THE PERILOUS STATE OF MEXICO

With Drug-Fueled Violence and Corruption Escalating Sharply, Many
Fear Drug Cartels Have Grown Too Powerful for Mexico to Control. Why
Things Are Getting Worse, and What It Means for the United States.

Detective Ramon Jasso was heading to work in this bustling city a few
days ago when an SUV pulled alongside and slowed ominously. Within
seconds, gunmen fired 97 bullets at the 37-year-old policeman,
killing him instantly.

Mr. Jasso had been warned. The day before, someone called his
cellphone and said he would be killed if he didn't immediately
release a young man who had been arrested for organizing a violent
protest in support of the city's drug gangs. The demonstrators were
demanding that the Mexican army withdraw from the drug war. The
protests have since spread from Monterrey -- once a model of order
and industry -- to five other cities. Drug Wars in Mexico

Much as Pakistan is fighting for survival against Islamic radicals,
Mexico is waging a do-or-die battle with the world's most powerful
drug cartels. Last year, some 6,000 people died in drug-related
violence here, more than twice the number killed the previous year.
The dead included several dozen who were beheaded, a chilling echo of
the scare tactics used by Islamic radicals. Mexican drug gangs even
have an unofficial religion: They worship La Santa Muerte, a Mexican
version of the Grim Reaper.

In growing parts of the country, drug gangs now extort businesses,
setting up a parallel tax system that threatens the government
monopoly on raising tax money. In Ciudad Juarez, just across the
border from El Paso, Texas, handwritten signs pasted on schools
warned teachers to hand over their Christmas bonuses or die. A
General Motors distributorship at a midsize Mexican city was extorted
for months at a time, according to a high-ranking Mexican official. A
GM spokeswoman in Mexico had no comment.

"We are at war," says Aldo Fasci, a good-looking lawyer who is the
top police official for Nuevo Leon state, where Monterrey is the
capital. "The gangs have taken over the border, our highways and our
cops. And now, with these protests, they are trying to take over our cities

The parallels between Pakistan and Mexico are strong enough that the
U.S. military singled them out recently as the two countries where
there is a risk the government could suffer a swift and catastrophic
collapse, becoming a failed state.

Pakistan is the greater worry because the risk of collapse is higher
and because it has nuclear weapons. But Mexico is also scary: It has
100 million people on the southern doorstep of the U.S., meaning any
serious instability would flood the U.S. with refugees. Mexico is
also the U.S.'s second biggest trading partner.

Mexico's cartels already have tentacles that stretch across the
border. The U.S. Justice Department said recently that Mexican gangs
are the "biggest organized crime threat to the United States,"
operating in at least 230 cities and towns. Crimes connected to
Mexican cartels are spreading across the Southwest. Phoenix had more
than 370 kidnapping cases last year, turning it into the kidnapping
capital of the U.S. Most of the victims were illegal aliens or linked
to the drugs trade.

Former U.S. antidrug czar Barry McCaffrey said Mexico risks becoming
a "narco-state" within five years if things don't improve. Outgoing
CIA director Michael Hayden listed Mexico alongside Iran as a
possible top challenge for President Obama. Other analysts say the
risk is not that the Mexican state collapses, but rather becomes like
Russia, a state heavily influenced by mafias.

Such comparisons are probably a stretch -- for now anyway. Beyond the
headline-grabbing violence, Mexico is stable. It has a thriving
democracy, the world's 13th-largest economy and a growing middle
class. And as many as 90% of those killed are believed to be linked
to the trade in some way, say officials.

"We have a serious problem. The drug gangs have penetrated many
institutions. But we're not talking about an institutional collapse.
That is wrong," says Attorney General Eduardo Medina Mora.

Officials in both Washington and Mexico City also say the rising
violence has a silver lining: It means that after decades of
complicity or ignoring the problem, the Mexican government is finally
cracking down on the drug cartels and forcing them to fight back or
fight with one another for turf. One telling statistic: In the first
three years of President Felipe Calderon's six-year term, Mexico's
army has had 153 clashes with drug gangs. In the six years of his
predecessor Vicente Fox's term, there were only 16."

If Mexico isn't a failed state, though, it is a country with a weak
state -- one the narcos seem to be weakening further.

"The Mexican state is in danger," says Gerardo Priego, a deputy from
Mr. Calderon's ruling center-right party, known as the PAN. "We are
not yet a failed state, but if we don't take action soon, we will
become one very soon."

Mexican academic Edgardo Buscaglia estimates there are 200 counties
in Mexico -- some 8% of the total -- where drug gangs wield more
influence behind the scenes than the authorities. With fearsome
arsenals of rocket-propelled grenades, bazookas and automatic
weapons, cartels are often better armed than the police and even the
soldiers they fight. The number of weapons confiscated last year from
drug gangs in Mexico could arm the entire army of El Salvador, by one
estimate. Where do most of the weapons come from? The U.S.

Last year alone, gunmen fired shots and threw a grenade, which didn't
explode, at the U.S. consulate in Monterrey. The head of Mexico's
federal police was murdered in a hit ordered by one of his own men,
whom officials say was working for the drug cartels. Mexico's top
antidrug prosecutor was arrested and charged with being on a cartel
payroll, along with several other senior officials. One man in
Tijuana admitted to dissolving some 300 bodies in vats of acid on
behalf of a drug gang.

The publisher of Mexico's most influential newspaper chain moved his
family from Monterrey to Texas after he was threatened and gunmen
paid a visit to his ranch. Other businessmen from cities across
Mexico have done the same.

"I have never seen such a difficult situation" in Mexico, says
Alejandro Junco, who publishes Reforma in Mexico City and El Norte in
Monterrey. Mr. Junco now commutes every week to Mexico from Texas.

A few weeks ago, a recently retired army general hired to help the
resort city of Cancun crack down on drug gangs was tortured and
killed. His wrists and ankles were broken during the torture. Federal
officials' main suspect: the Cancun police chief, who has been
stripped of his duties and put under house arrest during the investigation.

Every day brings a new horror. In Ciudad Juarez on Friday, gunmen
killed a police officer and a prison guard, and left a sign on their
bodies saying they would kill one officer every two days until the
city police chief resigns. He quit late Friday.

Analysts and diplomats worry that drug traffickers may increase their
hold on Mexico's political process during midterm congressional
elections scheduled for July.

Mauricio Fernandez Garza, the scion of a wealthy Monterrey family,
says he was approached by a cartel when he was a gubernatorial
candidate in 2003 and told the cartel would foot the bill for the
campaign if he promised to "look the other way" on the drugs trade.
He says he declined the offer. He lost the election.

Mexico has long been in the crosshairs of the drug war. In the 1980s,
the drug of choice for local traffickers was marijuana, and much like
today, accusations of high-level Mexican corruption were common. In
1985, DEA agent Enrique "Kiki" Camarena was tortured to death by
local traffickers, with the aid of a former president's
brother-in-law. In 1997, the country's antidrug czar Gen. Jesus
Gutierrez Rebollo was jailed after it emerged he was in the employ of
a powerful trafficker.

Drawn by the opportunity to supply the U.S. drug market, powerful
trafficking groups have emerged on Mexico's Pacific coast, its Gulf
coast, in the northern desert state of Chihuahua and in the wild-west
state of Sinaloa, home to most of Mexico's original trafficking
families. These groups, notorious for their shifting alliances and
backstabbing ways, have fought for years for control of trafficking
routes. Personal hatreds have marked fights over market share with
barbaric violence.

Several new factors in the past few years added to the violence,
however. In 2000, Mexicans voted out the Institutional Revolutionary
Party, or PRI, which had ruled for 71 years. The end of a one-party
state loosened authoritarian control and broke the old alliances
cemented through corruption that kept a check on drug-related violence.

Another factor was 9/11. After the attacks, tighter border security
prompted some gangs to sell cocaine in Mexico instead, breaking an
unspoken agreement with the government that gangs would be tolerated
as long as they didn't sell the drugs in Mexico but passed them on
instead to the gringos. Since 2001, local demand for cocaine has
grown an estimated 20% per year. The creation of a local market only
encouraged infighting over the spoils.

Things started getting really nasty in 2004, when Osiel Cardenas,
then leader of the Gulf Cartel, killed Arturo "the Chicken" Guzman,
the brother of Joaquin "Shorty" Guzman, a leader of the Sinaloa
cartel. Mr. Guzman soon tried to take over Nuevo Laredo, the border
city controlled by Mr. Cardenas with the help of the Zetas, former
elite Mexican soldiers who defected to the drug traffickers, as well
as most of the Nuevo Laredo police, who in fact worked for the Zetas.
The struggle for Nuevo Laredo culminated in a pitched battle when
gunmen used rocket-propelled grenades to attack a safe house
belonging to the other cartel. The all-out battle led the U.S. to
close its consulate for a week. The violence soon spread as the two
groups fought for dominance all over Mexico's northern border.

Monterrey, just a hundred miles to the south, seemed unperturbed.
Can-do, confident and modern, Monterrey likes to think of itself as
more American than Mexican. It's the home of Mexico's best
university, Tecnologico de Monterrey, modeled on MIT, as well as the
country's most prosperous suburb, San Pedro Garza Garcia, and local
units of 1,500 U.S. companies. Its police are considered among
Mexico's best. In the 1990s, the San Diego Padres came to play a few
regular season games here and there was heady talk of Monterrey
landing a pro baseball team.

As violence engulfed Nuevo Laredo, Monterrey business leaders, police
chiefs and government officials were of one mind: It wouldn't happen
here. "We have drawn a line in the sand and told the drug lords they
cross it at their peril," state governor Natividad Gonzalez said in a
2005 interview.

What the governor apparently didn't know is that, for years,
Monterrey's relative calm was due to an unspoken agreement between
rival drug lords whose families lived quietly in the wealthy San
Pedro enclave, a place where their wealth would not be conspicuous,
say local police. But Monterrey was too big a local drug market to
ignore for both sides, and soon fighting broke out.

By 2006, the murder rate spiked and cops were getting shot at
point-blank on the streets. San Pedro Police Chief Hector Ayala was
gunned down. Months later, Marcelo Garza y Garza, the chief of state
police investigations, a well-known San Pedro resident and the DEA's
main contact in the city, was murdered outside the town's largest
Roman Catholic church. U.S. law-enforcement officials believe he was
betrayed to the Zetas by a corrupt cop.

Today, the warring gangs still vie for control, though the Zetas have
the upper hand. In much of the city, the gang is branching out into
new types of criminal enterprise, especially extorting street
vendors, nightclubs and other shops that operate on the margin of the
law. These places used to be preyed upon by local cops, but no
longer. The owner of a billiards hall says the Zetas told him they
wanted a cut of the profits every month, a bill he ponies up. They
also ordered him to allow someone to sell drugs at the hall, he says.
"What can I do," he shrugs.

In the street market along the city's busy Reforma Ave, the Zetas
sell pirated CDs, and have their own label: "Los Unicos," or "The
Only Ones," with a logo of a black horse surrounded by four Zs. In
Spanish, "Zeta" is how you pronounce the letter "Z." One vendor says
some Zetas came to the stalls last year and ordered several vendors
to start peddling the Zeta label CDs.

Many Monterrey residents are convinced that even a cut from bribes
they pay local cops for traffic violations goes to the Zetas through
corrupt cops. That kind of extra money to fund the drug gangs only
worsens the balance of power between the state and the traffickers.
The drugs trade in Mexico generates at least $10 billion in yearly
revenues, Mexican officials say. The government's annual budget for
federal law enforcement, not including the army: roughly $1.2 billion.

Both the Zetas and the Sinaloa cartels are believed to field as many
as 10,000 gunmen each -- the size of a small army. The Zetas, for
instance, can find fresh recruits easily in Monterrey's tough
barrios, where the unemployment rate is high.

In Monterrey's Independencia neighborhood, one of the city's oldest,
it is not the city government that controls the streets but the local
pandillas, or gangs. During a recent workday, the streets were filled
with young gangsters, sitting around playing marbles, chatting, and
looking tough. At the entrance to a local primary school, a group of
four men sat and smoked what appeared to be crack cocaine, what
locals call "piedra" or rock.

Outsiders are clearly unwelcome. A reporter visiting in an unmarked
SUV along with a state policeman wearing civilian clothes was enough
to get plenty of hostile stares and a few mouthed expletives. One or
two gang members pulled out their cell phones and began placing a
call. "They're unsure whether we're cops or another drug gang," said
Jorge, the state policeman, who did not want his full name used for
fear of retaliation by the drug lords. "Either way, we move on or
we're in trouble."

Jorge, clean cut and with an infectious smile, has been a state cop
for more than 20 years. He earns 6,000 pesos -- $450 -- a month. It's
an old saw in Mexico that police here don't make enough money to
either resist being corrupted by the criminals or care enough to risk
their lives going after them. In fact, corruption extends throughout
the police forces. A senior state official said privately that he
doesn't trust a single local police commander.

The state's former head of public security resigned amid allegations
that he was in league with the Sinaloa cartel. The man who took his
place is Mr. Fasci, a former top prosecutor. Mr. Fasci says officials
are trying to improve coordination among Mexico's alphabet soup of
different law enforcement bodies. In Monterrey's metropolitan area,
there are 11 different municipal police forces, a state police, three
branches of the federal police, and the army. Statewide, there are 70
different emergency numbers for the police. Making matters worse,
narcotics smuggling is a federal crime, so local cops aren't supposed
to prosecute it.

Mr. Fasci says the protests are organized by drug gangs, who go to
barrios like Independencia and pay $30 to each person to block
traffic, hold up signs like "no military repression." Mr. Fasci
thinks the gangs are trying to goad the police into a crackdown that
would generate antipathy for the authorities and the army. "We're not
going to fall for it," he says.

Neither will the Mexican government call off the soldiers. Mexico has
no choice but to deploy the army to do what corrupt and inefficient
state and local police forces can't, says Mr. Fasci. And the protests
are likely a sign the military is having success pressuring the drug
gangs, say officials. Meanwhile, Mexico has passed a law that calls
for an ambitious reform of all its state and municipal police forces.
The problem: It could take 15 years or longer to complete, says Mr.
Medina Mora, the attorney general.

The U.S., which is providing Mexico with some $400 million a year for
equipment and training to combat drug traffickers, backs Mexico's
stand. U.S. law enforcement officials are ecstatic about Mr.
Calderon's get-tough approach. A U.S. law enforcement official says
the Mexican military is trying to break down powerful drug cartels
into smaller and more manageable drug gangs, like "breaking down
boulders into pebbles." He adds: "It might be bloody, it might be
ugly, but it has to be done."

Demand in the U.S., of course, is the motor for the drugs trade.
Three former respected heads of state in Latin America, including
Mexico's former president Ernesto Zedillo, issued a joint report
recently saying the drug war was too costly for countries like
Mexico, and urged the U.S. to explore alternatives like
decriminalizing marijuana.

Indeed, Mexican officials long ago gave up on thinking they might one
day eliminate the drugs trade altogether. Victory now sounds a lot
like what victory in Iraq might be for the U.S.: lower violence just
enough so that people won't talk about it anymore.

Jorge Tello, an adviser to President Calderon on the drugs war,
defines it like this: "It's like a rat-control problem. The rats are
always down there in the sewers, you can't really get rid of them.
But what you don't want are rats on people's front doors."