Mexico Unveils Stabilization Plan : Economy: Program calls for gas, electricity hikes and sets inflation at 42%. Business, labor withhold approval.

Mexicans were warned Thursday to brace for 42% inflation and an economy that will shrink 2% this year as the government announced the first economic plan in eight years that does not have the approval of business and labor unions.

The long-awaited economic stabilization plan, aimed at pulling Mexico out of its worst financial crisis in more than a decade, calls for a 35% price hike in gasoline, a 20% rise in electric bills and an increase in sales tax to 15% from 10%. The minimum wage will increase 10%, effective April 1. The government will no longer try to limit wage increases negotiated in collective-bargaining agreements.

“The program that the government presents today contains measures that will no doubt be costly for the population, but these costs are less than those from any other alternative,” Treasury Secretary Guillermo Ortiz said in presenting the plan late Thursday.

The most immediately evident cost was the rupture of Mexico’s “pact” system of negotiating economic targets and policies among business, labor and government. The pacts were credited with creating the cooperation that allowed Mexico to undertake radical free-market economic reforms that had seemed successful until December, when the current crisis began.

The initial emergency plan announced in January was quickly overtaken by events, and the economy continued to deteriorate as negotiators were unable to reach an agreement, apparently because of business resistance to tight credit and higher taxes and labor’s refusal to accept continued government control of wage contract negotiations.

The failure to announce a new plan had shaken financial markets, causing the peso to drop to less than half what it was worth on Dec. 20, when the crisis began. Thursday, the peso plunged to a new low of 7.85 against the unhealthy dollar on rumors that the government’s long-awaited stabilization plan would include currency controls, which it does not.

The currency closed at 7.55 to the dollar. The battered Mexican stock exchange index closed up 42 points--2.8%--at 1,540.54 before the plan was announced.

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While President Ernesto Zedillo and his advisers struggled to finish the plan, other branches of government addressed political problems underlying the economic crisis, even as new controversies arose.

In key developments Thursday:

* The Treasury Ministry made final negotiations for $3.25 billion in loans from international financial institutions to strengthen the banking system and to provide a safety net for the poorest Mexicans; $1 billion will be used for education, health care, nutrition and training for those who will be most hurt by federal budget cutbacks that are part of the stabilization plan.

The rest of the money will improve bank regulation and be used to support the federal insurance fund for banks. In a separate announcement, the National Banking Commission revealed that Mexico’s third-largest bank, Banca Serfin, will participate in a government program to raise capital for banks run through the insurance fund.

* Evidence mounted that top law enforcement officials have been corrupted by drug cartels, fueling speculation that narco-politics may have been involved in two high-profile political assassinations, one of which has already been linked to the former president’s brother.

* The violence that has fueled a deepening sense of nationwide insecurity continued unabated, despite Zedillo’s accelerating campaign to enforce a new rule of law in Mexico. The director of the state penitentiary in Tijuana was killed in an ambush near his home late Thursday night in what investigators suspect was a murder planned and ordered by one of his inmates. Jorge Alberto Duarte Castillo, 42, was shot five times by two men after returning home from work at Tijuana’s La Mesa prison, an institution known internationally for the utter chaos within its walls.

* The Chamber of Deputies approved a bill, already passed by the Senate, to set the ground rules for renewing peace talks in the embattled state of Chiapas, where an Indian uprising has simmered for 15 months.

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Deputies’ efforts to pass the proposed law bogged down early in the day, because the two major opposition parties were sidetracked in a heated discussion over allegations of human rights abuses in the government crackdown on rebels last month.

Late Thursday, Chamber of Deputies members voted 427-7 with two abstentions in favor of the package.

The government’s national human rights commission has received 379 complaints ranging from torture to harassment. Various law enforcement agencies and the Mexican army were cited, panel Chairman Jorge Madrazo said.

The Senate version of the bill incorporated many of the rebel preconditions, including suspension of arrest warrants for alleged leaders of the Zapatista National Liberation Army, recognition of an independent mediating committee and changes in phrasing that had offended the rebels.

But it stopped short of telling the Mexican army to withdraw from former rebel-held territory that troops reclaimed last month.

The law also specified that peace negotiators come to the talks unarmed, in sharp contrast with the first round of talks a year ago when rebels brought their guns to negotiations.

The government’s inability to resolve the rebellion that left at least 145 people dead last year was the spark that set off the economic crisis, which began when angry rebel supporters blocked roads and took over town halls in a one-day protest in December.

Doubts about Mexico’s political stability--reinforced by two unsolved high-profile political assassinations--set off concerns about the economic policies the country followed in 1994, an election year. As investors fled the country, cutting the peso’s value in half and sending interest rates soaring, events overtook the initial economic stabilization plan that Zedillo announced in January.

In addition, in order to obtain the $20-billion U.S. rescue package, officials here had to agree to even more austerity than Mexico has suffered for the last dozen years.