Mexicans Send Message With Votes, but the Results May Not Be What They Hope

The political confusion in Mexico is much worse news than most American observers realize. In a purely political sense, the events are inspiring in a way: After 60 years of one-party rule, the Mexican people are once again speaking, delivering a clear message that they are tired of a “revolutionary” party that buttresses vast social inequality and pervasive corruption. But real life is not a morality play. The electoral results threaten to undermine the authority, not of corrupt conservatives, but of liberal reformers.

Even before the election, the U.S.-educated team of technocrats assembled by government party candidate Carlos Salinas de Gortari was embarked on a daring and risky program of economic and political change for Mexico. To make that program work, they relied on generating a virtuous circle of political and economic success. Now it is all too easy to imagine that they will find themselves in a vicious circle instead, in which political failures erode the business confidence and ability to override vested interests that their economic program demands, while economic disappointments erode the political base for economic reform.

The key point about the Mexican election was that it was the official candidate who was the real radical. That is, Salinas intended--still intends, if he has the political power left to do it--to pursue a bold restructuring of Mexico into an outward-looking, market-oriented, modernizing economy. His opponents within the ruling party stand for business as usual; his main electoral opponent, Cuauhtemoc Cardenas, for a populism that sounds radical but that is, in the Mexican context, a return to the past rather than a fresh approach to the future. Salinas will still be the next president, but he may no longer be able to carry his economic program through.

Some Favorable Developments

To understand the problem, we need to understand Mexico’s situation as it stood in the fall of 1987, when Salinas was chosen as the candidate of the Institutional Revolutionary Party (PRI). The Mexican economy presented a mixed picture of deep problems together with some hopeful signs. Dragged down by a massive burden of foreign debt, buffeted by declining oil prices and given an earthquake as a final insult, Mexico had shown little economic growth since 1982. The standard of living of ordinary workers had fallen by half. The sinking peso had fed an inflationary spiral that had taken the inflation rate in a country once proud of its price stability into triple digits.

Yet there were some strong points. Through Draconian budget cuts and tax increases, the Mexican government had been able to make up for the loss of oil revenue; fiscal austerity and the weak peso had contributed to a large trade surplus that not only allowed Mexico to pay the interest on its foreign debt but to accumulate more than $13 billion in foreign exchange reserves. And there was a dramatic boom in exports of manufactured goods, bringing hopes that Mexico might have found a new engine of long-term economic growth.

The program of the young technocrats that surround Salinas is to build on Mexico’s new strengths: to use the window of opportunity provided by a large trade surplus and foreign exchange reserves to radically liberalize Mexico’s trade, ensuring a permanent shift away from the traditional inefficient industries that had grown up under protection toward a new, export-oriented industrial base. Mexico has already removed the licensing requirements that restricted many imports and reduced the tariffs that limited others. Breaking with a 60-year tradition of distrust of the private sector in general and foreign investors in particular, Mexico is privatizing important government enterprises and welcoming foreign multinationals. If the Salinas team gets its way, Mexico will try to turn itself into a kind of Latin American Taiwan.

Obviously, the political resistance to this strategy is enormous. Indeed, it is remarkable that advocates of such radical policies could have achieved power at all. They have no strong constituency and can maintain their power--and carry through their program--only by building success on success. Salinas and his team must succeed in controlling inflation; they must translate that inflationary success into political success that gives them the power to pursue economic liberalization; they must then fairly quickly deliver results in terms of economic growth that validate their economic program.

Fighting Inflation

If the chain of success is broken, it is hard to see where the constituency for the new policies will be found. In particular, if the political setback of July derails the first stages of the economic program, the whole attempt to reform Mexico will be on the road to failure.

The immediate issue is inflation. In February Mexico launched a “shock treatment” program of inflation control aimed at breaking the inflationary spiral. The program involved further sharp budget austerity combined with wage and price controls and a stabilization of the peso. The Mexican stabilization program follows a classic strategy for controlling runaway inflation that sometimes works--for example, it worked spectacularly well in Israel in 1985, an example that the Mexicans have studied closely. But it also often fails equally spectacularly, as in Argentina’s Austral Plan and Brazil’s Cruzado Plan.

When such programs fail, they do so for two main reasons. First, the government does not follow through: When the inflation rate comes down, the government allows its budget to get out of hand instead of maintaining austerity until price stability is firmly established. Second, a lack of confidence on the part of the private sector can be a self-fulfilling prophecy: Expectations of the plan’s collapse keep interest rates high, swelling the government’s deficit, and eventually lead to capital flight that wipes out the country’s foreign exchange reserves.

The initial results of Mexico’s plan were highly favorable. Inflation fell rapidly, from a monthly rate of more than 15% in January to only 3% in April. With falling inflation, the interest rates on government debt also fell, producing a dramatic reduction in the budget deficit. But the gains are fragile. Brazil and Argentina also did well at first. The collapse of an inflation stabilization plan is by now so familiar that one can easily write the script.

Suppose that Salinas, his political base weakened by the electoral mess, finds that he must make deals that restore some of the privileges of the vested interests within his party. Wages of public sector workers are increased; subsidies to politically powerful sectors and enterprises are restored; import restrictions are reimposed.

‘Hyperinflation’

The government budget begins to look out of control, raising fears of a resurgence of inflation and a collapse of the peso. Interest rates rise with inflation fears, pushing the government deeper into deficit and reinforcing those fears. Capital flight cuts deeply into Mexico’s foreign exchange reserves, forcing a devaluation that starts the inflationary spiral turning again.

As the country heads for hyperinflation, demands for a nationalistic, anti-American, inward-turning response become irresistible. Capital controls are imposed, the government declares a moratorium on the payment of foreign debt. . . .

This is not a scare story. It is a scenario that has been played out before in other countries, and it may even be the most likely outcome. One needn’t be an expert on foreign affairs to realize that such a development would be a disaster for the United States.

Clearly the United States should be trying to do something to head off the collapse of what even a month ago looked like a highly promising experiment in economic reform. And we could help if we wanted to. The U.S. government has a huge influence on the negotiations between Mexico and its private creditors; it could change the political equation completely by giving Salinas a success on the most important issue of all, relief on foreign debt.

Is anyone in the U.S. government prepared to take the lead? Or will we drift, hoping that Mexico’s problems will go away, or at least wait until January? If we do, we risk a foreign policy disaster that will make our Central American worries look trivial.