MEXICO : Progress and Promise : A WORLD REPORT SPECIAL SECTION : National Agenda : Mexico is radically shifting its economy and ideology. The nationalist, state-run model is out. The free market is in. But there are costs.

A decade ago, when the Perisur shopping center opened its glitzy doors in southern Mexico City, consumers marveled at the state-of-the-art mall with multilevel parking, three department stores and dozens of pricey specialty shops. Here was the best that Mexico had to offer in clothing, furniture and appliances.

That was the problem.

Under the bright lights and modern displays were made-in-Mexico clothes, many copied from international designs, second-rate Mexican toasters and televisions and Mabe-brand kitchen appliances--maybe they worked and maybe they didn’t, consumers quipped. Mexico’s best was mediocre.

Today the upscale, stucco-and-glass Polanco Pavilion that opened across town in December offers an altogether different fare: Benetton for clothes, Nintendo for games and McDonald’s for lunch.

An import grocer in the pavilion sells everything from American breakfast cereals to microwave dinners. Electronics stores are stocked floor-to-ceiling with Japanese stereos, Korean televisions and U.S. kitchen appliances. They even sell Mabe refrigerators, which now compare favorably with their foreign competitors.

Polanco Pavilion is a monument to the radical transformation of Mexico’s economy and official ideology. The government has abandoned the nationalist model that came with the 1910 Mexican Revolution--a protected, state-run economy where imports and foreign investment were blocked--to embrace a competitive, free-market system.

Casting aside its historic fear of foreign domination, Mexico is trying to forge a free-trade agreement with the United States and Canada. The rest of Latin America is watching closely, hoping Mexico will pave the way to open borders throughout the Western Hemisphere.

These momentous shifts, begun in 1985 by President Miguel de la Madrid, have gained force under his Harvard-trained successor. Taking office three years ago, President Carlos Salinas de Gortari promised to modernize not just Mexico’s ailing economy but also its stifling system of one-party rule.

Midway through Salinas’ term, Mexico is awash in the cross-currents of change--with hopeful progress, painful dislocation and unfulfilled promise. Aspiring to greatness, it is weighed down by a volatile past.

Half of Mexico’s 82 million people live in poverty. The country lost half its territory in a war with United States and millions of lives in the revolution. Presidents come in promising and go out plundering. An oil boom went bust in the early 1980s, leaving an unpayable foreign debt and an unhappy irony--a nation that exports some of its hardest workers as well as petroleum.

Today, for the first time in a decade, Mexicans have a clear sense of where their president is leading them. But his mission is fraught with controversy and uncertainty.

Salinas has shrunk the state dramatically, shedding its huge deficit and restoring economic growth after a “lost decade” of stagnation. But the massive sale of state-owned factories, withdrawal of subsidies for small farmers and depressed salaries have left millions of Mexicans behind, widening the gap between rich and poor.

The president is counting on the free-trade agreement to attract investment and sustain growth. But his critics argue that the proposed treaty could backfire--making Mexico too dependent on the United States without creating enough jobs, spurring more migration over the border and drawing more industries that pollute the environment.

While economic change has come quickly, political reform has lagged. The Institutional Revolutionary Party’s 62-year dominance of Mexico is unshaken. Instead of encouraging debate on his economic program, Salinas has mustered his near-monarchical powers to push it through. Heavy-handed management of the press has fed expectations of prosperity. But if those hopes are dashed, he risks a political backlash.

“The political system is proving inadequate to accommodate such a thorough economic liberalization,” said economist Rogelio Ramirez de la O. “Either there is steady progress on all fronts, or a society is disrupted as we saw in the Soviet Union.”

Fear that the political system would topple prompted the government to change its economic model in the first place. Since its founding in 1929, the PRI had been a social welfare machine that distributed the benefits of continuous growth to its constituencies--mainly peasants, workers and bureaucrats--in exchange for political support.

When international oil prices fell and Mexico’s debt-ridden economy collapsed in 1982, the resources of this patronage system dried up. Confronted by the demands of a youthful population for 800,000 new jobs a year, Mexican leaders realized there was an urgent need to grow.

De la Madrid tried to revive the economy with government spending but failed. In 1985, he decided to join the General Agreement on Tariffs and Trade, initiating the switch to a free-market model. He picked Salinas, his budget and planning secretary, to succeed him as president.

Identified as the architect of De la Madrid’s reforms, Salinas was elected with the lowest vote percentage ever for a PRI presidential candidate amid widespread charges that the election was stolen. Union workers and government bureaucrats who were squeezed by the economic crisis had abandoned the ruling party.

Salinas started his term by negotiating a reduction of Mexico’s $104-billion foreign debt and a $1.8-billion reduction in annual debt service payments. The accord began to restore international confidence in Mexico and bring down the federal deficit.

At home, the president attacked opponents of economic reform: He jailed the corrupt leader of the vast oil workers union, Joaquin Hernandez Galicia, then streamlined the state-run oil monopoly, eliminating jobs and contracts for union-owned companies.

But still foreign investors were reluctant. They wanted guarantees that the reforms would continue. And with the emergence of capitalism in Eastern Europe, Mexico faced unexpected competition for resources. Salinas reversed his campaign position, announcing that he would negotiate a free-trade pact. Then he began to privatize the banks.

Today the government owns only about a quarter of the 1,228 enterprises it did a decade ago, having sold mines, mills, airlines and the telephone company. Salinas has relaxed franchise laws, stopped requiring import permits and cut tariffs once as high as 200% to an average of 9%.

The payoffs have been remarkable. Mexico’s 5% annual growth rate has a solid economic foundation: The public deficit, once 16% of gross national product, has been virtually eliminated; inflation is down from 159% a year to an estimated 19%, and foreign reserves are a record $16.3 billion. More than $10 billion in new foreign investment has flowed into the country, along with the plethora of imported goods.

“I can assure you that the Mexican economy is entering a virtuous circle of growth with price stability,” Secretary of Finance Pedro Aspe told bankers in Acapulco this month. “If we persevere in the adjustment and adoption of structural change measures, that virtuous circle should become permanent.”

In the course of restructuring, Salinas has redefined official language. The word revolutionary, which used to mean putting the interests of workers and peasants first, now means favoring free enterprise. Sovereignty once encompassed the ideal of strong national industrial base; now it means competing successfully in international trade. In essence, the government has shifted alliances from workers and peasants to business and the United States.

Nonetheless, Salinas has won sweeping popular support. In a Times poll finished this month, 83% of Mexicans surveyed gave him a positive job rating and 77% said they approved of his handling of the economy--even though most people said the economy is weak and identified economic issues as their primary concern. Only 36% said they are better off today than when Salinas took office--a reflection of the fact that Mexicans’ purchasing power has been cut by about one quarter.

Analysts offer a variety of explanations for these seemingly contradictory opinions--from media manipulation to the popularity of Solidarity, the president’s multibillion-dollar social welfare program. Financed from the sale of state-owned companies, Solidarity has mitigated the economic squeeze by delivering public services to poor communities. Half the people who told The Times that they support Salinas cited Solidarity as one of the reasons.

Cuauhtemoc Cardenas, champion of Mexico’s old nationalism and Salinas’ leading rival in the 1988 election, lost ground; his 50% approval rating in a Times survey two years ago fell to 39%.

Salinas’ popularity has risen in spite of his reluctance to deliver political reform. The president has not separated the PRI from the state or the electoral process from the government. The PRI-dominated Congress limits itself to rubber-stamping presidential proposals, rather than initiating its own.

Even some who agree with his economic reforms worry about the way Salinas is imposing them.

“The Mexican presidency has always resembled the enlightened despotism of late 18th-Century Europe,” said Enrique Krauze, one of Mexico’s foremost historians. “The 18th-Century despots made many changes in the right direction without the participation of the people. That is exactly the case (in Mexico) today.”

By way of a warning, Krauze compares the Salinas administration to that of President Porfirio Diaz, who ruled for 34 years before he was toppled by the 1910 Mexican Revolution. Diaz made a success of the Mexican economy, beefing up exports and integrating Mexico into international markets. He attracted foreign investment. But his government was a dictatorship.

“In 1991, nobody can sell a hegemonic, one-party system in the world. You have to put makeup on it and say we are gearing towards democracy. But Mexico is not Mars and one-party systems do not work. The only way to modernize is to modernize in both the economy and politics,” Krauze said.

In an interview last month with The Times, Salinas defended his record on political reform, citing a new electoral code and a $300-million voter registry. “I would say that we have engaged in both economic and political reform simultaneously,” he said.

But his hopes that the new law and registry would restore credibility to the election process were dampened in the Aug. 18 midterm vote. The new Federal Electoral Institute failed to count the congressional votes quickly, leading to public suspicions of tampering.

The PRI swept the congressional elections and claimed victory in all six governorships at stake. But mass opposition protests against fraud forced the government to give up the two most-contested statehouses, in Guanajuato and San Luis Potosi.

Rather than recognize irregularities in either state, Salinas simply replaced the declared winners with interim governors. His solution demonstrated what some critics and business people describe as their main concern about the system--its arbitrary and often illegal behavior.

Mexicans routinely call the courts “lousy” and “corrupt.” International human rights groups accuse the police of torturing prisoners. Traffic police decide whether to apply the law or take a bribe. Bureaucrats want their cut too.

Investors want legal guarantees.

“A lot of our clients are concerned that what the law says is not always what it means,” said Cheryl Schechter, an American lawyer whose Mexican firm represents foreign companies. “That gives rise to a lot of insecurity.”

Their opinion matters greatly. Under the neo-liberal model, sustained growth depends more on foreign investment and less on government spending.

Such dependence is one of many criticisms of the reforms: Free trade makes the country more vulnerable to fluctuations in the U.S. economy, as Mexican firms become export-oriented and multinationals produce a greater share of exports.

Economists caution that the government is losing control over the economy to the private sector and foreign capital. As the government sells off key industries, it has fewer tools to fix problems such as lingering inflation.

That point was driven home last month in the government’s response to a credit crunch. Officials blamed bankers for over-lending in August and announced that they would do nothing to alleviate the problem. But a week later, they caved in to pressure from bankers and dropped the reserve requirement that had forced banks to invest $1 in government securities for every $3 in deposits.

Optimism about the economic program is evident in companies that believe they can compete in a world market. The Visa Brewery, which produces Tecate, Carta Blanca, Superior and Bohemia, already exports to the United States and is planning its regional strategy in anticipation of a free-trade agreement.

“We used to say we sold 52% of the beer in Mexico,” said Edgardo Reyes, special projects director at Visa. “Now we say we sell 7% of the beer in North America.”

At Polanco Pavilion, businessman Jorge Troop said he had owned two J. Troop clothing stores when Salinas took office. Now he has four stores under his name and five franchises of the Italian designer Benetton.

“I am investing and taking risks because of my confidence in the current policies,” said Troop, 47. “I believe in what is happening.”

While joining in the import boom, Troop also stocks Mexican-made clothing because he believes that Mexican manufacturers are beginning to match the quality of foreign producers now that they are allowed to import materials such as linings, buttons and shoulder pads.

“They aren’t Armani suits, but they are excellent quality. The best Mexican suit costs about $400 and competes with $600 to $700 suits from other countries that are not significantly better,” he said.

The Mexican government insists that producers are becoming more efficient and competitive. The manufactured goods sector is growing at a rate of 10% per year. But critics note that the growth is primarily in automobiles, pharmaceuticals and petrochemicals, sectors that are dominated by multinational firms. In other words, Mexican exports by foreign companies.

Not all businessmen are confident that Mexican firms will make it in the world market. Salvador Garcia, of the Mexican Institute of Small and Medium Enterprise, said he believes most of his colleagues are unprepared for open borders.

Garcia estimates that there are 325,000 small and medium businesses in the formal economy and another 200,000 mom-and-pop operations in the so-called informal or underground economy. Most don’t produce enough volume to export and have no knowledge of export markets, he said. He expects half of them to fold.

“I think a free-trade agreement can be good for the country, but not immediately,” he said. “Mexican business is not ready to compete with American companies. They have never worried about investing in technology. They don’t look ahead. . . . They don’t speak English. Their businesses are undercapitalized.

“They copy models from abroad. For example, a Mexican clothier buys an Italian fashion magazine and copies a design with a few changes. Instead of having a unique product that’s exportable, he has a poor copy that nobody will buy,” he said.

Small business is not the only group unprepared for free trade.

Under Mexico’s old system, pro-government unions commanded wages that kept up with inflation and offered job security. But Salinas has kept wages low to control inflation and will continue to do so to attract foreign companies. Low wages and the sale and closure of state-run companies have forced hundreds of thousands of people into the informal or underground economy. Once a major pillar of the PRI, organized labor’s power has been broken.

Union member Salvador Perez, 55, was laid off from the government’s bankrupt Zacatepec sugar mill in August after 38 years of working at the plant. But under bankruptcy law, the severance pay called for in his contract was reduced.

“Salinas is to blame,” Perez said. “His idea is to put everything in private hands. Perhaps this is correct, but our rights ought to be protected. If I enslaved myself to this plant, it was to earn a good retirement and pension.”

Salinas’ changes have upset the ruling party’s other traditional ally--farmers. He has eliminated price supports for most crops, reduced government lending and cut subsidies for seeds and fertilizers.

Even the ejido, a kind of communal farm that once enjoyed special status as a symbol of the revolution, is being forced to change. Subsidies have been cut and credit withheld from unproductive farms. When ejido members protest that they need capital, the administration suggests that they join the 70 farms that have formed partnerships with private industry.

“Salinas’ policy is to force the ejido farmers into a desperate situation, to oblige us to accept any investment scheme,” complained Jesus Leyva, head of the National Agricultural Credit Union, one of Mexico’s largest independent farmers’ groups with 100,000 members. “On some ejidos, the profits won’t be much more than minimum wage. The farmers will become salaried workers of their partners.”

Agriculture Secretary Carlos Hank Gonzalez said the government can no longer afford to prop up the countryside or maintain protective trade barriers in agriculture. His goal is to make the country self-sufficient in basic foods, and to that end he is channeling credit and technical assistance to the production of corn, beans, wheat, rice and milk--much of which is now imported.

Like Salvador Garcia in the business world, Leyva believes the shift in agricultural policy is too abrupt. He argues for continued subsidies, saying they failed in the past because corrupt officials stole much of the money. “Mexican farmers need 20 years to catch up with farmers in the United States and Canada,” he said.

While they worry that changes are coming too quickly, some business people fear the system is not adapting swiftly enough. They bemoan the lack of infrastructure--roads, railroads and working telephones--and insidious red tape.

The government hails its reduction of bureaucracy. Previously, securing a permit for foreign investment could take years. Now, if the government doesn’t respond within 45 days, the investment is automatically approved.

But business people say that is not enough.

“We have two employees whose only job is the paperwork involved in exporting,” said Eduardo Garza, chairman of Frisa, a Monterrey-based manufacturer of machine tools that exports 80% of its production. “That means more people. It offsets the advantage of cheaper labor.”

Business also complains about continued corruption. The government has attacked several well-known rip-off operations, such as international customs and the port of Veracruz. Last summer, the government confiscated the union-run company that operated the port and reformed the PRI-affiliated unions, which had commanded huge bribes to unload ships.

Still, 41% of the respondents in the Times Poll said bribery had increased in the last three years compared to 17% who said it had decreased. About a third of the people said it was business as usual.

What most preoccupies business people is the permanence of the current economic policies. While noting a historical swing of the pendulum between populist and pro-business administrations--President Venustiano Carranza confiscated the banks in 1915, President Alvaro Obregon returned them in 1921 and President Jose Lopez Portillo nationalized them again in 1982--they tend to view Salinas’ reform program as permanent.

“I don’t think you can call this a swing of the pendulum,” said Mexican economist Jonathan Heath. “There have been basic policy changes.”

Just to be sure, the businessmen want a free-trade agreement, to inscribe Mexico’s neo-liberal identity in stone.

* ABOUT THIS SECTION

The principal writers for this special report on Mexico were Marjorie Miller and Juanita Darling of The Times’ Mexico City Bureau, and Richard Boudreaux of The Times’ Managua Bureau. Don Bartletti, of The Times’ San Diego Edition, took the photographs.

Times staff writer Richard Boudreaux contributed to this report.