Taking On Mexico’s People Problems : Economics: President Salinas’ successor will face the country’s overwhelming social problems or preside over an increasingly strife-torn nation.

In nearly six years as president of Mexico, Carlos Salinas de Gortari has done a masterful job of taming inflation, reducing the nation’s budget deficit and attracting international investment.

But Salinas’ policies have exacted enormous social costs at the same time that Mexico’s new respect in the industrialized world and approval of the North American Free Trade Agreement have raised expectations among Mexicans for a better life.

The next president--most likely Ernesto Zedillo Ponce de Leon, the Institutional Revolutionary Party’s (PRI) newly designated candidate to replace assassinated candidate Luis Donaldo Colosio--will have to focus on solving the country’s overwhelming social problems or risk presiding over an increasingly strife-torn nation.

“There has to be a much more deliberate approach to (solving) extreme poverty” and to improving education, health, housing and other basic services, said Nora Lustig, senior fellow at the Brookings Institution.

Salinas’ priority was fighting inflation, which has fallen to about 8% from more than 50% six years ago. But the campaign required reduced public spending and a tight money policy that aggravated the impact of the global recession--particularly the slowdown in the United States.

Salaried jobs in Mexico shrank by 2% in 1993 as the country slipped into a recession in the last half of the year, according to official statistics. Unemployment, including people not formally included in the work force, is an estimated 25%. Mexicans who kept their jobs found their spending power reduced because prices rose higher than wages.

Salinas’ programs have created a “sound financial base” and fiscal stability for Mexico but at a great sacrifice by most Mexicans, said Scott E. Kalb, a Mexico analyst with Smith Barney Shearson.

“You have to turn to matters of creating better equity, and you do that by spending on social welfare, on education, health care and improvements. You need infrastructure in place or you get bottlenecks. If you don’t spend on education, your economic progress will be inhibited by the capabilities of your work force,” Kalb said.

Many analysts said Salinas’ fiscal policies have provided some leeway for the next administration to increase public spending without reigniting inflation.

“The critical point is that Salinas’ progress in achieving stability has paved the way for greater spending on health, education, bridges and roads,” said Salomon Bros. economist Larry Goodman.

Zedillo, a 42-year-old Yale-educated economist who served Salinas as minister of budget and planning before leaving to direct Colosio’s campaign, on Tuesday spoke of the need to more equitably distribute the nation’s economic gains.

In accepting the PRI nomination, he pledged to “greatly enhance regional development in every region of the country, particularly those which have been left behind in the greater advancement of the country.” He also promised to “further an economy of certainty based on healthy public finances that will directly benefit the standard of living of all Mexicans.”

Economists reacted favorably to Zedillo’s designation as a sign of continuity from the Salinas regime.

There was also approval--though restrained--from investors. The Mexican Stock Exchange, which had dropped 3% Monday and continued downward in early trading Tuesday, rebounded with the news that Zedillo was named.

Zedillo “is the best candidate that PRI could get under these conditions,” said Josue Campos Campuzano, an economist with the Wharton Econometric Forecasting Assn., a Philadelphia-based think tank that studies Mexico. “He knows the politics and the economics of the old guard and of the avant-garde of the PRI. He will work to consolidate them.”

Whatever his policies, Mexico’s next president will be much more subject to outside political pressures and less free than Salinas to impose technocratic solutions, said Rudi Dornbusch, professor of economics at Massachusetts Institute of Technology.

“Economic issues are going to be far more politicized than in the past,” Dornbusch said. “Democracy has arrived and that makes economic policy-making much harder. Remedies to poverty will be far more important and politicized than in the past six years.”

“Mexico will become a real country. It’s been the dream of a technocrat for the last six years,” Dornbusch said.

Advice? Dornbusch of MIT said his suggestions to the new president are an immediate 30% devaluation of the Mexican peso, a move that would create more demand for Mexican goods by making them cheaper on foreign markets. That, in turn, would create more manufacturing jobs.

Such a devaluation is not likely. But, even without such sweeping measures and despite last year’s recession, most Mexico experts expected the country to bounce back with economic growth of 3% or more in 1994.

“For most of us who look at Mexico on a daily basis, things have been looking up lately,” said Lawrence Krohn, an emerging markets analyst with Lehman Bros. “Anecdotal evidence suggests that the economy is recovering in the first quarter in retail sales and manufacturing.”

Economy at a Glance

Taming inflation has been one of Mexico’s greatest economic successes in recent years.

Inflation rate: 9.0%

But the tight money and other austerity policies used to fight inflation have been costly in terms of slower economic growth.

Gross domestic product (percent change): 2.3%

And higher unemployment.

Unemployment rate: 10.8%

Sources: Bank of America, World Information Services, CIEMEX WEFA

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