The Good News Behind Mexico Election Strife

The election in Mexico is making headlines, and that’s news in itself. Usually Mexico simply appoints its presidents. The outgoing office holder and the Institutional Revolutionary Party (PRI)--which has ruled the country for almost 60 years--name the new leader, who then receives a massive landslide vote and serves a six-year term.

Not this year. The candidate of the government party, Carlos Salinas de Gortari, a bright budget director in the present government, probably will be declared Mexico’s new president when official election results are released--perhaps today, more than a week after the voting. But he’ll have to pay attention to minority parties who garnered almost half the total vote--and particularly one party that is led by Cuauhtemoc Cardenas, the son of a past Mexican president.

What’s it all mean? Good things on the whole: First, a healthy political change for a nation that is so close as to be more housemate than neighbor to the United States, and second, an immediate boost in the domestic economy of one of the biggest customers for U.S. exports.

The Mexican economy probably will get a boost because the 30% of the voters who supported Cardenas are demanding relief from the economic austerity that has seen their wages cut in half in the last six years. Why did their wages fall? Because Mexico is a big oil producer and the price of oil fell (folks in Texas and Oklahoma know too well what that does to paychecks).

Financial Markets Steady

But Mexican belts were pinched even tighter because the country had borrowed heavily against oil revenues and was stuck with a foreign debt of about $100 billion when oil fell--a debt it has worked diligently to pay the interest on.

Because Mexico went on short rations at home, and pushed its exports, it has run trade surpluses for the last six years and accumulated international reserves of almost $20 billion--which is not bad for a poor country of less than $200 billion in annual output of goods and services.

However, economic austerity proved a political liability for the government party in this year’s election. The PRI was challenged by one party calling for lower taxes and more free enterprise, and by Cardenas, who vowed to boost government spending and reduce interest payments on foreign debt.

Cardenas is backed by the oil workers union, which is very powerful (and so corrupt that it makes the U.S. Teamsters look like choirboys). So one way or another, an expansion of Mexico’s economy seems inevitable, even though there’s a danger of a return to last year’s 150% inflation.

Yet U.S. and world financial markets haven’t budged throughout the election crisis. The value of the peso didn’t change at all last week, and the stocks of banks with loans to Mexico haven’t moved.

Peaceful Negotiation

Why so calm? It could be the markets see current events in Mexico in a positive light. “Mexico has a good record on debt repayments and that’s not likely to change,” says James McDermott, head of research at Keefe Bruyette & Woods, a brokerage specializing in bank stocks.

Its economy has some room to grow, says David Bodenberg, a partner in Duquesnoy, Mentcher & Bodenberg, a New York investment firm. “If it’s handled carefully, a boost in Mexican wages could be in everybody’s interest right now.”

Behind that economic optimism, though, lies an even brighter hope that Mexico may be able now to hash out its political problems peacefully. It was the country’s inability to do so in the past that explains why it has been ruled for so long by one party, and why that was regarded as stability.

Mexico was wracked by violence for two decades before the PRI was set up in 1929--following the assassination of a Mexican president. The party offered a peaceful alternative for settling disputes among the interest groups that had been fighting one another.

And at the outset it meant progress. President Lazaro Cardenas, the current candidate’s father, brought land reform to Mexico in the early 1930s. He also formally nationalized the oil industry in 1938--after Mexican oil workers had taken over U.S. and British-owned oil fields and refineries.

It was an earlier turning point in U.S.-Mexican relations, as President Franklin D. Roosevelt resisted calls to send in the Marines, and the whole matter was settled amicably--with Mexico becoming a staunch and helpful ally of the United States in World War II.

In time, however, one-party rule led to corruption--with some recent Mexican politicians becoming notorious for swollen Swiss bank accounts. The formation of new parties is a reaction to that corruption. “It’s the opening of democracy and it’s great,” enthuses Douglas Campbell, a Los Angeles broker specializing in Mexican issues.

With demonstrators taking to Mexico’s streets to protest the election results, that sentiment may be premature--but undeniably it would be good news if political maturity turned out to be the story behind today’s headlines.