Give Mexico a Lot of Credit

After months of hard negotiations, Mexico’s President Carlos Salinas de Gortari has signed an agreement with more than 450 banks that effectively reduces his nation’s monstrous $100-billion foreign debt by about $7 billion. This is bus fare, and it may not be enough to revive Mexico’s moribund economy. That would be bad news for all Third World debtor nations.

Mexico’s debt troubles have major impacts on the United States--and could affect the entire Third World debt picture. A strong Mexican economy keeps people working there rather than migrating north for jobs. And a prosperous Mexico is one of the biggest markets for goods produced by U.S. workers. That’s why U.S. Treasury Secretary Nicholas F. Brady leaned on the banks to be flexible with Mexico, helping Salinas reach his new agreement. Brady leaned so hard, in fact, that economists refer to the Mexican agreement as nothing less than a model of the Brady plan for dealing with Third World debt.

In simplest terms, the Brady plan offers debtor nations some debt forgiveness if they will agree to reform their economies by (1) controlling inflation, (2) opening new doors to foreign investment and (3) selling off inefficient state-run companies.

Well, Mexico did all of that, but has paid a heavy price. Unemployment is high and even employed Mexicans earn barely half of what they did in 1980. The ruling Institutional Revolutionary Party (PRI) also paid a price, losing several elections due to widespread discontent with the austerity measures Salinas and his predecessor, Miguel de la Madrid, had imposed. There are not many other political parties that could make such harsh austerity work without being voted out of office, and more than a few Mexicans think the PRI held on to power in no small measure through electoral fraud and intimidation.

However it happened, Mexico’s political system has so far come through the economic crisis with remarkable stability. And if this new debt agreement helps stimulate confidence in Mexico, that’s all to the good. Still, it’s hard to think of other indebted countries with the discipline and resources to duplicate Mexico’s experience. Maybe Costa Rica, which is said to be next in line for debt relief. But further down the line are Brazil, Argentina and the Philippines. Too much austerity could make those nations explode, as recent food riots in Rio de Janeiro and Buenos Aires and coup attempts in Manila attest. Given the tension and uncertainty that still lie ahead, the international bankers who took so long to hammer out the complex Mexican loan agreement may yet look back on it as a fairly easy deal.