If there ever was a reason NAFTA was a bad deal, we are looking at it now as Mexico flounders. President Clinton's decision to provide financial backing through the U.S. Treasury makes sense, if only because the near-meltdown in Mexico will affect the U.S. economy far worse than anything NAFTA could have done directly. Even with the $50-billion bailout, the peso crash represents tremendous losses--more than $10 billion in U.S. investor funds alone, plus $10 billion in U.S. export revenues. Some put the losses as twice that, including as much as half a million U.S. jobs, a total that more than erases the 140,000-job gain the Administration claimed as the NAFTA harvest of 1994. Add to that the expected 30% rise in illegal immigration from Mexico and the huge global stock-market drubbing, and the promise of financial stability and responsibility enshrined in the North American Free Trade Agreement starts to look like a scam.
How were so many people fooled so thoroughly, and what caused the Emperor's nakedness to be so abruptly exposed? And why, on the heels of financial debacle, is President Ernesto Zedillo beating the war drum against an Indian rebellion?
When Zedillo blamed the Zapatista movement for much of the financial crisis, he was criticized for trying to shift blame from the government's mismanagement. But the fact is, the Zapatista Army of National Liberation--no more than 5,000 peasants, mostly Maya Indians, in the remote state of Chiapas, --managed in less than a year to transform the power landscape of Mexico.
The rebellion, which drew international media coverage on a scope unprecedented for Mexico, started with a takeover of key towns on New Year's Day, 1994. The rebels condemned the then-president, Carlos Salinas de Gortari, as a traitor for betraying the principles of the Mexican Revolution leader Emiliano Zapata. They demanded the rescinding of NAFTA, calling it a death sentence for all of Mexico's already land-poor indigenous people. The initial military response was clumsy and it became news as well. Within weeks, Salinas settled for peace negotiations, a turnabout also done in the bright glare of the media.
In August, Zedillo was elected, and the government party (PRI) candidate was declared the winner in the Chiapas governor's race. The opposition in Chiapas was outraged and vowed to form a parallel government. The Zapatistas threatened to resume the war if the PRI governor was installed. He was, with Zedillo in attendance. Soon after, the rebels took over another town, their first bellicose action since January.
On Dec. 20, the army moved to respond. Two days later, the peso was floated on the exchange market and went into free-fall. The army withdrew.
But what does the crash have to do with Chiapas? It was clear that the peso was overpriced, inflated in part by the massive inflow of investor dollars looking for a high return and overlooking national soundness. The investment houses of New York saw Mexico as a hot market right up till the day of the devaluation. This pressure pushed Salinas into the humiliating position of negotiating with the guerrillas.
In blaming the Zapatistas, Zedillo was acknowledging that Mexico's economic boom has been built on foreign speculative investment--which, of course, is extremely sensitive to bad news in a fundamentally risky "emerging market."
Ultimately, the crisis may say much about the idea of economic reforms that are unaccompanied by serious social and political ones in the Third World. When Chiapas was thrust into the international news net in early 1994, it was not just because of the dramatic nature of the peasants' challenge to the government or the connection of agrarian misery to the newly concluded NAFTA debate, although both helped. It is that investors in highly liquid markets are insistent on coverage of any event that might threaten their money. Unfortunately, outside interest waned when negotiations moved behind the scenes. Now, the investors' attention has been gained too late, and at quite a cost. Only the Mexican insiders, aware of the peso's true value and shielded by government policies and secrecy about the national reserves, were able to turn a profit, rushing as they did to buy dollars before Dec. 22.
If we do even the most conservative calculations and consider only the impact on U.S. investors, each armed Zapatista represents at least $1 million lost as of Christmas. The New York Times reported that U.S. holdings lost $6.5 billion in value between Dec. 1 and 22, and another $3 billion was lost in the devaluation of the peso and peso notes held by Americans. Even if half of that loss recovers with the aid of U.S. lending and other emergency measures (an increasingly doubtful scenario), investors are out $5 billion, probably more. It will be years before investment confidence returns. NAFTA now begins to look to some like a con game to snooker the gringos.
Meantime, the nightmare grows worse. Zedillo's political weakness forced him to cut his losses by negotiating with the opposition and the Zapatistas regarding political reforms, including a review of the elections in Chiapas and neighboring Tabasco. Why the sudden turnaround in pursuit of a military solution? While Zedillo claims that the non-Indian elements in the rebels' leadership were uncooperative, rumors are flying that crushing the Zapatistas was a condition of the bailout.
Political instability does not wear well in international finance. Zedillo has to put Mexico's house in order. The Zapatistas and the larger civil movement inspired by them have the upper hand, at least in Chiapas. That hand has been strengthened, not weakened, by the crash and the new military offensive. The worse the economy, the more attractive the rebels and the more insightful their complaints. The more the violence escalates, the more international money runs away. Clinton and the international lenders would be pound-foolish to even contemplate conditioning assistance on eradicating the rebels. This will be a long drawn-out affair. After 500 years of struggle against domination from the outside, it is not likely the Maya will become impatient or concede defeat any time soon. Even if they were to disappear tomorrow, their influence would still be felt for years in Mexico--and the investment behavior of the financial world. They may not understand it, but these ill-equipped and impoverished insurgents have gained a niche in history as the most costly army per capita to take up arms.
At least up to now.