Mexico’s Peril and Promise

If countries were common stocks, Mexico would be a possible bargain issue on Nasdaq, possessing enormous promise and significant risk.

In the long term, Mexico could yield a great return on today’s investment, of business capital or even of faith in a neighbor. But it could also go into economic collapse as it has before, extending its decades of poverty and underdevelopment.

Mexico is at a critical point. A majority of the U.S. House of Representatives voted last week to sanction Mexico for insufficient efforts to stop the flow of drugs into the United States. It was a blustering, gutless vote. The Congress members know that President Clinton will veto their bill. And they were uncaring about reactions in Mexico.

However, Congress’ frustration is understandable. Corruption, intensified by drug money, runs to many levels and institutions of Mexican political life. President Ernesto Zedillo and his associates in government and the judiciary are trying to root it out, but the process will take time--as reform of Boss Tweed and gangland-style corruption did long ago in New York and Chicago.

Mexico is undergoing a historic transition from more than 60 years of Soviet-style state control in which the ruling party has controlled every village and town, factory and job to democracy and decentralized, responsive government.

Mexico holds key elections this year, and already politicians there are reacting to the House action by fanning anti-U.S. sentiment for campaign purposes.

Meanwhile, many Americans wonder why Mexico can’t get its act together and why they should even care.

So it is important to step back and see what Mexico must do for itself, what the U.S. should do and why Mexico’s successful development matters.

Mexico is a poor country, with $350 billion in annual output of goods and services--one-twentieth the size of the U.S. economy. The typical Mexican worker earns 26 pesos, or $3, a day, although workers in some industries do earn more. But all living standards have fallen 20% in the last three years, reports Mexico City economist Rogelio Ramirez de la O.

Mexicans work hard but often ineffectually because capital has not been invested in needed equipment or in the underlying infrastructure of roads, electric power and communications lines.

Mexico’s one-party government fell down on the job of development. The single-party rule was set up in 1929 to bring order after 20 years of violence that followed the fall of the previous, feudal system. Compared with the U.S. and Canada, Mexico has recalled the failed kingdoms in old Europe.

Yet profound changes are building. Today’s Mexican people, with an 87% literacy rate--higher than that of the U.S.--are increasingly urban, ambitious and demanding more than past generations.

They are pushing a modernization of the economy that has raised Mexico past all the non-Japan countries of Asia combined, to be the third-largest U.S. trading partner (after Canada and Japan).

And trade figures don’t capture investments such as the store HEB Supermarkets, a San Antonio, Texas-based chain, has opened in Monterrey.

Statistics largely miss the success of U.S. Filter Corp., a Palm Desert company that has built water-treatment systems for two cities and several industrial plants in Mexico in the last five years and that now has been asked to study the huge water-treatment needs of Mexico City.

Even more instructive is the experience of Metalclad Corp., a small company based in Newport Beach. Metalclad builds waste-treatment plants in Mexico, among them a big one in San Luis Potosi state. The company had Mexican government approval for the plant, but the state governor has delayed its opening for a variety of disputed reasons.

In the past, a U.S. company would have little recourse in such a dispute. But under the North American Free Trade Agreement, or NAFTA, three judges--one from Mexico, one from the U.S. and a third from another country--will arbitrate Metalclad’s dispute.

“With legal protection and an expanding market, the outlook is good” for business in Mexico, says Metalclad President Grant Kesler.

Tom Frost, senior chairman of San Antonio’s Cullen/Frost Bankers Inc., who worked in Mexico right after college in 1950, sees the drug traffic problem being fixed and San Antonio becoming a distribution center for goods and services flowing through Texas as they go into and out of Mexico.

In a broader geographic perspective, Mexico’s economy looms large in Central America, where it is key to bringing apparel manufacturing back from Asia. In recent years, apparel manufacturing--using U.S. textiles--has grown in Honduras and Mexico as it has declined in Asia, reports World Trade magazine.

Simply put, Mexico’s economic modernization is running ahead of its political reform. Duff & Phelps, the U.S. credit agency, has upgraded Mexico’s bonds and complimented its fiscal discipline--which resulted recently in a prepayment of a 1995 U.S. emergency loan.

“The best thing Mexico can do for itself is continue to develop economically,” says Sidney Weintraub, longtime Mexico scholar at the University of Texas who is now at Washington’s Center for Strategic and International Studies.

“And the best thing the U.S. can do is ‘do no harm,’ ” adds Weintraub, recalling the physician’s Hippocratic oath.

In that sense, U.S. help will be forthcoming to encourage small business in Mexico. Right now small companies must pay 30% interest on bank loans, when they can get credit at all. But in Washington, the Nasdaq market system is supporting efforts to set up a similar over-the-counter stock market in Mexico.

Still, the Mexican economy is at a critical point. The currency has been stable at 8 pesos to the dollar despite inflation there of 27% last year. Currency markets are looking ahead to a growing, improving Mexico.

But if U.S. sanctions or continued corruption were to change that outlook and force another devaluation of the peso, the “consequences would be devastating for society and unpredictable for civil order in Mexico,” says Sebastian Edwards, an expert on Latin America at UCLA’s Anderson School of Management.

If Mexico were a common stock, it would be a great buy--for those, like neighbors, who take a risk.