Government Spending Cut but Peso Keeps Dropping : Mexican Economic Efforts Find Spotty Success

At the halfway point in its six-year term, the government of President Miguel de la Madrid has undertaken a piecemeal effort to strengthen the floundering Mexican economy.

Some of the steps taken recently seem to be aimed at opening the economy to greater competition and less government domination. Others are attempts to correct mistakes made by the government in 1984, mistakes that have stimulated the country’s crippling inflation.

Inconsistencies abound, making it difficult to characterize the government’s economic policy. Investors and businessmen are nervous, and their lack of confidence is reflected in a halving of the value of the peso against the dollar since the beginning of the year.

“It’s all rather unsettling,” one economic expert said. “No one seems to know where the economy is going next.”

Economic Jitters

De la Madrid, who inherited a chaotic economic situation from his predecessor, Jose Lopez Portillo, admits that economic jitters are a problem, but he predicts that confidence will soon be restored.

He said in an interview published recently in the newspaper Excelsior, “It will be the facts, the effective realization of the economic policy we follow and are going to follow, that will re-establish a climate of greater tranquility.”

Making progress has become increasingly important, not only in Mexico but abroad as well, for Mexico will be negotiating with numerous creditors over the terms of payment of its foreign debt. The debt stands at $96 million, second only to Brazil’s in Latin America.

In November, the government announced that Mexico will join the General Agreement on Tariffs and Trade, the 90-nation group that oversees trade worldwide. Entry into GATT will presumably reduce barriers to trade with Mexico, and the decision gave rise to fears that Mexico will lose business and jobs as better-made and competitively priced foreign goods flood into the country.

Tight Spending

But the government is betting that new markets for Mexican goods abroad will more than offset any increase in imports. Also, the opening of the domestic market is expected to force Mexican manufacturers to modernize and become more efficient in the face of competition.

The government recently made public its 1986 budget, which like the three previous budgets calls for tight government spending. Moreover, it proposes to reduce subsidies in some areas. For example, the Mexico City subway fare is 1 peso, about a fifth of a cent, and city officials have suggested raising it to 15 pesos. But the subway fare is a sensitive political issue, and a higher fare is not expected to go into effect soon.

Some observers doubt, on the basis of past performance, that the government’s budget goals can be accomplished. Last year, apparently in anticipation of state and municipal elections, the government went on a spending spree, stimulating the economy beyond planned growth rates and bringing on an inflation rate of 60%.

The reconstruction bill for the disastrous September earthquakes will put further pressure on the new budget.

The weakening peso has been of special concern, as it reflects not only a lack of confidence but a nearly feverish flight of capital. In an effort to reduce the capital flight, the government moved not long ago to plug a loophole that had permitted foreign banks operating here to accept pesos for deposit and then disburse the money as dollars in the United States.

Also, in a rare reversal of a step taken by a previous administration, the government has decided to permit residents of Mexican border cities to have dollar bank accounts. The Lopez Portillo government had forbidden such accounts in an effort to stop the fall of the peso, surprising dollar holders by converting their dollars to pesos overnight.

The move had little or no effect on the flight of dollars. Border residents simply crossed into the United States and deposited their money in American banks. People in areas removed from the border, who found it inconvenient to go to the border, sent their money across with friends and relatives or made deals with foreign merchants to deposit dollars abroad on their behalf.

No Immediate Effect

Although the new decision recognizes the futility of trying to curb dollar traffic across the border, it may have no immediate effect on the flight of capital. When the Lopez Portillo government froze dollar accounts, it converted the dollars to pesos at the rate of 70 to 1. On the same day, the free market was quoting a rate of 114 to 1. With that in mind, not many people are likely to move quickly to put their dollars into Mexican banks.

While these relatively long-range reforms were being undertaken, the De la Madrid government also implemented several short-term polices, some of which were vexing to businessmen.

For one thing, the administration set a limit on the interest it pays under certificates of deposit, making them unattractive to investors and spurring the buying of dollars.

For another, the government expropriated private lands for the reconstruction of housing destroyed by the earthquakes. This offended businessmen and investors.

High Priority

Since its first day in office, the De la Madrid government has given a high priority to improving the economy. In the first year of his term, De la Madrid blocked imports in an attempt to increase earnings from abroad and to help pay the foreign debt. An influx of tourism helped to create a big trade surplus.

He had a measure of success in reducing government spending and in reducing the budget deficit as a percentage of national income. Inflation was reduced, though at the cost of slow or no growth. Bankers lauded the effort and helped Mexico reschedule its debt.

But by the start of this year, a new crisis had set in. Public spending increased, bringing on more inflation. Oil prices fell, cutting into revenue and aggravating the ability to pay foreign debts.

Dollars flowed out of the country. Suddenly, for the De la Madrid government, it is like starting all over again--but with only three years left in office.