Domestic Gloom Shadows Mexico’s Recovery

Bankers, businessmen and diplomats are hailing the choice of Carlos Salinas de Gortari to be the next president of Mexico because he is bound to continue the economic adjustment policies of his mentor, President Miguel de la Madrid. After all, those policies are working, aren’t they?

Mexico’s international reserves are approaching a whopping $15 billion, an $8- billion trade surplus is expected for 1987. Stronger oil prices have helped, but Mexico’s real success story lies in the dramatic diversification of its exports. Non-oil exports--manufactures, food, commodities--were up 35% in 1986. New investment is pouring in. Together with a booming tourism sector, Mexico’s unhealthy dependence on oil for foreign exchange earnings has been reduced by half. Moreover, Mexico has made a serious start on dismantling one of the most protected economies in the Western hemisphere. It has privatized or closed half its inefficient state-owned enterprises, and a surprising number of wholly-owned foreign plants have been approved in an environment traditionally hostile to foreign investment.

While much remains to be done, especially with regard to a too-loose fiscal policy, the international community tends to see Mexico as a great success story, especially compared with the others.

Salinas, a brilliant Harvard-trained technician, has been a key architect of these policies and, along with De la Madrid, deserves much of the credit for their success. However, it would be dangerous for those with economic stakes in Mexico to be complacent about Salinas’ necessarily continuing these International Monetary Fund-blessed policies.

The often-ignored fact is that Mexico has paid a high price internally for its remarkable performance externally. The average Mexican will vote in the July, 1988, presidential election not on whether the foreigners are satisfied, but rather on whether, to paraphrase Ronald Reagan in 1980, he is better or worse off than before.

Internally, the Mexican scene is gloomy. Healthy external reserves, booming exports and other courageous economic adjustment efforts have failed to produce a turnaround in the domestic economy. For most of the past five years, growth has been stagnant at best. Triple-digit inflation has plagued Mexico for 18 months and wage increases have been minimal. The elimination of many basic subsidies for the ubiquitous poor provide a thin cushion against hunger. The middle class is squeezed by rising urban unemployment and a 40% loss of purchasing power.

This economic decline is causing the government’s Institutional Revolutionary Party (PRI) to face its toughest challenge in decades. From the right, the National Action Party believes that it can take advantage of economic stagnation to build on electoral gains in the north. From the left, a new coalition, especially active in the poor southern parts of Mexico, expects to benefit from some anti-PRI sentiment. Perhaps most serious is the increasingly vocal dissent within the PRI itself as it grapples with the political fallout from a dwindling economic pie.

Salinas appears to have been vigorously opposed by old-line political elements within the PRI. They consider him a technician who lacks requisite experience in electoral politics; he is largely responsible for the austerity policies that have shaken the PRI’s political dominance, and he favors the foreign creditors over growth at home. Salinas has labored mightily to overcome this opposition. But he likely will take office in December, 1988, facing skepticism, if not worse, from much of the party. He may feel compelled to buy their good will by switching to a “get-tough-with-the-foreigners” policy. Two ways of doing this would be to seek major new concessions from Mexico’s creditors or to prime the fiscal pump that is already working overtime.

Mexican history is replete with examples of presidents whose post-election policies differ significantly from their pre-election views. Salinas’ impressive record to date on Mexican economic policy offers hope for more of the same, but the lessons of history--and contemporary Mexican politics--argue for considerable caution.