Mexico and the World
Vol. 3, No 1 (Winter 1998)
http://www.profmex.org/mexicoandtheworld/volume3/1winter98/mexico_detour.html

Hemisfile May/June 1996

Mexico: Detour on the Way to the Promised Land

by Sidney Weintraub

Mexico has a habit of digging itself into deep holes, as it did in 1976 and again in 1982. But this time, it's a grand canyon.

GDP fell in 1995 by 6.9 percent, more than in any year since the Revolution and ensuing Civil War which ended more than 65 years ago. Some 2 million more people are unemployed today than a year ago. Inflation rose by more than 50 percent and real wag es plummeted by 20 percent. Consumers cannot meet housing and car payments. Companies are falling into bankruptcy like leaves in autumn. It will cost 5 to 10 percent of GDP — perhaps up to $30 billion — for the government to buy out bad loans of commer cial banks. More than 800 crimes are reported daily in Mexico City, double the number in 1994.

These are only the visible hardships, omitting the inner turmoil of Mexicans who had hoped their country was on the road to first-world status. Isn't this what participation in the North American Free Trade Agreement (Nafta) and membership in the Orga nization for Economic Cooperation and Development implied?

What happened on the way to the promised land? And why? And what is Mexico doing to avoid future implosions every six years or multiples thereof?

Mexico was done in this time by shocks that struck at unpredictable moments, combined with habits of governance that made the worst of the unfolding events. The internal plagues that afflicted Mexico in 1994 were biblical in their dimensions: the revolt in Chiapas on the first day of the year; the assassination of Luis Donaldo Colosio, the presidential candidate of the ruling Partido Revolucionario Institucional (PRI); a series of spectacular kidnapings that presaged what has since become a pervas ive atmosphere of crime; and a second shocking assassination on the main street of Mexico City, this time of José Francisco Ruiz Massieu, the number two man in the PRI hierarchy.

While all this was going on internally, the United States Federal Reserve repeatedly raised interest rates. Actions taken by US officials for domestic reasons can have more impact outside than inside the country. Rising interest rates in the US increa sed the attractiveness of US as opposed to Mexican government debt and thus affected capital flows.

After Mr. Colosio’s assassination in March, investors, both foreign and domestic, withdrew large sums of money out of fear of instability. The Mexican authorities treated these withdrawals as temporary and conducted monetary policy accordingly. Lawre nce Summers, US deputy secretary of the Treasury, has stated that government policy should be predicated on the assumption that good news is temporary and bad news is permanent. Mexican policy did not heed this dictum and, to their chagrin, the shocks ke pt coming.

The measure that in the end proved to be straw that broke the camel's back was the buildup during 1994 of Mexican debt in the form of tesobonos, which were short-term treasuries indexed to the dollar and, hence, equivalent to dollar obligations. The tesobonos gave investors a way of hedging against a peso devaluation. When the devaluation came, the market suddenly realized that the tesobonos outstanding were a multiple of Mexico's foreign reserves and this fact triggered the panic.

This abbreviated recitation of the facts that led to the peso crisis and consequent economic tragedy omits the backdrop that made Mexico so vulnerable to bad news. For this, it is necessary to look deeper. The revolt in Chiapas, which is an atypical state whose developments are unlikely to be reflected in the rest of the country, brought home to Mexicans how deep were the contrasts between rich and poor. Some 40 percent of the population lives in poverty and this reality has persisted in good times and bad.

The discovery that Raúl Salinas, a brother of ex-President Carlos Salinas, had more than a $100 million stashed away in bank accounts in the United States and Switzerland, and who knows how much more and where, highlighted what all Mexicans knew — that corruption was pervasive, at high levels and low. It asks too much of the Mexican man and woman in the street to have much admiration for their leaders as they observe the extent of illicit enrichment, or of a privatization process under which ri ch insiders became even richer. It was hard to respect a political structure that for some 60 years was rigged to assure the victory of PRI candidates and thereby provide the means for their enrichment.

Equal justice under the law has been a sham. Mexicans, when they are robbed or assaulted, fear calling in the police because that would just aggravate the damage. The increase in reported crimes must be a vast understatement.

These are familiar criticisms of the Mexican model coming from Mexicans themselves — that the country has had a structure of inequality, authoritarianism, cronyism, privilege, and corruption. The events of 1994 brought out additional attributes that c ontributed to the tragedy that ensued. Most key policy decisions were taken by a small group of insiders with little debate either in the Congress or among the population as a whole. During 1994, dissenters to the prevailing policy generally were not in vited to critical meetings. It has been widely publicized since the December 1994 devaluation that Mexican foreign reserve figures were published only once every three months, but less attention has been given to the secrecy of decisions taken in the nam e of the public.

The silver lining, one hopes, is that the depth of the economic decline is forcing fundamental changes in Mexican practices. President Ernesto Zedillo has tried to separate the role of the government from the workings of the PRI — to change what in th e past was the familiar hyphenated word PRI-government into two distinct words. This is proving to be difficult in that entrenched interests are loathe to give up privilege.

Electoral democracy is more of a reality today than at any time in modern Mexican history. It is no longer unthinkable that the PRI will lose control of the Congress in mid-term elections in 1997 to the conservative National Action Party (PAN). These democratic norms have led to considerable criticism that Zedillo is not presidential enough. He would be condemned by the opposition as dictatorial if he pursued past presidential practice, and he is being damned by PRI insiders who believe he is conc eding too much. Mr. Zedillo is opposed by the majority of his own party on such basic matters as Mexico's openness to imports and foreign investment, privatization of secondary petrochemicals, and reform of the social security and pension systems.

But the debate has brought significant change. Mexican economic figures are now available shortly after the fact on the Internet. The political system is no longer closed. The president, at least this president, is not acting like a monarch. Presid ent Salinas' brother is in jail on charges of corruption. The old system of "justice" is under attack.

Mexico is going through what is at once the most difficult and most hopeful period of the last several decades. The difficulties are evident, while the promise is still largely incipient.

The existence of NAFTA is one of these strengths. When Mexico confronted its economic crisis, it did not seek relief through import and capital controls which, in the past, had been the invariable remedy. As a result, US exports in 1995, while they d eclined from the 1994 levels, still exceeded the pre-NAFTA level of 1993. Mexican imports from Europe and Asia dropped far more sharply than did those from the United States. Credit NAFTA and the integration of the US and Mexican economies for this.

Many US politicians are trashing NAFTA because the positive US trade balance in 1994 turned into a deficit in 1995. The administration, when it sold NAFTA to the public and the US Congress, implied permanent US trade surpluses and thus contributed to the current criticism. Yet, in a world of global trade, a bilateral balance is of little consequence. All imports from Mexico in 1995 amounted to less than 1.5 percent of GDP, hardly a fundamental determinant of US well being. For Mexico, exports to th e United States in 1995 were the single bright spot in an otherwise dismal year. Mexican recovery depends on close economic relations with the United States. From the US viewpoint, stability in Mexico is dependent on this recovery.

Despite the economic breakdown, despite the urging from members of his own party for more populist measures, President Zedillo is sticking to an economic policy designed to secure long-term economic growth. Fiscal policy is austere, but the government is taking measures to ease some of hardships caused by the sharp rise in interest rates. The year 1995 was particularly harsh because of the desire to end the worst economic effects as rapidly as possible rather than to prolong them for the roughly four years required in 1982. There are, in fact, signs that the worst of the financial and economic crisis is over.

The final hopeful note is that despite the infighting in the PRI, despite the public criticism that the president lacks charisma and is not providing sufficient political leadership, a closed political system is opening more rapidly than anyone could have anticipated just a few years ago. This is a time of terrible travail in Mexico, but it is just possible that at the end of the day, some of worst excesses of the past will have been exorcised.