Mexico Is Unlikely to Retreat From a Decade of Rapid Progress

Recent events in Mexico--the revolt in Chiapas, executive kidnapings and the assassination of the leading presidential candidate--have understandably spooked international investors.

In April alone, more than $3 billion in short-term capital flowed out of Mexican securities and the stock market took a 5.2% plunge. Doubts are being expressed as to whether Ernesto Zedillo, who took up the ruling party’s banner to run in the August presidential elections, is up to leading the nation. There is a great deal of confusion surrounding the assassination of Luis Donaldo Colosio in March--and a lack of confidence as to whether justice will prevail.

In financial circles, there is also fear that the government may be forced to reinflate the economy in anticipation of the elections.

But the Cassandras are wrong. The transformation taking place in Mexico in the last decade is monumental--and largely irreversible.

Pre-1980s Mexico was characterized by trade barriers that shielded domestic business from foreign competition. The state subsidized products from tortillas to public transport, at huge costs. More than 7% of all the credit created in the banking system during the late 1970s went to finance deficits in public enterprises, which numbered more than 1,200 by 1980.

While the economic growth rate was high--real growth in gross domestic product averaged 6.5% between 1965 and 1980--inflation averaged 11.8% annually. The built-in inefficiencies of protected industries worsened income inequities and produced massive trade deficits. Foreign debt went from 9% to 50% of GDP between 1970 and 1982, mainly to pay for consumption and poor investments.

After the crash of 1982, Mexico began a long and painful process of transformation. From a level of nearly 15% of its GDP in 1986, Mexico’s fiscal deficit was erased entirely by last year. Tax rates were simplified, the tax base was broadened and a start at weeding out corruption was made. The rich lost their tortilla subsidies. Average tariffs were reduced from 34% to 4% and other trade restrictions were nearly eliminated. As a result, the inflation rate dropped to 8% in 1993 from 160% in 1987.

Meanwhile, foreign corporations rushed into Mexico as regulations were liberalized, and the modernization of financial markets attracted individual and institutional investors to a booming Bolsa index. Fully 65% of these funds were channeled into productive enterprises. The number of public enterprises was reduced to 206 by 1993. The North American Free Trade Agreement served to consolidate these gains.

Still, it is in the social arena that many of the more dramatic changes have occurred.

The “lost decade” of the 1980s left more than 17 million people--nearly a fifth of Mexico’s population--subsisting below the poverty line. President Carlos Salinas de Gortari’s “solidarity” program, in reaction, earmarked more than $2.5 billion for infrastructure investments, and social spending has increased from 32% to 50% of the budget during his term.

Since 1988, more than 150,000 local committees have been formed to plan and execute projects that have brought clean water, electricity and sewers to millions of people. In addition, 1.8 million deeds were issued to farmers for their property. While that obviously was not enough--judged by the Chiapas uprising--one can only ask what would have occurred in the absence of such programs.

Looking ahead, the Salinas administration has two major responsibilities. One is to guarantee the integrity of the electoral process. A recent request for “technical assistance” from the United Nations and an invitation for foreign observers as witnesses--both unthinkable just a few months ago--indicate the seriousness with which the government takes this duty.

Salinas’ second, more difficult task: to ensure that justice is done in the pursuit of Colosio’s assassins.

Tough challenges will remain for the next administration as well.

The social pact signed in 1987 among government, labor and industry kept inflation low by controlling prices, wages and the exchange rate. Mexico’s next president will face a sluggish economy that has yet to bear fruit for the majority of people. Real wages, for example, are still at 82% of their 1980 level; they must rise soon. Social spending in the provinces must increase, perhaps backed by more than $3 billion in banking and telecommunications shares still held by the government--and, if that is not enough, by privatizing the electrical power and oil monopolies.

The stability of the peso was central to the pacto de solidaridad, but now it has become a drag on the economy. The strong peso has damaged export industries and shifted investment toward non-trading sectors. A rapid slide in the peso’s value could be Salinas’ going-away present to his successor, in the manner typical of outgoing Mexican administrations.

These are the consequences of a process of change that aims to accomplish in 10 years what has taken 50 or more elsewhere.

Meanwhile, opportunities for foreign--particularly U.S.--investors and exporters are bullish. Already, many foreign firms have begun to redefine their North American operations to include Mexico, a shift nowhere more evident than in the automotive industry.

When General Motors Corp. moved production of its Cavalier models from Mexico to Lansing, Mich., it also announced a $1-billion plan to build a plant in Mexico that would turn out more than 250,000 light trucks a year. Ford Motor Co. is increasing investments in various plants in Mexico, yet it estimates that U.S. exports of finished automobiles will rise to more than 25,000 this year from fewer than 2,000 units.

Indeed, Mexico’s real business transformation is just beginning. Wal-Mart and Pepsico will dramatically alter patterns of competition and bring economies of scale to retailing and distribution. A TRW affiliate’s introduction of reliable credit rating systems will help reduce the cost of mortgages and consumer credit by unleashing a market of 85 million eager consumers. Participants in the telecommunications industry will share in a $3-billion modernization program over the next five to seven years. Manufacturers will find a large work force willing to learn new skills.

An old Spanish saying holds that fishermen profit in turbulent waters. Perhaps the real risk to U.S. business would come from not casting a net.