Economists Call Mexico’s Anti-Inflation Plan Inflationary
Although the government of Mexico has billed its new economic program as an attempt to bring runaway inflation under control, it has announced wage hikes and price increases for key products that, in the short term, will boost the rate of inflation wildly, government officials and economic experts say.
Moreover, the program announced Tuesday will do little to moderate prices over the long run, independent economic experts contend. They argue that large government budget deficits, which continue to deform the Mexican economy, may be reduced enough possibly to set off a recession but not bring down inflation rates.
“This is strictly public relations,” economic columnist Patricia Nelson said of the plan. “The government does anything except what is really needed to solve the problem.”
Added Sidney Wise, who publishes an investment newsletter in Mexico City: “The plan doesn’t fight inflation. It just tries to make it possible to live with inflation.”
The government plan is called the Pact of Economic Solidarity. With it, Mexican President Miguel de la Madrid claimed to have wrenched a pledge from labor, farm and business organizations to limit wage demands and price increases beginning in March. In return, the government will moderate and even freeze the prices it fixes on key products such as tortillas and gasoline.
After March, prices and wages will be set monthly to keep up with the rate of inflation that is anticipated during the subsequent four weeks.
“We are not offering a magic cure for our economic ills; we are asking society for more effort and sacrifice,” De la Madrid said in a speech introducing the plan Tuesday.
Halt to Rising Demands
The goal, according to presidential spokesman Manuel Alonso, is to hold the annual inflation rate to 8% to 10% beginning in March. The current annual rate of inflation is estimated to have reached about 150%. Before the new program was announced, there were predictions that next year’s inflation rate could range as high as 230%.
“The important thing is that everyone has agreed to stop raising price and wage demands,” Alonso said.
In the meantime, the Mexican government has authorized official price increases for a range of key products. The price of gasoline will climb by 85%, telephone service by 85%, sugar by 84% and fertilizers by 79%. The government also granted a two-part, 38% wage increase to unionized workers.
“We realize that this will fuel inflation, but we needed to get prices in some sort of realistic order,” Alonso said. Raising the prices of the basic goods reduces the subsidies the government pays to keep them inexpensive for Mexican consumers.
Independent economic experts criticized the plan because it accelerates price and wage increases before trying to bring them under control. Furthermore, the plan deals only marginally with a main cause of Mexico’s five-year bout with high inflation: runaway budget deficits that pump pesos into a stagnant economy.
The government has announced a 1.5% cut in next year’s budget. Most observers say that will mean cutbacks in building programs and thus will slow the country’s already snail’s pace economic growth. Budgeting and Planning Minister Pedro Aspe said Wednesday that the economy will not grow at all during the first half of 1988 but should recover during the last six months and expand by 2% over the whole year.
“Only government investment will be reduced, and that means recession,” economist Jorge Castaneda said.
Other budget expenses are virtually impossible to reduce, critics point out. For example, the government must maintain payments on $20 billion of internal debt incurred while covering past budget deficits.
Moreover, cutbacks of some other expenditures could create political problems for the government. Because 1988 is a presidential election year, it is highly unlikely that the government will lay off bureaucrats or workers in inefficient state-owned industries.
“You have to turn off the money machine somehow, but I doubt they can do it now,” said Nelson, the columnist.
The government may also face a credibility problem. Recent zigzags in economic policy have made the public wary of government pledges, observers say, making it more difficult to convince anyone that inflation will be brought under control.
In his state of the nation speech in September, De la Madrid promised he would not spring any major surprises during the remainder of his term. His six-year term ends next December.
This autumn, however, there has been little else but surprises. Last month, for instance, the Bank of Mexico suddenly withdrew its support of the Mexican peso on the free market. The value of the currency against the U.S. dollar immediately spun downward.
At the time, government officials insisted that the decline in the peso’s worth was not a true devaluation. Finance Minister Gustavo Petricioli said the government would continue to set an official price for the peso on a controlled market used for import-export transactions.
Then, just this past Monday, the government devalued the controlled rate by about a fifth to bring it into line with the free market rate.
It is not clear whether the government will continue to let the peso slide. A devalued peso itself contributes to inflation by making goods from abroad more expensive. Mexico is increasingly opening its borders to imports, thus making the economy more sensitive than ever to the price of foreign products.