Paradox Keeps Mexico in an Economic Bind

On the day last week when President Ernesto Zedillo declared the Mexican peso stable against the dollar for the first time in seven months, the government released its latest unemployment figures: 2.3 million Mexicans were out of work, twice as many as when the economic crisis exploded in December.

The stock market was up, but so were inflation, crime and bankruptcy.

That same day, the Central Bank spent $630 million of its $20-billion U.S. loan fund to pay off wealthy and institutional bondholders--part of a strategy that has helped stabilize financial markets. But Treasury Secretary Guillermo Ortiz simultaneously confirmed that Mexico’s 90 million people “are now in a profound recession.”

Foreign investment is beginning to return--$23.8 billion in the stock market alone, officials said that day. But Mexico’s banks are saddled with more than half that amount in overdue loans from a record number of bankruptcies and unpaid credit-card bills.

These clashing statistics, say independent economists, underscore the paradox in Zedillo’s strategy for winning back investment by imposing austerity measures--which have frozen the nation’s economy.

It is a paradox that helps explain how Mexico’s markets can improve while the human impact of the crisis worsens. And it is a contradiction with significant implications for Mexico’s political stability--indeed, for its social fabric.

“The situation is getting worse,” said Jose Antonio Crespo, an analyst at a Mexico City economic think tank. “If unemployment continues to rise, more people will take to the streets.”

The markets may have calmed, “but it is temporary,” said Jose Luis Calva, economics professor at the National Autonomous University of Mexico. Zedillo has gained time and avoided default, he said, but “time is running out.”

Zedillo and his advisers have insisted that the recession was unavoidable, that it was necessary not only to stabilize financial markets but to increase domestic productivity through a better trade balance. That balance has improved dramatically; Mexico showed a record $6.9-billion trade surplus with the United States during the first five months of the year, although analysts agree that is largely because Mexicans no longer can afford to buy U.S. goods with devalued pesos.

Many analysts say Zedillo’s strategy is a race against time, a gamble that increased investments and exports will save the nation’s producers before accumulated debt, high interest rates and higher taxes destroy them.

Central to the president’s strategy is the hope that those high interest rates, along with sweeping privatization of the nation’s airports, seaports and telecommunications, will attract billions of dollars in new foreign investment. Long-term investment would lay a more solid foundation for the economy than the speculative investment Mexico largely has drawn in the past. As additional incentives, Zedillo’s strategy includes reduced government spending, dramatic sales-tax increases and a tightened money supply.

But so far, most analysts say, the majority of new investment remains short-term and speculative--in Mexico’s stock market and in peso-denominated bonds.

With $30 billion in such bonds scheduled to come due within the next six months, the financial markets clearly remain fragile. Analysts say Zedillo is counting on enough social and political stability to persuade investors to roll over their bonds rather than redeem them.

As a result, they say, Zedillo’s most urgent race now is against instability. A year of assassinations and a simmering revolt by indigenous Mexicans in the southeastern state of Chiapas shook Mexico’s financial markets to the core, and analysts warn that another such shock would be a devastating blow. Moreover, some fear that the escalating economic pain caused by the austerity measures and soaring inflation could trigger a political and social backlash--even before any positive effects of Zedillo’s bitter medicine reach average Mexicans.

“This type of recessive adjustment kills the economy and produces all sorts of social problems,” Calva said, stressing that social ills are fertile ground for unrest.

The government’s austerity strategy already has taken a social toll during its first six months:

* Violent crime soared more than 20% in Mexico City between January and June. The largest increases were in kidnaping, murder and armed robbery, which the city’s top prosecutor blamed on the economic crisis. “The educational, cultural and social conditions of our city--and, today more than ever, the economic conditions--directly influence the crime rate,” Mexico City Atty. Gen. Jose Antonio Gonzalez Fernandez said last month.

* At least 30% of Mexico City’s low-paid primary school teachers, responsible for the education of millions of children, have been forced to take second or third jobs that include selling tacos, flowers or shoes on the street, according to Noe Garcia Ortiz, chief statistician and planner for the capital’s largest teachers union. He said the practice has lowered the quality of education dramatically as teachers have skipped classes in favor of their other jobs.

* Political unrest is growing, particularly in the countryside. In the south-central state of Guerrero, for example, more than 30 deaths in the past month have been blamed on clashes between police and peasant groups. These groups have grown in size and power by harnessing popular resentment over the effects of the crisis. Federal security officials privately express concern that violence could spread quickly if the crisis continues to deepen.

At the core of these problems, analysts say, is Mexico’s skyrocketing unemployment rate--the direct result of bankruptcies or sharp staff cuts after the peso lost more than 40% of its value and interest rates soared. In Mexico City, the Chamber of Commerce reported that 2,000 of its 42,000 members went out of business during the first quarter of the year.

The government concedes that 1 million workers have lost jobs since the crisis began, a figure labor groups and private analysts dispute. The Confederation of Mexican Workers, Mexico’s largest union, says 8 million workers--nearly four times the official number--are unemployed, and independent farmers groups add that the figures do not account for thousands of debt-ridden farmers who are losing their land to bank repossessions.

“We know we are living through difficult times,” Zedillo acknowledged in a recent speech. But the president insisted, in his strongest terms yet, that he had no choice but to implement an austere recovery strategy--one analysts liken to the actions taken in the midst of a similar crisis in 1982. (Mexico’s economy grew just 0.22% between 1982 and 1988, when inflation was more than 150%.)

“If we had not taken these decisions at the beginning of the year, I have no doubt our country would be living through an economic disaster of unimaginable proportions,” Zedillo said. “We wouldn’t be speaking of the pain of thousands of Mexicans out of work. . . . We would be speaking of millions, perhaps many millions.”

Economist Calva, the author of several books critical of Mexico’s economic neoliberalism, is not so certain. Echoing other critics of Zedillo’s strategy, Calva said the president is bound to lose the battle against time.

The foreign investment rolling into Mexico now is less than half of what it was a year ago. Calva and other analysts said a nationwide campaign by Zedillo urging domestic manufacturers and workers to increase productivity lacks the necessary economic substance.

“There are no incentives to produce because there is no place to sell,” Calva said. “Companies have to lay off people; salaries are reduced. There is no investment that increases productivity.”

Calva concluded that Zedillo ultimately will have to renegotiate the nation’s debt and restore public investment to restart the economy--as former President Carlos Salinas de Gortari did successfully in 1988.

“We’ve seen this movie before, and we didn’t like it the first time,” he said. “It’s a vicious circle.”

Other analysts see even more ominous problems. As the economic crisis fuels the nation’s political and social crises, they caution that Mexico’s stability could be threatened on several fronts.

“The economy already is deteriorating rapidly,” analyst Crespo said. “Social unrest would speed up the deterioration and expand the political crisis, and that would be disastrous.

“The stabilization of the financial markets is giving the government some breathing room,” he said. “Now it has a margin that it must take advantage of, but it’s only two or three months.”