CelsoFlores via Flickr Mexican President Felipe Calderon is losing his war on the drug cartels.

Mexico's security situation has deteriorated dramatically. More than 35,000 people have died in the conflict - 15,000 in 2010 alone - and drug-related violence continues to spiral to new, horrifying levels. Meanwhile, Mexican production of marijuana, heroin and meth continues to ramp up.

Calderon argues that Mexico cannot win its war against the cartels unless the U.S. does more to curb insatiable American demand. He’s right about that, of course, but that doesn’t mean Mexico should drown in a bloodbath while the U.S. grapples with its drug addiction.

So what can Calderon do?

The answer, basically, is nothing. Mexico was not ready for Calderon's war on drugs. Weak democratic institutions, a corrupt and ineffective judicial system and underdeveloped infrastructure have made it virtually impossible for the Mexican government to break up the country’s vast and flexible criminal networks.

Rather than devote limited resources to fighting a futile internal war, Calderon would be better advised to focus on more attainable goals; like implementing judicial reforms, expanding access to credit, growing the middle class, and promoting government accountability and transparency.

In the last decade, Mexico has made significant strides toward opening up markets and transitioning to a multi-party democracy. But there is a long, long way to go. Restoring a semblance of order to Mexico’s civil and political society would be a good first step toward reversing the country’s slow economic growth and declining global competitiveness. To achieve this, Calderon could recall the 45,000 troops he sent to fight the drug war and call for a ceasefire between the Mexican army and the cartels.

The fight against drug traffickers - and the militarization of domestic security - is eroding Mexico’s democracy. Public opinion is beginning to turn against the cartels, but widespread corruption has undermined the credibility of democratic institutions. At the same time, escalating violence and terror is endangering business growth and fledgling civic networks.

Proponents of using the Mexican military to fight the drug war point to the army’s success capturing drug kingpins and cartel cell leaders. The drug war has destabilized the cartel leadership and led to the atomization of powerful criminal organizations into smaller, more regionalized gangs. If left alone, these weaker organizations will wield considerably less influence over local governments and law enforcement than their predecessors. Stronger democratic institutions and a reformed criminal justice system would further marginalize and weaken these gangs.

If Mexico keeps trying to battle the drug traffickers, however, the army will have to adjust to a paradigm shift in organized crime. As the cartel hierarchies break down, their splinter cells will likely change the rules of the game. The death of a U.S. immigration agent by low-level drug hitmen - the first in more than two decades - suggests that the shift is already starting to occur.

While a ceasefire will not put an end to all drug-related violence, there are indications that it might take innocent Mexicans out of the line of fire. Until Calderon declared war, civilians were largely spared from drug violence, co-existing with organized crime in relative peace. Unlike drug trafficking organizations in Colombia and other parts of Latin America, most of Mexico’s major cartels do not have a political or social agenda (perhaps with the exception of the quasi-religious La Familia Michoacana). Money, not power, is the goal for the vast majority of Mexican traffickers. The cost of fighting a multi-front war seriously cuts into profits.

As long as American demand exists, the drug trade will thrive south of the border. But as the cost of doing business in Mexico increases, the nexus of power will shift to other Latin American countries. Indeed, 2010 was a huge year for drug trafficking in Guatemala, Nicaragua and Venezuela. As bad as Mexico’s capitalist capos are, a Sandinista or Chavista cartel would undoubtedly be much worse.