Zedillo Must Put a Firm Hand on Fiscal Policy : Decisiveness is needed now to control Mexico’s economy

For more than a year now, Mexicans have been on an economic roller coaster. Every time Banco de Mexico, the central bank, raises interest rates to shore up the sick peso, the stock market crashes and the peso becomes even weaker, diminishing buying power. Just last Tuesday, Treasury Secretary Guillermo Ortiz went before the Mexican Congress to announce the Zedillo administration’s economic goals for 1996 and the peso finished the day at a historic low.

It is time for President Ernesto Zedillo to bring an end to this, take firmer personal control of economic policy and, if need be, install a new economic team. Both the international financial markets and Mexican public opinion demand from him a decisiveness that sets the course of recovery, a decisiveness that so far has been lacking.

PUBLIC CONFUSION: The president needs to clarify, for instance, his exchange rate policy. Mexico cannot afford to hear it defined by the governor of the central bank one day and then the next day learn that the treasury secretary is taking measures to modify it. If there is ongoing contradiction on exchange policy as set forth by these two outstanding public servants, Zedillo should replace both from among the many other good economists in Mexico. The leaders of Banco de Mexico and the Treasury, whoever they are, must speak with a single voice.

Exchange rates, a focus of financiers, is not the only problem Zedillo must overcome. If the president, a Yale-trained economist himself, does indeed have a clear vision of Mexico’s economic future, he should take a critical look at his public information office, which has not articulated it, and take it upon himself to explain the policy to the nation. The public’s present confusion strongly suggests the need for such steps.

Mexico’s economy is traveling a rough road in several areas and has been for some time. In the fall of 1994, three pesos were needed to buy a dollar; now nearly eight are needed. The inflation rate, almost 50%, is seven times what it was a year ago. The gross domestic product is expected to drop 6% this year from the 1994 level. A million unemployed workers are competing for jobs with the 1 million young people who annually enter the sagging job market. The banking industry is in chaos because more than 1 million borrowers have stopped paying their debts. The money supply has shrunk by 57%. And, not least, almost half of all small entrepreneurs are running inefficient, antiquated businesses that are already bankrupt or probably will never recover. The pitiful thing is that no one is offering much guidance on how to run a business in these hard times.

A BRIGHT SIDE: Of course, not all is bleak in Mexico’s economic panorama. More than half of the nation’s industrial base has successfully moved to modernize since the 1982 crisis that brought down the old welfare state. Advancing companies include not only large international and domestic companies like Ford and Cementos Mexicanos but also many small family-owned businesses in industries like textiles and crafts, businesses that have proven remarkably shrewd in the export-oriented sector. These businesses have been able to establish sound distribution networks in the U.S. markets. Mexican exports--which only a few years back were anchored in oil, amounted to less than $10 billion annually and made a negligible impact on the GDP--have now grown to nearly $76 billion, 25% of GDP.

Together, the private and public sectors must develop a more aggressive trade policy that creates niches for Mexican products in other countries. If this happens, recovery will be within reach, and Mexico--along with its economic ally the United States--will breathe a little easier.