The United States’ $3.5-billion mega-loan to Mexico says something about the true state of the Mexican economy and the real nature of current U.S. policy toward Mexico. On neither account is there much to be optimistic about.
First, and most discouraging, look at the reason given for the loan: to tide Mexico over while it negotiates new credits from the International Monetary Fund and World Bank.
The loan became necessary because of three converging negative developments. At an immediate level, Mexico’s central bank reserves were diminishing rapidly because of capital flight and a drop in the price of oil, concurrent with the “end-of-term blues,” which have plagued the past three Mexican governments in their last months in office.
At a slightly deeper level, it had become increasingly clear to investors and speculators that the peso-dollar exchange rate, frozen since mid-December of last year and artificially maintained for political reasons, could not be sustained forever. This policy had already cost the country between $6 billion and $8 billion in reserves during 1988. A devaluation was approaching, regardless of the price of oil or the relative confidence (or lack of it) in the incoming president, Carlos Salinas de Gortari.
Most importantly, perhaps, the performance of the Mexican economy itself was casting lengthening shadows on its own future. For the past six years, the country had financed massive debt-service payments, totaling roughly $55 billion, in three ways: new loans (few and far between), a trade surplus (the main factor) and, more recently, a return of capital from abroad due to a domestic credit squeeze and high interest rates. But by mid-1988 all three factors had evaporated: The $12-billion 1986 rescue package had been disbursed, capital inflow (never terribly substantial) had ceased for political reasons and, most dramatically, the trade surplus had disappeared. Despite a significant economic contraction, imports continued to rise (more than 57% over the first eight months of the year) because of an excessively rapid and indiscriminate trade liberalization policy. Exports began to stagnate, partly because of the fall in oil prices, partly because non-oil exports were no longer growing at the previously high and unsustainable rates. By June or July, instead of financing most of its nearly $1-billion-per-month debt service with a trade surplus, Mexico was financing a small trade deficit--and all of its debt service--with reserves.
From that point on, the reserves’ exhaustion was simply a matter of time. Either the currency had to be devalued, or debt service suspended, or fresh funds had to be found. The first option was politically unacceptable; the nation’s middle class, already enraged by fraud in the July 6 election, would probably have gone berserk. There was no negotiated debt relief in sight, and a suspension of payments would alienate Salinas’ only remaining constituencies: the Mexican private sector and the U.S. government. The only choice was a new loan from Washington, with all the drawbacks and dangers it implied.
The key issue is where this leaves the Mexican economy. After six years of stagnant growth, massive transfers of capital abroad through debt service and capital flight, and extremely painful structural reforms that simply refuse to bear fruit, the nation is no closer to sustained growth than before--and it still needs a major U.S. bail-out. Each time the political or economic situation deteriorates--1976, 1982, 1986, 1987, 1988--the private sector reacts by pulling its money out and the government turns again to the United States for a renewed transfusion to keep it running. And each time, instead of solving the debt crisis by reducing indebtedness and debt service, the inevitable new loans make it worse by implying new liabilities and new commitments to pay interest on them.
The difference with previous occasions, of course, is that this time the same events are occurring in a radically different context. First, they come after six years of stagnation and hardship for the vast majority of the nation’s inhabitants. And they come as the country is in the midst of its most serious political crisis in decades, in the face of the emergence and rapid strengthening of a powerful opposition on both the right and left of center. This seems to be the explanation for the United States’ quick but perhaps insufficiently thoughtful response of granting Mexico the largest one-shot U.S. government loan in history.
There is no escaping the perception in Mexico that the loan is linked to panic in Washington over the growing weakness not only of President-elect Salinas, but of the Mexican political system as a whole. The impression is that the American government has decided that, given the unpopularity and discredit of the Mexican regime, it has to prop it up with whatever it can, from Ronald Reagan’s premature telegram of congratulations to Salinas back in July to the mega-loan in October.
While this policy may seem sensible superficially--today, the only alternative to Salinas is the left-of-center coalition headed by Cuauhtemoc Cardenas--it may prove short-sighted. It weds the United States to a regime that may not be able to overcome its original sins and initial handicaps. And the perception of needing a crutch from the United States will not help its friends in Mexico.
In the past, the United States has been accused of intervening in Mexican affairs by seeking to weaken or unseat strong governments with which it disagreed. Now it will undoubtedly be criticized for trying to shore up a weak government it likes. If this policy is the result of serious debate and deliberation in Washington, so be it. If not, the next Administration will have no time to lose in drawing up a policy that balances U.S. interests with Mexico’s. But first, some advice: This is the wrong country to have a government that is perceived as being propped up from abroad.