Prosperity Keeps Race in Mexico a Close One

Mexico is pondering an extraordinary prospect: For the first time in 30 years, it is on the verge of ending a presidential term without a devastating economic crisis.

No sudden peso devaluation. No wave of inflation slashing people’s buying power. No interest rate surge sinking businesses and destroying jobs. Simply a smooth end to the current six-year administration after next Sunday’s presidential election, and a calm hand-over to the winner.

“Imagine that, for the first time in a generation, we have--as we shall--a transition with no economic crisis,” enthuses Finance Minister Jose Angel Gurria. “It really is like an injection of confidence in what we believe we can achieve.”

Yet even this prospect might not prove enough to rescue ruling party candidate Francisco Labastida from the legacy of debilitating crises that have whipsawed Mexico’s population since 1970, the last stable electoral transition year.

Opposition challenger Vicente Fox of the center-right National Action Party is about even with Labastida in opinion polls. Fox’s campaign mantra: 71 years of unbroken rule by the Institutional Revolutionary Party have brought you nothing but hardship and poverty.

If the ruling PRI does win its 13th consecutive election, it will be thanks largely to the economic stability built since 1996 by President Ernesto Zedillo, a Yale-trained economist, and his financial team.

Most analysts believe that the economic strength is real. Exports have boomed under the North American Free Trade Agreement. Oil export prices are robust. And Mexico’s economy has soared since 1996, heading for 5% growth this year even as inflation falls below 10% for the first time since 1993.

But a key question is whether voters next Sunday will choose to punish the PRI for the cumulative pain of past crises--buying power for the average Mexican is still well below what it was in 1981--or whether they will endorse the recently won stability as a foundation for longer-term growth.

The views of two small-business owners help explain why a hairsbreadth margin is likely to decide Mexico’s path.

For Agustin Mina, who has spent 22 years trying to keep his small fabric factory in Mexico City from going bust, the PRI has burned up its last chance. After a lifetime of voting PRI, Mina will vote for Fox--even though his business is now on a growth path.

“We have to risk it,” Mina said, “even if we don’t know how he will govern. The PRI will only change if it is pushed out of power.”

Bernabe Martell, by contrast, is willing to give the PRI one more chance. Martell, whose parents migrated from the dry north-central state of San Luis Potosi to the working-class Iztacalco section of Mexico City, co-manages the family’s cluster of backyard businesses. After plummeting during the 1995 recession, sales of clothing zippers and labels are growing again. Martell, 29, says he’ll stick with Labastida.

“Undoubtedly, the stability and certainty we have now have had a major effect on my decision,” Martell said. “But I do believe this is the last chance for the PRI.”

Many Mexicans’ Lives Have Not Improved

Certainly, personal financial experiences help determine voters’ electoral choices. And one seeming contradiction shapes that experience: For most Mexicans, the glowing macroeconomic performance indicators since 1996 have not significantly improved their lives.

In a May poll by the respected consulting firm Economists and Associates Group, known as GEA, only 18% of respondents said their wages had improved during the current presidential term; 56% said they were unchanged, and 26% said their wages had worsened.

The GEA survey elicited virtually the same responses regarding people’s household conditions and job opportunities: About as many felt that the situation has worsened as believed that it has improved, and most saw no change.

Mauricio Gonzalez, director of GEA, explained the contradiction simply: “It’s because you have many Mexicos. You have the exporting Mexico, which is doing great. But if you’re linked to the domestic market--the other two-thirds of the economy--you feel it’s the same as before.”

The maquiladora, or assembly factory, economy--focused in border cities but increasingly spreading to the interior--has created 1.1 million jobs and underpins a foreign trade juggernaut likely to exceed $300 billion this year.

But the purely domestic economy hasn’t kept pace, and many smaller businesses have been hurt by cheaper foreign goods flowing into Mexico. Hence the public’s schizophrenic response to economic policy. Despite the recent growth, 80% routinely tell pollsters that they want that policy changed.

No wonder. The gap in Mexico’s income distribution remains enormous.

“In the north, we’re getting close to South Korea and Taiwan standards, with GDP per capita above $8,000,” said Alejandro Valenzuela, the former chief government economic spokesman who now runs Labastida’s economic policy unit, “while in the southern states, GDP per capita is $400 a year. . . . In essence, you can say that in Mexico we have our own Africa.”

Valenzuela, one of the young technocrats who have been pursuing free-market reforms since 1986, warned: “We must concentrate both on the fundamentals and on the trickling down. People are tired. They’ve been dealing with these [reforms] for 15 years. That’s why sometimes we see a certain backlash. . . . So we must show them that this is going to deliver sooner rather than later.”

Not all share the technocrats’ optimistic vision.

Macario Schettino, a prominent left-wing economist who is supporting Fox, notes that Mexico has created just 6 million jobs in the last 20 years, when it needed to create 23 million. This left 17 million people on the street, where they became either emigres to the United States or part of a huge informal economy.

Street vendors and backyard factories form an uncounted but vast portion of the economy and remain outside the reach of tax collectors. Economists of all stripes agree that tax reform will need to be a cornerstone of subsequent reforms in Mexico if wealth is to be redistributed meaningfully.

The porous tax system, rife with evasion, collects just 12% of GDP, well below the rate in other Latin American countries. That leaves less and less money for equalizing services such as education.

Even worse, Schettino said, high real interest rates and inflation “have been a powerful wealth redistribution tool--but from the poor to the rich. We are transferring more and more wealth to the rich each year.

“The solution is simple: First, the PRI has to lose. And then we need a social accord to adopt the reforms we require,” Schettino said.

Some Positives Have Sprung From Crises

Gurria, the finance minister, argues persuasively that the government has imposed structural reforms that minimize the risk of a new financial crisis: The budget deficit has been narrowed sharply, to a shade over 1% of GDP, compared with double-digit deficits in the early 1980s; savings have increased steadily, thanks to new retirement programs; direct foreign investment is more than $10 billion a year; and foreign currency reserves, at $33.7 billion, are at nearly six times 1994 levels.

Mexico is also less vulnerable to things it can’t control, such as oil prices. Oil is a fraction of total exports now; it was 70% in the 1970s. The peso now floats freely, so the government doesn’t waste foreign reserves defending an exchange rate as it did in 1994.

Some macroeconomic warning signals persist. A nearly $100-billion bailout of the banking system, which imploded after the 1995 crisis, still hasn’t resolved the serious lack of credit, although recent bank mergers and takeovers may help.

And despite all the positives, the toll of past crises was so great that it will take until 2004 before wages will achieve the same purchasing power they had in 1994, according to a recent book by Mexican economist Jonathan Heath.

“Even then,” Heath argued, “real wages would still be below the purchasing power observed in 1981.”

Economic Gains May Work Against the PRI

Ironically for the PRI, the improved economic climate may make it easier for people to vote against the ruling party candidate, says Carlos Elizondo Mayer-Serra, a researcher who heads the Center for Economic Teaching and Research in Mexico City.

“The economic growth and the strengthening situation make people feel that a change would be less risky, that there is less at stake, that things are going so well that why worry about a change,” Elizondo said.

Indeed, young entrepreneur Martell says his businesses have thrived since the 1995 crisis, in which his family had to sell cars and scrape together loans just to keep afloat.

But he worries that Fox, a former Coca-Cola executive, might threaten the newfound stability.

“Never before have we had a chance to make such a radical change,” he said, “but that is just what I fear--that radical aspect. I don’t see the prospects for Fox to develop such a stable economy.”

Not far away, in the endless eastern sprawl of Mexico City known as Iztapalapa, fabric manufacturer Mina remains embittered by the 1995 crisis, even though his 15-employee shop has rebounded smartly.

“Now we think we should be looking for real change,” he said. “It’s not possible to keep going this way after 70 years. And the only way to test this is to change to another party and see if they can do better.”