Reform Is a Sensitive Issue in Mexico : Closing Money-Losing State-Owned Steel Mill Angers Voters

The furnaces of Latin America’s oldest steel mill no longer light up the sky over Monterrey, a city sometimes described as having the industrial vitality of Chicago.

The government-owned mill, Fundidora de Monterrey, was shut down in May after officials in Mexico City decided that in these times of belt-tightening the government could not continue to subsidize it.

Flames of another sort greeted the news. Protesting union members among the 8,800 idled workers took to the streets and burned their membership cards in the Institutional Revolutionary Party, the ruling political party of Mexico.

Beyond the passion of the moment, the unusual anti-government protest symbolized the political risks inherent in Mexico’s economic difficulties.

“It was a time of anger, an act of desperation,” steelworker Heriberto Hernandez said. “Perhaps the anger has passed, but who knows when it might surge up again?”

At a time when Mexico is being pressured by the United States and international lending institutions to cut spending and open itself to foreign investment, the country’s economic crisis is increasingly a political problem for the government of President Miguel de la Madrid.

De la Madrid’s term, now in its fourth year (of the allotted six), has been characterized by rising levels of inflation and unemployment. Moreover, Mexico is burdened with $98 billion in foreign debt that aggravates the problems.

Mexican negotiators have met in Washington with officials of the International Monetary Fund in the hope of getting new loans or easier payment terms on existing loans. They were able to obtain a 30-day delay in the deadline for completing the negotiations and IMF permission to exceed spending targets this year that the international organization had attempted to impose. But, even with the IMF waiving the spending requirements this year, Mexico has already cut back substantially and will probably have to cut more deeply next year, when the IMF targets will be in place. For years, the government has been living beyond its means, spending much more than it has collected in taxes and other revenue.

It owns more than 300 enterprises that employ tens of thousands of Mexicans but, for the most part, lose money. Fundidora de Monterrey was one of these. To close down more enterprises or reduce the government payroll could be risky, because this would threaten the livelihood of many of the government’s political supporters.

Some politicians have called for a different solution: They say Mexico should stop or reduce payments on the debt, with or without IMF approval. So far, however, the government has balked at such radical action; last week, an interest payment of $600 million was made, on schedule.

But Adolfo Aguilar, an economist in Mexico City, said recently: “The government is getting to the point where it feels threatened. It is afraid to cut back” further on spending.

Worker reaction to closing the mill in Monterrey is not likely to encourage further dramatic cuts in government spending.

The day chosen to announce the shutdown may have contributed to the ill feeling. It was May 10, which is Mother’s Day in Mexico.

“I went home,” Hernandez said, “and told my wife, ‘Look at the gift I’ve brought you. I’ve lost my job.’ She cried every day for a month.”

The steelworkers mounted several protest demonstrations, demanding first that the mill be reopened, then more severance pay. At one demonstration, they burned pictures of De la Madrid. Some threatened to abandon the PRI, the ruling party, forever.

“President Miguel de la Madrid promised to create jobs and now he takes them away,” said Maria de los Angeles Espinosa, a steelworker’s wife. “Never, never again will I support the PRI.”

Union leader Aurelio Arenas said: “The government left us no alternatives. We don’t know where (politically) we will go.”

Arenas is an official of Local 67 of the Mine Workers Union, which represented Fundidora workers. The union is an affiliate of the PRI, which has ruled Mexico for 57 years.

Eventually, the government and the union agreed on a formula for severance pay that will cost the government 2 billion pesos, something over $3 million. The fever passed and the demonstrations stopped.

The incident “produced political and social risks, but the risks have been overcome,” Gov. Jorge Trevino of Monterrey state said. “It is irreversible, even if painful.”

Gave Economic Jolt

Aside from throwing thousands of men out of work, the closing of Fundidora gave an economic jolt to a sizable region of the country. Labor leaders and businessmen in Monterrey are still trying to assess the full consequences of closing the mill, which cost the jobs of about 1% of the city’s labor force. Hundreds of related businesses were also affected.

“What happened was a regional shock,” businessman Jorge Arrambide said. “It may be good in the long run, but for now there are a lot of problems.”

For one thing, dozens of businesses had sold supplies on credit to Fundidora. They have not been paid and are negotiating with the government.

The steel mill was closely tied to the city and, more recently, to the economic fortunes of the country.

Monterrey, with a population of 3 million, is an industrial city. Mills and factories are scattered across a broad valley framed by rugged mountains. A large esplanade in downtown Monterrey is adorned with a tall orange shaft known appropriately as the Lamp of Commerce.

Fundidora de Monterrey was one of the city’s industrial landmarks. Opened at the turn of the century, it boasted the first high-temperature steel-making furnace in Latin America. For years, it prospered. But in the early 1970s, earnings were diluted by a combination of debts and relatively costly labor contracts.

In 1973, the mill’s cash-strapped private owners turned it over to the government of then-President Luis Echeverria. The government was glad to take it on, believing that state intervention in the economy was a desirable thing.

“At that time, the policy was to save jobs, whatever the cost,” Trevino said. “The policy was justifiable then, but no longer.”

Since 1973, the plant has lost money consistently as a result of high wages, a sagging market for steel and increased borrowing to keep the mill going. Losses this year were expected to reach the equivalent of $20 million, about equal to the state budget.

Such a loss could be sustained when the price of oil, the source of most of Mexico’s foreign income and much of its government revenue, was high. But oil prices have fallen sharply and money is scarce. Fundidora’s losses were considered intolerable.

“We could not run the plant as social welfare,” Trevino said.

De la Madrid has announced plans to sell off scores of other industries, to close a number of others and to cut back on the number of employees in several state-run industries, including oil.

But the promise is now four years old, and little had been done toward fulfilling it even before oil prices started their plunge. Because of the reaction to the closing of the steel mill here, there is wide skepticism that the De la Madrid government will ever carry out the program. Only a handful of plants have been closed so far, the mill the largest of them.

Many of the other state-owned businesses are not considered attractive to potential buyers. In any case, high interest rates make it difficult to borrow money to buy them.