remain understaffed, underpaid, and plagued by corruption. President Bush, who has increased the budget for overall U.S. border security by $2 billion for the next fiscal year, should offer U.S. help for Mexico in training its customs, immigration, and police agencies and in working on ways to improve coordination of law enforcement efforts.
  
  Finally, the U.S.-Mexico border has experienced explosive population growth, but without a corresponding investment in infrastructure or security.10 Informal communities lacking adequate sanitation have sprung up, primarily in Mexico, while water is in short supply on both sides of the border.
  
  The United States made a NAFTA commitment to finance environmental and infrastructure projects through the North American Development Bank (NADB). However, because of its rigid charter, the bank has been unable to offer loans at attractive interest rates, particularly on the Mexican side of the border where currency exchange provisions push the rate above 20 percent. Rather than permanently funding public works through a less-than-effective bank, the Bush Administration should replace those efforts with direct grants to border cities to improve such services as water supply, sanitation, and sewage treatment.11

• Encourage President Toledo to promote political and economic reform. Momentum is building for judicial reform, government decentralization, and even a new constitution, but there is little agreement among civic groups on specifics. Priorities should be the judiciary, which is subservient to the executive branch; Peru's overly centralized government, which has little reach into outlying districts and municipalities; and the political party system, which collapsed when President Fujimori encouraged the development of personal followings or movements. Accordingly, President Bush should reallocate U.S. assistance to offer expertise on judicial reform from the U.S. Department of Justice's Administration of Justice Program, provide funding for local non-governmental organizations (NGOs) that have the most effective proposals for such reforms as decentralizing government, and continue supporting the efforts of the International Republican Institute and National Democratic Institute to help revitalize Peru's political party system.
  
  
  Peru's lack of commercial competitiveness and uncertain climate for investment also demand attention. Although unemployment is relatively low by Latin American standards, the fact that nearly half of the Peruvian labor force still works in the informal sector is evidence of burdensome and arbitrary government regulation of business. The government competes with private industry in such enterprises as public construction and road building. Stronger guarantees of property rights proposed by renowned Peruvian economist Hernando de Soto during the first Fujimori administration were never fully adopted. Though improving this environment is a job for President Toledo and the Peruvian congress, Washington can encourage change by supporting local NGOs that advocate free-market reforms and by tying future trade initiatives to the adoption of these reforms.
  
• Pledge to reinforce Andean security measures with greater civilian and military agency cooperation. President Bush should emphasize America's support for local efforts to reduce drug trafficking and defeat terrorist activities. He should redefine U.S. security assistance to the Andean region beyond its counterdrug focus to include counterterrorism.
  
  The President should pledge a better coordinated effort with Andean civilian and military security agencies in military-to-military, police-to-police, customs-to-customs initiatives rather than allowing a hodgepodge of U.S. agencies to work with dissimilar counterparts as they did during the Clinton Administration. He should back Peru's decision to reactivate rural military and police outposts to repel FARC incursions in the North and the Shining Path rebel movement in the South. He also should welcome Colombia's decision to end its unproductive peace process with FARC guerrillas and its decision to expand its police and military forces to defeat them.
  
• Offer to sign free trade agreements with the Andean countries on the basis of each country's demonstrated commitment to eliminating the drug traffic and fighting terrorism. America's trade policy toward the Andean region has focused on the Andean Trade Preferences Act of 1991 (ATPA), which sought to strengthen the legitimate economies of the Andean countries and create viable alternatives to the profitable drug trade.15 The act was a limited accord that removed trade barriers between the Andean countries and the U.S. market only for products selected by the United States, which were not necessarily those for which the Andean countries had a competitive advantage. Andean textiles and apparel, rum and sugars, syrups, and sugar-containing products are not included in ATPA.16
  
  
  The United States has proposed an extension of ATPA to include several of the products for which the these countries are competitive, but the United States will still select those products and their level of trade preference. A better alternative would be to offer bilateral free trade agreements to each of these countries to remove substantial barriers to trade, and to provide a sustained incentive for the type of reforms that attract investment and help to reduce risks for investors making long-term decisions.17
  
  Bolivia, Peru, and Ecuador would qualify today for a free trade agreement, based on their previous efforts in the war on drugs and current commitments to liberalize their markets. Colombia--under siege from drug traffickers, terrorist guerrillas, and "self-defense" groups--requires a different approach. President Bush should first offer to broaden narrowly focused counternarcotics assistance to Colombia to include training, equipment, and security assistance to defeat the terrorist rebels. As Colombia demonstrates its commitment to demobilizing the guerrillas and curbing the drug traffic, the United States should offer Colombia a free trade pact as well.

• Promote the proposed Central America Free Trade Agreement. The leaders of Honduras, El Salvador, Nicaragua, Guatemala, and Costa Rica have welcomed President Bush's offer to explore a free trade agreement. The CAFTA would motivate participating nations to advance economic reforms that could be sustained by the growth that follows trade. CAFTA is the fruition of efforts begun by the Reagan Administration with its Caribbean Basin Initiative (CBI)--a series of trade preferences to help Caribbean and Central American economies develop--which was launched in 1984, a period in which the Soviet Union and the Castro regime in Cuba were backing Marxist insurgencies in the region. As a complement to U.S. security assistance, the CBI's goal was to bolster these economies during the 1980s.
  
  
  After the insurgencies were defeated in the 1990s, Central American leaders felt they were losing economic opportunities to the more comprehensive NAFTA signed in 1994. Even after President Clinton's October 2000 announcement of the Caribbean Basin Trade Partnership Act, which expanded preferences on apparel made in the region, Central American policymakers continued to seek NAFTA parity. President Bush's intent to include Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua in a free trade agreement would reward that quest by offering broader market opportunities to spur economic growth.
  
  President Bush should stress America's commitment to the advancement of free-market reform in the region and should encourage his counterparts to do so as well. This is important for two reasons: First, economic reform will speed up free trade negotiations; and second, once reforms open economies to much wider citizen participation, many of the poor will be able to move into the ranks of the middle class, the backbone of a democratic society.
  
• Encourage Central American states to develop human capital through education reform. The average amount of schooling completed by citizens of El Salvador, Honduras, and Nicaragua is about four years. In Guatemala, it is three years, while Costa Rica leads with six.20 With the exception of Costa Rica, education--especially in rural areas--is poorly funded and controlled by politicized national bureaucracies. Poor schooling is partly responsible for the large pool of unskilled labor in these countries. Unable to find manual labor at home, many of these workers migrate to Mexico and the United States to seek employment. President Bush should offer U.S. help by supporting local non-governmental organizations that will advocate and help implement such reforms as decentralizing education authority from national bureaucracies to local communities, introducing accountability into the systems, and increasing support for private and public education in rural areas and marginal urban neighborhoods.
  
• Pledge support for the region's democracies to combat crime. The United States already provides police and counternarcotics training for all Central American states, but El Salvador, Guatemala, and Honduras need increased assistance to boost the numbers of police and improve their training in order to combat crime from gang members deported from the United States, unemployed ex-combatants who were involved in the civil conflicts of the 1980s, and Colombian drug traffickers who are now moving up from South America. Besides pledging to support the training of more professional law enforcement personnel, President Bush should instruct the U.S. Immigration and Naturalization Service to notify Central American justice and police authorities before alien gang members and criminals are deported back to their country of origin.