HOLLYWOOD — With the breakout arthouse hit “Like Water for Chocolate,” Mexico has reached a watershed in its film history. Because of the impressive numbers chalked up by the 1993 film by Mexican veteran actor/director Alfonso Arau — nearly $ 20 million at the U.S. box office — America’s southern neighbor appears ready to enter a new age in the international film scene, unrivaled since its Golden Age of the ’40s and ’50s. A broad survey of producers, directors and distribs reveals a promising yet challenging path towards that goal.Mexico now has its most promising group of young filmmakers in over 20 years. If given opportunities, they can consolidate Mexico’s new-found position as a producer of world-class films. And if, as Arau intends, pan-American distribution and production entities can be established that are self-sufficient , rather than totally dependent upon government sponsorship, this exciting region will export more and more important films to the world. It has also opened new doors for Mexican filmmakers, including Guillermo del Toro, whose Gothic thriller “Cronos” swept the Mexican Oscars and who will helm another spooker for Universal, and Arau himself. After choosing from “over 60 scripts” he was offered, Arau is about to shoot “A Walk in the Clouds” for the Zucker brothers, who produced “Airplane!” “Water” showed what Mexican artisans and craftspeople are capable of when given the budget and direction to do it. Financed through bank loans and a home mortgage belonging to Arau and his wife, Laura Esquivel (who wrote the novel and the screen adaptation), “Water” had a huge budget by Mexican standards: about $ 3 million, including promotion. “We had to risk more money to get a minimum of production quality to compete in the international market,” Arau says. Significant change To comprehend the significance of this film to the Mexican film industry, it’s important to realize that until three or four years ago, Mexico’s production was largely relegated to exploitation pix geared to the domestic market. But in 1989, the election of Carlos Salinas de Gortari as Mexico’s president ushered in a period of rapid political and economic reform. Among Salinas’ reforms was strong support for a retooled Mexican Film Institute, known as IMCINE. For the past five years, IMCINE has been credited with no less than a rebirth of the once venerable Mexican film culture. In the period during and after World War II, Mexico released a bounty of classic, romantic big-screen films, including some of film great Luis Bunuel’s masterpieces. Change feared But with another election coming this August, Mexican producers fear a recurrence of non-support from their government such as they suffered during the Lopez-Portillo regime of the ’80s. “We again face the question,” says Arau, “of whether the government will support good cinema or not.” Under the stewardship of director general Ignacio Duran, IMCINE has strategically supported young filmmakers. Each year, IMCINE sponsors up to 60% of production budgets for 10 films, most of them by first-time directors. The result after only five years is a new generation of young filmmakers, many of them trained abroad, who bring an international outlook and fresh ideas to the table. One of the new generation is del Toro, the 28-year-old director of “Cronos,” which opens in New York March 30. Though poised to break into Hollywood, Del Toro views himself as a “round-trip filmmaker” who will “always go back to where my roots and heart are in Mexico.” Del Toro believes that he and other young Mexican filmmakers are “on the verge of a breakthrough” in Mexican cinema after the success of “Water.” The producers of “Cronos,” Ventana Films’ L.A.-based Arthur Gorson and Julio Solarzano of Mexico City, next plan to make “Tequila,” a film for the U.S. market about a Mexican-American who denies his heritage, but then returns to Mexico. Like “A Walk in the Clouds,”"Tequila” aims to directly address the U.S. Latin audience by making a movie focused on their concerns. Now that Arau has seen his gamble pay off so spectacularly, he is nonetheless skeptical that his film will lift all boats in today’s highly competitive world market. “These singular sensations have occurred before in Latin America,” he says. “First, we had ‘Dona Flor and Her Two Husbands’ from Brazil in 1978. That raised hopes but nothing happened. Then in 1985 we had the same thing with (Oscar-winner) ‘The Official Story’ from Argentina. And the same thing will happen with ‘Water’ unless we address the problems of financing and infrastructure.” Arau’s success, which even he describes as “a miracle,” will only yield a sustainable future for Latin filmmakers if more films of like quality can be consistently produced. “Talent we have a lot of,” says Arau. “We have literature , writers, actors, great cultural resources and history, cinematographers, everything — but we don’t have financing.” In Mexico’s favor is the fact that entertainment companies around the globe are salivating over the untapped potential of the largest, single-language market in the world. “If you include Spain and the U.S. Latin market,” says Arau , “we’re talking about a territory of 400 million people speaking Spanish.” To ensure “Water” will not go down in history as just the latest Latin sensation, Arau is forming a distribution company called Seventh Dimension with four partners: Luis Carlo Barreto in Brazil, Jean-Pierre Leleu in Mexico, Ivan Macalester in Colombia and Jorge Mora Estrada in Argentina — all established distributors who will run regional offices while corporate HQ will remain in L.A. Per Arau, who plans to operate out of Hollywood, the plan is to distribute “quality films that work” for the first two years. Meanwhile they will develop scripts and projects of top Latin American writers and directors. The third year , they intend to start funding production of these projects based upon the existing distribution pipeline. “Until now,” says Arau, “Latin American distributors have existed solely to make money by exploiting American movies.” Arau and his partners hope to raise financing from U.S. investors to capitalize the fledgling firm. Given the deterioration of the Latin film industries over the last 30 years, some analysts feel an enterprise like Seventh Dimension faces an uphill struggle. Partly due to its proximity to the powerhouse U.S. film business, Mexico is the only Latin American country with a true film industry. Lance Hool, a longtime U.S. producer in Mexico, says the Mexican film industry’s decline began with the nationalization of the film industry in 1975. “In the Golden Age of the ’40s and ’50s, Mexican film production accounted for 15% of the world market,” Hool observes. Then, in a misguided attempt to fashion an economy modeled after Franco’s Spain, Mexico nationalized everything, including film and TV. The films the state produced over the next 14 years were divided into two kinds: exploitation, and high-blown paeans to Mexican culture and history. “IMCINE was a great supporter, but they didn’t create an industry,” says Alfonso Cuaron, the Mexican director of “Love in the Time of Hysteria.” Cuaron is in pre-production on “The Little Princess,” for U.S. production firm Baltimore Pictures. “People cannot live doing IMCINE movies,” Cuaron adds. “They do it as an act of love. Technicians used to live off of U.S. films; that can support them, but not the Mexican industry.” Hool agrees that the problems are with financing and infrastructure, but he advocates a different solution than Arau. “IfMexico and other Latin countries would offer tax incentives to film investors, like they do in Canada and Australia and other countries, it would give ailing Latin film industries the jump-start they need,” claims Hool. Hool maintains that “small films that are near the heart of Mexico” have always had an audience. These small films, made for a couple of hundred thousand dollars, used to get financing from distributors in the form of an advance. Only the theaters now “are so terrible there are only about 500 decent theaters in a country of 80 million people,” says Hool. “Mexicans love to go to the movies, only there’s nothing they want to see.” “Cronos” co-producer Gorson has known the pleasure of working with the cream of Mexico’s new film generation. Gorson’s Ventana Films, whose first Mexican collaboration was “Cabeza de Vaca,” says the thing that impressed him most on the set of that movie was “the world-class quality of the crew. It was a big crew, shooting in the jungle for nine weeks, with good equipment. The film only cost $ 1.5 million.” Since the passage of NAFTA, Mexico has come into clearer focus for American business. Increased cultural exchanges, including co-productions, may benefit both nations.