Free-Market Policies Under Fire in Mexico : News Analysis: Economic liberalization is main cause of country’s economic woes, critics say, and must be reversed.

The news that foreign investment is returning to Mexico might be a positive sign for that nation’s crippled economy, but more and more influential Mexicans now believe that what’s needed is a fundamental change in economic policy--and they’re pressuring President Ernesto Zedillo to abandon free-market principles.

Mexican consumers’ insatiable appetite for cheap imported goods and the foreign capital to pay for them was, critics believe, the main cause of the economic crisis that has shaken this country to its foundation over the past eight months. With the public now facing 60% annual interest rates, soaring unemployment and tumbling purchasing power, they say, a reversal of free-market policies is the only way out.

Critics dismiss recent positive economic indicators such as the influx of foreign capital and a trade surplus--the latter resulting from last December’s dramatic devaluation of the peso--as meaningless for most Mexicans.

“We believe it is indispensable that [economic policy] be revised and changed to clearly favor the great majority of the country,” Maria de los Angeles Moreno, the chairwoman of Zedillo’s party, said in a recent speech.

Said one disillusioned government economist: “The old-style economists warned that if we reduced import tariffs and let foreign-made goods into the country, our own industry would disappear and we would be left with nothing. Now it looks as if they were right.”

In response, Zedillo appears to be retreating from the unilateral slashing of import barriers that was once cited as proof of Mexico’s commitment to free markets. Still, in most respects Zedillo’s government continues to cling to free-market principles, exasperating even many of its supporters.

The quick turnaround from a trade deficit and the investment rebound are cited by free-traders as reasons for staying the course. But most independent economists expect inflation of 50% to 65% to quickly erode the benefits a cheaper peso provides export-oriented Mexican companies.

Moreover, a large part of Mexico’s export boom is the product of foreign-owned border assembly plants, limiting the benefit for Mexico. And many Mexican companies that survived the free-market reforms of recent years--mainly by borrowing heavily to modernize plants and equipment--are collapsing under the burden of astronomical interest rates and dollar debt that has doubled because of the devaluation.

That, in turn, has exacerbated problems in the financial sector, where many corporations that borrowed money on international markets are unable to make their scheduled payments.

All this makes economic liberalization increasingly hard to defend.

“The political bases for liberalization have been shaken,” said Manuel Pastor, an economist at Occidental College who is studying the effects of the North American Free Trade Agreement, the symbol of the new global direction of Mexico’s economy. “Liberalization, in people’s minds, is connected with the crisis.”

Economic liberalization was originally conceived as an answer to a previous crisis. As part of its effort to extricate the country from the debt crisis that afflicted many developing countries in the 1980s, the Mexican government sold off hundreds of companies, cut subsidies, removed price controls and slashed trade barriers, provoking a flood of imports. The triple-digit inflation of the 1980s fell to less than 10%, attracting the foreign investment that promised to bring Mexico into the industrial world.

Along the way, Mexico joined the world’s free-trade organizations and 18 months ago became party to the North American Free Trade Agreement with Canada and the United States.

Mexico was a success story of free-market reform--until Dec. 20, 1994, when the newly inaugurated Zedillo was forced to face the consequences of his country’s dwindling international reserves. He devalued the peso, provoking the economic crisis that has cut the currency’s value nearly in half.

The crisis has inspired an unlikely alliance of business owners and intellectuals to challenge the continuation of free-market reforms.

“Neo-liberal economics has destroyed practically all small and medium industry and all small and medium agriculture,” writer and social critic Carlos Montemayor said. “Mexico’s productive plant has been impoverished because the government has been obliged to follow the instructions of the International Monetary Fund and the World Bank.”

Because Mexico’s case has been so highly publicized--both as a miracle and, subsequently, as a failure--the international financial organizations have been eager to defend their programs. “The model is not wrong,” insisted Armeane Choksi, vice president of development at the World Bank. “Integration into the world economy is absolutely essential if you want to grow.”

But critics say the World Bank and the IMF were well aware of the problems created by their free-market policies--and ignored them. An early draft of a 1993 World Bank report pointed out the problems that economic liberalization was creating for smaller companies, said Ngaire Woods, a political scientist at Oxford University. But she alleges that then-Mexican President Carlos Salinas de Gortari “convinced the World Bank to suppress the negative parts of the report.”

Ruben Barrios runs one of those mid-size companies. His Mexico City firm, now called Casa Ruben Barrios, started making automobile brake parts in 1928, right after Ford opened its first Mexican car assembly plant.

A 1960 law that required auto makers to buy a certain percentage of their parts in Mexico from Mexican manufacturers in order to sell cars here was a boon for the company. But when the government decided to phase out that requirement as part of its free-market policies, Barrios got out of the auto parts business. He now makes other products.

“The auto parts industry is not possible in Mexico” without such buy-domestic requirements, Barrios said. “We cannot buy big enough volumes of steel to get the discounts our international competitors do. We used to buy subsidized steel from the government, but those plants have been sold or shut down. We are not competitive.”

The arguments made by Barrios and Montemayor are beginning to be reflected, in a limited way, in government policy. Although he declared that he does not intend to turn his back on free-market reforms, Zedillo and his Cabinet have begun to raise tariffs again--to 46% from 20%--on goods from countries without free-trade agreements with Mexico.

“We [previously] dropped tariffs without thinking about the effects,” said Alejandro Carrillo, director of international affairs for Mexico’s ruling party. “This contributed to cutting inflation, but no single economic variable should take so much precedence over the rest.”

To be sure, less than one-fifth of imported goods are affected. The United States and Canada, which together account for about 80% of Mexico’s foreign trade, continue to enjoy lower tariffs. The gesture is thus largely symbolic, but nevertheless important.

And earlier this month, the Commerce Ministry announced tightening of sanitary regulations--a traditional protectionist ploy--on dozens of products, from leather to contact lenses.

“Zedillo perhaps is not as neo-liberal as we thought he was,” said political analyst Denise Dresser.

Critics are also now calling for the regulation of financial markets. Foreign investment in the stock market had been counted upon to close the trade deficit that opened up when tariff reductions loosed a flood of imports--but skittish investors began withdrawing their money when signs of trouble mounted last year.

Carrillo argues that regulation is a logical consequence in light of the severe financial problems created by the overnight withdrawal of foreign stock investments. “This does not mean that the [free] market does not work,” he said, “but it does mean that you have to make rules.”

Despite the views of party leaders such as Carrillo and Moreno, however, the Zedillo administration remains opposed to restricting capital flow. Finance Minister Guillermo Ortiz told an interviewer last week that the way to prevent another financial crisis is via sound economic policies--not regulations.

“In the case of Mexico, it is very difficult [to limit capital inflows] because we have a close integration with the U.S. and international financial markets,” Ortiz said.

And pioneering reformers such as Hernan Buchi, architect of Chile’s economic reforms, remain staunch defenders of liberalization.

“The potential for risk is enormous when a country opens” its market to imports, he said. “But it is no longer possible to shut a country off from the world in order to feel the effects. In the end, it is much more costly to close yourself off than to open up.”