MEXICO

Ask Isidra Sanchez what Mexico’s decade of reform has done for her and the 26-year-old maid and mother replies without hesitation: “I now have to work. Before, my husband’s pay was enough for us to live on.”

But ask the same question of Gustavo de Leon, a proud young engineer at a gleaming new Shell petrochemical plant in the Gulf Coast city of Tampico, and he is just as clear: “There are many new opportunities for young people in high-tech jobs, and that lets us support Mexico’s growth.”

Seen through a macroeconomic lens, the Mexican landscape looks more competitive, more productive, leaner and healthier than a decade ago. But through an average family’s eyes, the reforms of the last 10 years too often have meant less food on the table.

Consider: The average nonfarm, non-government worker in Mexico last year earned one-third less than he did in 1982. (See chart.)

The first grudging economic reforms in Mexico took place in the early 1980s, but the headlong plunge into the global market economy really began with Carlos Salinas de Gortari’s inauguration as president in December 1988. So it’s exactly a decade since the reforms began in earnest.

The reformist Salinas left as part of his disgraced legacy the worst recession in postwar Mexico. Yet the same Salinas is credited with crafting the North American Free Trade Agreement, or NAFTA, as well as other sweeping changes that redefined modern Mexico and made it the world’s 10th-largest trading nation.

So when people write report cards on the past wrenching decade for Mexico and its 95 million people, the grades are far lower when they comes from the vast numbers of working poor than from the sizable minority of Mexicans who have cashed in on the changes.

Still, the shift toward an open economy is unlikely to be reversed in a world that is less and less tolerant of countries that try to buck the free market. And very few people would dispute that change was necessary in a country drowning in bureaucracy and strangled by protectionism.

In addition to opening up trade through NAFTA, Mexico has privatized banks, the telephone monopoly Telmex and other state-controlled enterprises; invited foreign investment and foreign companies into the economy; and legalized the sale of communal land. On Jan. 1, even subsidies for the sacred tortilla were abandoned.

Mexico’s transformation coincided with similar changes all over Latin America. Yet Mexico stands apart because of its tangled but overpowering relationship with the U.S. In particular, NAFTA, which took effect Jan. 1, 1994, transformed the country into a low-wage production platform for U.S., European and Asian manufacturers building things for the U.S. market.

Last summer, for example, the number of workers employed in the NAFTA-driven export assembly industry passed the 1 million mark--often 50-cent-an-hour jobs, but nevertheless a vast pool of opportunity that has prompted at least some Mexicans to stay home rather than sneak across the Rio Grande. In October, Mexico overtook Japan as the second-largest U.S. trading partner after Canada.

At the same time, the opening of the economy exposed protected domestic businesses to fierce competition, and many failed to measure up. And privatization became a mantra. In 1982, there were 1,155 state-owned firms in Mexico. By January 1997 the number was down to 185, and many remaining state-controlled enterprises went through fierce efficiency programs that also stripped out thousands of jobs.

Rather than judge the reforms good or bad, political scientist Jorge Castaneda casts two opposing scenarios:

The positive view is that “Mexico is poised for takeoff, and that after the crash of 1995 and ’96 . . . we are now on the verge of a Chile-like situation with 10 years ahead of 6% to 7% annual growth.”

The converse view is that “Mexico is not really poised for growth, that the problems we saw this year--falling federal revenues, higher inflation because of devaluation, more difficult access to capital--all are leading to a new cycle of lethargic growth of 2% to 3%.”

Castaneda leans to the pessimistic view, reasoning that good results cannot come from reforms “designed by elite groups in the United States and Mexico.” The reforms ignore the reality that “the majority of people do not have a satisfactory standard of living,” he said. “This development challenge is not being addressed.”

Paychecks as Bottom Line

Yet other statistics point to useful improvements--at least for those with moderate cash incomes. A decade ago people waited years for a phone line. The telephone company, Telmex, was privatized in 1991 and has invested billions, doubling the number of phone lines and reducing the waiting list to a matter of days.

Savings was a chronic Achilles’ heel for Mexico. But compulsory private retirement funds were introduced in 1996, and more than 13 million workers have signed up for new types of funds over the last year. They had saved $4.1 billion by August 1998, already a huge new source of domestic capital for investment and growth.

Yet the bottom-line evidence of economic well-being--paychecks badly eroded by the peso’s decline--helps explain Mexicans’ skepticism toward economic reform. Just when things seem to be settling down, a new crisis erupts. Ground that was gained is suddenly lost. Inevitably, the least well-off suffer most.

Isidra Sanchez and her cousin Teresa live in Ecatepec, a smog-filled, rough town on the northern edge of Mexico City. They, like many residents here, came several years ago from a village in the mountains of adjacent Puebla state, trading the uncertainties of subsistence farming for a couple of rooms in a two-story boarding house shared by eight families.

“It got much worse in 1995, when all the prices went up and there was no work,” Isidra said, recalling the 52% inflation that year. She and Teresa both went to work as domestics, and earn about $30 a week--the same as their husbands, who work in a nearby factory making shelves for stores. Teresa, who has two young children, must travel two hours each way to work. “Now we both have to work, and we barely make it,” she said.

Their tiny apartments are immaculate, with precious space set aside for a shrine to the Virgin of Guadalupe and the living rooms ingeniously adapted to include bunk-bed space for four. The walls are crammed with tidy sections of toiletries, books and an ancient color TV.

Opportunities Available to Few

There are prospects for improvement. Both husbands contribute to a government-backed housing program that could land the two families modest homes of their own in years to come.

The original reason for the families’ move--better schooling for each couple’s two children--remains the principal motive, and they feel the quality is indeed much better. Isidra’s son Felipe, 10, wants to be a doctor.

For engineer Gustavo de Leon in Altamira, the reforms have opened up a new world. Parts of Mexico’s petroleum industry are slowly being opened to competition. That encouraged Shell to open a huge new polyester plant, creating well-paying jobs for local talent like De Leon. He noted proudly that while 25 U.S. experts had helped get the state-of-the-art plant up and running last year, the factory will soon be run entirely by Mexican technicians, many in their 20s and 30s and most of whom studied at the state technical university.

But the percentage of ordinary Mexicans who have such opportunities remains small.

Independent economist Rogelio Ramirez de la O broadly characterizes the reforms in Latin America as “very positive, and probably most positive for Mexico.”

Yet the reforms have fallen short, he said, because the government has lacked the resolve to push them further and deeper, and change fundamentally the way Mexico operates.

President Ernesto “Zedillo couldn’t capitalize on the confidence that arose with the original opening of the economy. Part of that opening was accidental, chaotic, forced by the 1995 crisis,” Ramirez said, referring to reforms such as the floating exchange rate adopted after Mexico ran out of foreign reserves trying in vain to defend a fixed value for the peso.

“But the government didn’t exploit the crisis to get to the bottom of problems,” Ramirez said. “This has meant that the reforms haven’t reached the ordinary people, and salaries haven’t risen. So Zedillo is making an annual apology that the new order isn’t delivering the goods for the average person. I think we have become a lot more polarized between the haves and the have-nots.”

Still languishing, for example, are proposed reforms to the labor laws to create more flexibility in hiring and firing and to offer better job training. Better, fairer tax collection remains elusive--a critical problem as slumping oil prices rob the government of revenue. Some financial reforms remain stuck in Congress. And everyone agrees the judicial system needs restructuring to end a culture of impunity--including tougher measures against corruption and white-collar crime.

But what Mexico has done well, Ramirez and others agree, is build its manufacturing export capacity.

Whereas growth under Salinas was fed by consumption and fattened by an artificially strong peso, growth under Zedillo has been more disciplined and built on industrial output--up an average 9.2% per year since 1996. The number of exporting firms has risen from 22,000 in 1994 to 34,000 in 1998.

In the process, fixed investment has poured into Mexico at more than $10 billion a year to create new export-driven factories, while the proportion of volatile liquid capital--so-called hot money--invested on the stock market has declined.

“So in Latin America, Mexico is the exporter par excellence,” Ramirez said. Productivity has risen steadily and modern manufacturing quality systems are the norm. But the productivity still hasn’t translated into higher real wages for workers.

Thirty years ago, the economist noted, Mexican craftsmen producing relatively complex goods in a closed economy could command a premium wage. Now Mexicans are more often laborers on an assembly line. That means that in real terms, today’s workers are often less well-off than their fathers were.

“The abrupt entry of Mexico into the global economy, while correct, put the Mexican laborer at the bottom rung in world terms,” Ramirez said. “It will take a long time for the worker to recover.”

Benefits Don’t Filter Down

U.S. Ambassador Jeffrey Davidow, who previously served as assistant secretary of state for Inter-America Affairs, acknowledged that “the openings in the economy have generally not yet percolated down to the 50% of Mexico that is poor. . . . The challenge for the next 10 years is how do the benefits become more evenly distributed?” But Davidow added: “If Mexico had not changed, would the poor be any better off? My guess is not.”

Commerce Secretary Herminio Blanco said: “Now development opportunities are spreading across the entire country. Before, only the big cities developed. Now growth is occurring from the northern border to the Yucatan Peninsula.”

The reforms did feed one bad Mexican habit. The many privatizations that came with the apertura, or process of opening the economy, meant in at least some spectacular cases a bonanza for corruption.

The privatization of the banks in the early 1990s earned the government about $20 billion. But many unqualified non-bankers allegedly won the frenzied bidding by fraud and corruption and eventually needed to be bailed out. That rescue, still underway, is likely to cost taxpayers at least $60 billion--and has undermined the credibility of privatization.

While wages for workers have lagged, there’s little doubt that productivity and competitiveness have improved dramatically, boosting profits for companies instead of pay for workers. For many, that has bred resentment. For political scientist Castaneda’s optimist scenario, it means Mexico and its people should be better positioned for real gains in the years ahead.

In 1970, according to figures from the national statistical service, Mexico’s labor productivity in manufacturing stood at 70 on an index measuring output per hours worked. It has since soared to 132.3, a far faster growth rate than that achieved by the United States.

From President Zedillo to laboring families in towns like Ecatepec, there is broad agreement that the next phase of Mexico’s development must bring more equitable distribution of wealth to a broader spectrum of Mexicans than occurred in the first decade of reform.

If not, the risk of a backlash against the market will grow. Already, even the right-wing National Action Party has raised the idea of putting restrictions on stock market investments.

Jesus Silva-Herzog, finance minister from 1982 to 1986 and more recently ambassador to the United States, reflected on the reform model in a recent address to politicians--and found it wanting.

“There has to be a review and adjustment of the economic model,” said Silva-Herzog, a possible presidential candidate for the ruling PRI in 2000. “Arithmetically, without citing ideologies, the income per person has fallen, and simply and plainly, the number of unemployed has risen. And this has occurred not in the space of three or five years, but over 15 years. So something is going wrong.”

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Mexico’s Mixed Bag

Gains in wages and in the inflation battle were mostly wiped out by the 1995 peso crisis, leaving workers worse off than in the 1980’s. But Mexico’s rising exports since 1995 have helped the economy grow

Wage Growth

Average monthly wage of non-agriculture and non-government workers, in 1997 pesos:

1997: 2,462 pesos

*

Inflation

Annual inflation, in percent:

1997: 20%

*

Per-Capita GDP

Per-capita gross domestic product in 1990 dollars:

1997: $3,347 *

Economic Growth

Average annual EDP growth rates in percent:

1970-80: 3.5%

1980-90: 3.5%

1990-97: 1.0%

* Sources: Social and Economic Studies Division, Banamex; Inter-American Development Bank