COLUMN ONE : Real Issue for Mexico Is Economy : A desire for greater economic opportunity is driving demands for change in the most open election in 65 years. The stakes are high.
Antonio Perez stands in the field he planted with frijoles , or beans, and watches as grasshoppers eat away at the now stunted and torn plants. They have wiped out his crop.
Grasshoppers--a biblical plague, but one largely controlled by pesticides in modern times. Was there no pesticide for Perez? “The government didn’t get money to me for pesticide,” says Perez, a gray-haired, pleasant man in his 40s.
His mother, Maria Jesus Perez, who lives on the 15-acre farm with her son, his wife, Graciella, and their five children, explains, “It is the way God wanted it.”
In another field, Perez’s corn crop survives. And he may get some money from ProCampo, the Mexican government’s welfare system for farmers. Then again, he may return next year to Chicago, where he has already lived several times, working in a plant nursery.
The plight of Antonio Perez is a prime illustration of what is wrong with the Mexican economy--and of the direct U.S. stake in the fortunes of Perez and his neighbors. In a decade, the state of Zacatecas, in central Mexico, has sent more than 200,000 people to the United States, principally to Los Angeles.
This lack of economic opportunity--in Zacatecas and so much of Mexico--is what has driven the nation to the brink of change this weekend, as voters go to the polls in its most wide-open election in 65 years.
In a country racked by an uprising in Chiapas, the assassination of a presidential candidate and the kidnapings of business executives and their families, the big economic questions can be boiled down to a simple few for typical Mexicans like Antonio Perez:
Will loans be made available to irrigate and improve the land? Will food processing plants and other factories spring up to employ Perez and his neighbors so they can make a living in Mexico rather than the United States?
And in the cities, will wages--now the $6-a-day minimum for many workers--catch up to the price of chicken, now $1.06 a pound in a Guadalajara supermarket?
Antonio Perez might shrug his shoulders at such questions. Indeed, many U.S. analysts wonder if Mexico can ever hope to lift its standard of living, and dubious foreign investors are waiting to see if the election results spell stability in this country of about 90 million people, half of them under 20 and more than a third of them poor.
But the urge for reform is very strong. And across the political spectrum, Mexico’s leadership ranks are confident that, this time, their country’s attempted dash from the Third World to the First--to true industrial status--will succeed.
One embodiment of that vision is a company named Cerrey S.A. in the industrious northern city of Monterrey--a maker of boilers for electric power plants that almost failed in the recessionary 1980s but instead transformed itself into an exporter to Sweden, France, Saudi Arabia and the United States.
That’s no small feat in a country short on good roads and transport and lacking the kind of export financing that U.S., Japanese and European governments give to their companies. Cerrey’s response has been to focus on specialized markets--selling power components to industrial companies that generate their own electricity--and to use computers as a competitive equalizer.
The company, located on a paved but dusty road potholed by heavy trucks rumbling over it, boasts top-flight computer-aided design technology that custom-designs equipment for Cerrey’s demanding overseas customers.
“A company like this needs a lot of investment in new methods,” says President Ramon Torres, a chemical engineer with degrees from the University of Nuevo Leon and the University of Texas. He gestures across a room filled with 23 computer work stations and then walks a visitor across the plant site to prefabricated classrooms where Cerrey employees are trained to work with the software of several countries.
That training--raising Mexican employees with high school educations to world-class technical proficiency--is the very essence of economic development and the hope of this ambitious and needy land.
Economic growth and development are imperative for Mexico, which needs to create 1 million jobs a year just to keep pace with the young people pouring into its labor force. And it needs to find work--and education--for the one Mexican worker in three currently unemployed or underemployed.
The faces of underemployment are the men and children hawking chewing gum and novelties on the streets of Mexico City, moving amid cars stalled in traffic jams. In the capital, there is an abundance of unskilled labor available for menial tasks; Mexico City’s population has swollen to 22 million in recent decades.
The tax system is partly to blame for sucking people to the cities. The federal government collects all tax revenue in Mexico and sends a portion back to the 31 state governors, who in turn concentrate their public spending in the principal cities. Thus, Guadalajara has grown to 6 million people, Monterrey to 4 million.
As a result, workers can be had for a pittance. But food, clothing and supplies cannot.
Fertilizer costs the equivalent of $242 a ton--more than Antonio Perez can comprehend. Boys’ back-to-school slacks at $15 a pair or girls’ pleated skirts at $25 apiece may look reasonable to U.S. shoppers but are out of reach for many Mexicans.
The underlying cause of this mismatch between paychecks and groceries is that Mexico does not produce enough--and thus has a limited ability to hire and pay its people. Mexican industry has surprisingly low output for such a populous country. Even the largest companies, such as Monterrey’s big conglomerates Grupo Alfa and Vitro S.A., are no match in output or technology for companies of Europe, Japan or even South Korea.
Why? For three decades, during which world markets surged with historic growth, Mexico’s companies produced for a closed home market, with government protection against cheaper foreign goods. The companies made high profits, and those of Mexico’s educated elite who worked for them--or for the government that regulated and rewarded them--made high incomes.
But the companies could not compete anywhere else, and their limited operations made opportunity and good incomes scarce for most Mexicans.
One result: high prices and soaring inflation whenever demand for goods from Mexican industry or consumers heated up, as in the oil boom of the 1970s. Ultimately, the country was caught up in a tornado of inflation that reached 159% in 1987.
That brought forth the rigorous stabilization policies of the government of President Carlos Salinas de Gortari, which have brought inflation down to roughly 7% this year.
Salinas moved, too, to break down the protective barriers. He opened Mexico to trade with the United States--a historic reversal codified in the North American Free Trade Agreement (NAFTA) that went into effect Jan. 1.
Initially, NAFTA has greatly increased the two-way flow of goods, with slightly more U.S. exports coming to Mexico--which this year will rival Japan as the United States’ second-largest market after Canada--than the reverse.
In Mexico, NAFTA has meant pain, especially for small businesses coping with the surge of U.S. merchandise and marketing know-how.
But Mexico’s exports are also growing, and in any event the country benefits from its U.S. imports. Says Commerce Secretary Jaime Serra Puche, “Eighty percent of the goods we import from the U.S. are machinery and other products to help modernize Mexican industry.”
Again, Cerrey illustrates the trend: Those 23 computer work stations came from Intergraph Corp. of Huntsville, Ala., at a price dwarfed by the value of the boilers that the Monterrey company now ships to four continents.
Serra, who earned a doctorate at Yale after attending the National Autonomous University of Mexico, sees Mexico’s big companies restructuring to become competitive--indeed, Alfa, Vitro and others are doing just that--and smaller firms gaining prowess by working as suppliers to larger businesses.
The government gives a hand, but not a shelter. “I can take you to Puebla (east of Mexico City) where there are a lot of small companies producing jackets,” Serra says, describing a host of firms that once saw their profits eaten up by local middlemen. “Now we have organized them to share the cost of finance and marketing and to contract directly to supply custom designs to Polo and Members Only.”
Yet success stories will be few as long as small- and medium-sized companies face a virtually insurmountable obstacle: lack of credit. The longest loan a business can get is 90 days. The interest runs 25% to 30%, with fees to the bank on top of that.
If the new Mexican economy is to have any chance, those interest rates will have to come down. One way to bring them down is to control inflation. And with that aim, this summer Mexico took a power-ceding step surprising for a one-party state.
It amended the constitution to make its central bank--the Bank of Mexico--independent of politics. The model is Germany’s Bundesbank. “We have the same mission--to keep prices stable and inflation down,” says Francisco Gil Diaz, deputy governor of the Bank of Mexico.
With inflation under control, Mexico’s leaders are turning their focus to the bricks and mortar of the new economy.
Already, private industry and the government are pouring money into building Mexico’s infrastructure--its roads and ports, and also its phone lines and computing capacity--which will form the foundation of its bid for First World status.
In Monterrey, local investors put up $3 million to erect a 700,000-square-foot trade and convention center called CinterMex. “It’s a place exhibitors from abroad can bring their products and save Monterrey’s 7,000 manufacturers the expense of traveling,” says the center’s director, Jesus Franco.
A gleaming glass structure, CinterMex symbolizes the old and new in Mexican industry. It is built on the grounds of the old Fundador steel mill, which failed in 1983. The mill’s rusting steel furnaces still stand in a grassy area that is being turned into a park.
Elsewhere, the formerly government-owned telephone system, Telefonos de Mexico--whose stock trades prominently on the New York Stock Exchange--is modernizing the communications system.
Two years from now, Telefonos, which is partly owned by Southwestern Bell, will lose its monopoly and face competition, just as AT&T; does from MCI and Sprint. Meanwhile, cellular companies, one affiliated with Bell Atlantic, are rapidly starting operations.
U.S. retailers Wal-Mart, Kmart and J.C. Penney are spreading fast in Mexico, where Sears has had a presence for decades. This is good for consumers, of course, but this opening cuts two ways: “There’s a price to pay--our local merchants are going to have to change,” says Benjamin Clariond, the mayor of Monterrey and former head of a family construction business.
Such transition can be painful. But when will it halt the erosion in workers’ wages and bring the benefits of an open economy to Mexico’s tens of millions of increasingly impatient poor?
That will happen when it leads to an upgrading of jobs. In Mexico City, Grupo Gutsa, a hotel company owned by the Gutierrez family, is instituting computerized inventory control through a joint venture with Labatt’s Food Service of San Antonio, which supplies 2,000 hotels and restaurants in Texas.
The result is a Mexican revolution. The computerized system has achieved tremendous cost savings by organizing the former chaos of 80 food vendors making daily deliveries to Gutierrez hotels under the watch of 20 inventory clerks.
What happens to the unneeded clerks? “I need them as salespeople for Labatt Mexico’s inventory control system,” says Al Silva, a Texan and Labatt executive who works with Bernardo Gutierrez, executive director of the Mexican venture.
But Silva got a surprise when he said he needed salespeople.
“I was told that was a lowly position with no pay or status,” Silva says. “And I was puzzled until I realized that in Mexican thinking, salesperson, or vendedor , is seen as a lowly order taker, a Willy Loman who delivers goods and picks up a receipt.”
“But I don’t want a vendedor ,” Gutierrez interjects. “I want a marketing ejecutivo --somebody who can explain the business to a customer. I’d pay $30,000 a year for such a person.”
And so will many others, as Mexico’s economy develops. But to upgrade the work force will demand gains in education in a country in which only eight years of schooling is compulsory and many don’t complete even that.
“We’ll have to spend 8% of our economic output on education, compared to today’s 3.6%,” says Rogelio Ramirez de la O, a Mexico City economist who advises international industry. “But when we do, our work force and economy will improve.”
Obviously, Mexico’s modernization and the growth of its consumer market will take many years. If turmoil grows in the wake of contested election results, development will be delayed. Still, a lot of business people are preparing for the consumer market now.
Bancrocer, a medium-sized bank with 400 branches in major cities, plans to open hundreds of small, 600-square-foot consumer banks in poor urban neighborhoods.
“The vision is that people in these colonias or barrios will have savings to deposit and needs for mortgage loans,” says Miguel Alvarez, a vice president and director of the bank.
Of course, the line will be short for mortgages--just now becoming available after 10 years--as long as rates remain at 28%.
Still, stocks in consumer businesses--retail stores and the like--will rise quickly on the Mexico Stock Exchange if Sunday’s election is carried off peacefully, predicts Eduardo Cepeda, who heads the Mexico City office of J. P. Morgan & Co., the legendary New York City investment bank.
That Mexican stock market already has received a lot of U.S. mutual fund investment among the $21.8 billion in foreign investment it has taken in in the last three years--a huge bet by the average U.S. saver in Mexico’s future.
Of course, the U.S. stake in Mexico goes well beyond investments. Socially and economically, it goes to the issue of immigration. If Mexico fails to thrive, its people will turn north for work in even greater numbers, exacerbating tensions along the border and in major cities like Los Angeles.
And the United States has deeper, broader interests in Mexico’s success.
In contrast to Japan and South Korea’s Asian model of development--closed economies and confrontational trade policies--Mexico could become a confirming example of the Western model, an open country developing economically while nurturing a growing democracy.
“We are going to have greater citizen participation and higher incomes,” predicts economist Ramirez de la O.
Change is coming to all of Mexico, even to ancient Zacatecas, 375 miles northwest of Mexico City. The region grew to prominence in the 1500s, mining the silver that made Spain rich. Today, Zacatecas is a place of budding tourism, centered on the old mines and struggling ejido farms.
Ejidos are land that was given to farm-worker families with the breakup of haciendas , or plantations, in the years after Mexico’s 1910 revolution. There were conditions on the gift that proved far-reaching: The land could not be sold or pledged as collateral for loans. That limited the buildup of capital and practically ensured uneconomic farming as ejido plots became subdivided with succeeding generations.
The Salinas administration changed the ejido law, allowing land to be sold and pledged for loans. It was a step that helped cause the uprising in the southern state of Chiapas earlier this year--its leaders accused the government of trying to con the peasants out of their land--but which actually holds out possibilities for modernization.
There are, for example, 150 families in the La Encarnacion ejido, where Antonio Perez lives. The land is potentially good. Perez says he wouldn’t sell but would like to borrow to improve his land.
And if Mexico’s new president and his economic administrators are smart, they will see to it that loans exist to help Perez and his neighbors. Because unless Mexico modernizes its agriculture, other problems could arise, especially in relations with its NAFTA partner , the United States.
Prof . Rodolfo Garcia Zamora of Zacatecas Autonomous University, an authority on agriculture, senses the danger in anti-immigrant rhetoric by U.S. politicians--let alone new steel fences and beefed-up border patrols.
“We need to think now of how to reduce the number of Mexicans who emigrate; we need to make the jobs here, not in the United States,” Garcia says. “I believe we need a national economic effort to modernize agriculture, with jobs for everyone, on the land and in food processing.”
The future he sees is bracing, not gloomy. “The NAFTA is a challenge for us,” Garcia says. “We have 10 to 15 years to change agriculture inside NAFTA, so we have to make a greater transformation than has ever been attempted before.”
Indeed, Sunday’s presidential election is only one of the profound changes that will affect Mexico--and the United States.
The Mexican Economy
The woes of the 1970s and 1980s have stalled Mexico’s efforts to achieve true industrial status. Sunday’s landmark presidential election occurs as major progress has been made in the battle against inflation, foreign investment is rising and the economy is growing. But chronic joblessness and widespread poverty have prevented the development of a robust consumer economy.
Unemployment has shown no improvement in nearly a decade ...
... and the economy’s growth has been sluggish. (Gross domestic product in billions of 1985 dollars)
But triple-digit inflation is a thing of the past ...
... and foreign investors are back. (Direct foreign investment, in billions of dollars:)
Sources: The WEFA Group; Banco de Mexico; Researched by ADAM S. BAUMAN / Los Angeles Times