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MEXICO CITY--For many Mexicans, frustration with the ruling "Institutional Revolutionary
Party" (PRI) is at a peak. Traditional disgruntlement with the powerful
and corrupt PRI political machine, and dissatisfaction with the country's
awesome income disparities, have been compounded by six years of explosive
inflation and deep cuts in government spending. In real terms, purchasing
power has dropped every year since 1977; the minimum wage now buys about
half what it did less than one year ago. Bitterness is deeply felt at the
government's willingness to continue servicing its $105 billion foreign
debt while living standards at home have sharply dropped.
Discontent with the PRI came to a head in national elections in July, when the party suffered
its biggest losses in history. "The election was a call to change," says
Angel Aceves, a senior adviser to the Mexican Workers Confederation (CTM),
traditionally one of the pillars of the PRI. "People are very angry, and
they showed it." PRI President-elect Salinas de Gortari says he wants change
as well, but he wants to achieve it by continuing the economic policies
of President Miguel de la Madrid.
Salinas, a 40-year- old Harvard-trained
economist, appears committed to forging a more competitive, internationally
open economy, less dependent on oil revenues and government spending to
stay afloat. To help accomplish his goal, Salinas is likely to pick people
like himself: young, well-educated and aggressive. The new team will work
to keep inflation down and non-oil exports up. They will want to tear down
trade barriers, sell off state-owned enterprises and attract foreign investment.
But healthy macro- economic indicators do not always translate into happiness
for the voter, especially in a country like Mexico, where many people's
participation in the formal economy is limited to satisfying basic needs.
Poverty is widespread: an estimated 70 percent of children five years or
younger--about seven million-- suffer from malnutrition, according to El
Financiero, a business daily.
The gap between economic theory and reality
is evident in the different perceptions rich and poor hold of the government's
radical 11-month-old anti-inflationary program. The so-called "Economic
Solidarity Pact" has been remarkably successful in bringing monthly inflation
from 15.5 percent in January 1988 to 0.6 percent in September. The International
Monetary Fund (IMF), the business community and commercial bankers are
impressed. "I think the pact is very good, because prices (for parts) are
going down," says Giacinto Benotto, president of Benotto Bicycles. Alejandro
Alvarez Gurrero, a leading industrialist, agrees. "The pact is not perfect,"
he says, "but it's the only way to try. The inflation was so big that we
were really destroying the Mexican economy."
But for the poor, the pact
increased prices, since the government raised the cost of basic foodstuffs
80 percent before freezing prices and the minimum wage in March. (The program
also includes an exchange rate freeze and a government pledge to keep public
spending down.) The pact was endorsed by representatives of Mexican businesses,
organized workers and farmers. But food costs have continued to inch up
each month, often increased by shopkeepers in defiance of the government's
orders. "Here, everything just costs more and more. There is no pact. The
pact is government propaganda," says one cab driver. Octavio Zayrik Chahin,
director of the factory Simon, S.A., produces special polyeurothanes to
sell to industries. "I buy everything my workers need--shoes, paper, other
items, and food for the company restaurant," he says. "Since March 1, my
suppliers haven't raised their prices and I haven't raised mine. Food prices
are the only thing that have gone up." Meat and chicken prices alone, he
estimates, increased 15 percent between May and July. Since then, prices
on some items, such as newspapers and soft drinks, have begun to drop.
"The pact could be good," Zayrik contends. "We have to grow and in order
to do so we have to reduce inflation. There are no magic formulas. For
this reason, I hope the pact will stay in place through the end of the
year."
But he worries about the social cost of a shock dose of austerity
on top of years of steady belt-tightening. "The social changes in the past
six years have been enormous. Unemployment has grown, the crime rate is
rising. If the government [continues to] reduce public spending this could
be a very dangerous society." But a senior adviser in Mexico City's planning
and budget ministry, talking in his car on the way to a meeting, seems
oblivious to such concerns. "The pact is working," he insists. "We will
not raise salaries. We cannot afford to raise salaries." He reels off statistics
to illustrate the health of export industries, the dynamism of foreign
investment. "Don't stay in Mexico City," urges the adviser. "Go out and
see for yourself how dynamic are industries in Juarez. Go to the cities
in the north. They can't get enough labor." As he rattles on, the car stops
at a red light and the inevitable troop of little boys with painted clown
faces begins weaving in between the traffic, begging.
Exports
Many exporters are indeed doing well, thanks to de la Madrid's decision to slash trade
barriers and devalue the peso. In the past three years, import licenses
have been eliminated for about 60 percent of total imports, according to
the central bank. Import tariffs are now five percent or less for two-thirds
of all items for which rates apply.
In fact, the trade liberalization has
made some businesses dependent on exports for the first time. Before the
trade opening, for example, Mabe S.A., a major manufacturer of durable
consumer goods, dominated the Mexican microwave oven market. When trade
barriers fell, Mabe was unable to compete with lower priced ovens. "We've
lost our market share and we see we're going to have to get out," says
Francisco Berrondo, director of the firm. Since 1984, import competition
and weak domestic demand have reduced Mabe's domestic sales by about 50
percent. But the company's exports of refrigerators have increased 60 percent,
Berrondo estimates. Mabe recently began exporting to Canada and plans a
joint venture with General Electric that Berrondo hopes will win 80 percent
of the U.S. market. "It's been very difficult," he says. "Many times we
thought we'd go under. But right now, we're coming out okay."
Mabe's story is not unique. Thousands of companies are struggling in the face of intense
import competition and the severe slump in domestic demand. The experience
of companies like Mabe helps explain why non-oil exports from Mexico have
grown from 20 percent of total exports in 1982 to 66 percent in 1987. This
year, non-oil exports are expected to bring in $14 billion, a record high.
But not all businesses have success stories to tell. The flood of imports
has overwhelmed domestic industries such as electronics, textiles and apparel,
which are unable to compete with higher-quality goods.
At times, the trade liberalization has had unexpected effects: Saltillo Grupo Ltd., a Monterrey-based
manufacturer of household goods, recently closed a large Mexico City office
of lawyers and lobbyists because they were no longer needed to navigate
the government's trade regulations. The savings from the closure have more
than made up for Saltillo's loss of sales to import competition, according
to a central bank source.
Meanwhile, the frozen exchange rate is steadily
squeezing profit margins even for successful exporters. Nevertheless, most
Mexican entrepreneurs welcome the relative stability brought by the government's
policies. "Mexico has been through everything in the past six years," explains
a director at one investment bank. "Oil prices dropped. The [1985] earthquake.
The economic opening, and now this political change. The main thing for
us is to achieve stability--political and economic." The yearning for stability
has won the PRI the support of the business class, but the party needs
more than that. As the election results demonstrated, the prolonged economic
pinch on working and middle class Mexicans has created a pressing political
challenge for Salinas' government. Official returns gave Salinas 50.74
percent of the vote, left-wing challenger Cuauhetmoc Cardenas 31.06 percent,
and Conservative National Action Party (PAN) candidate Manuel Clouthier
16.81 percent. The results have been hotly contested by both sides of the
opposition. Salinas was formally named President-elect by Congress with
only 263 out of 500 votes, all of them from PRI representatives. The ruling
party faces the toughest opposition ever in the House of Representatives,
240 seats to the ruling party's 260. In the Senate, a less powerful body
than the House, four opposition candidates for the first time broke the
PRI's monopoly on seats.
The hope is that the economic reforms begun under
de la Madrid will begin to bear fruit under Salinas. But time is against
a new president. Local elections take place every year throughout the country.
The showdown is expected in 1991, when elections for all the congressional
seats, 32 of the 64 Senate seats and several governors take place. The
PRI will very likely be in real trouble unless conditions improve substantially
by then. "I give them three years," says Francisco Raminez Arriaga, a cab
driver. Acknowledges one senior PRI congressman, "We have to work very
hard between now and 1991." Not only must those bent on reforming Mexico
convince the electorate that their promises of change are worth waiting
for. They also face growing opposition from those within party ranks and
the government bureaucracy who stand to lose a great deal if Salinas and
his followers succeed.
Privatization
Salinas' plan to continue the sale
of state-owned companies is prompting some of the strongest resistance.
Privatization means lost jobs for thousands of bureaucrats who have grown
accustomed to good salaries and perks. Since de la Madrid took over in
1982, the number of state-owned enterprises has been cut by nearly two-thirds,
from 1,214 to 468, according to government data. But some of the most politically
sensitive sales are still ahead, with a major copper mine, the government's
stake in the airline Mexicana Aviation and a big petrochemicals company,
the biggest national truck and bus manufacturer and some sugar mills all
expected to be sold within the next year.
Workers are starting to grumble
as well. Labor union official Aceves says his statistics show unemployment
has not been increased substantially by privatization, but concedes the
figures are "the least imperfect" available. "In a good number of cases,
let's face it, the workers lose their jobs," he says. So far, the lay-offs
have been accepted as a sacrifice necessary to get the economy up and growing
again, Aceves says. "Workers realize what is the most important in the
long run." Aceves' optimism is part of his job: his union, the CTM, is
one of the pillars of the PRI. But he adds, "From a macro-economic point
of view, the unemployment is not so bad. But we know that for the workers,
losing 50 jobs is as bad as losing 500." And the CTM, Aceves says, cannot
afford to ignore the workers' views. "If at noon the people say it's night,
I'll send out the lamplighters."
The PRI must also deal with Cardenas,
who continues to draw public support for his claim to the presidency. Until
1987, Cuauhtemoc Cardenas was a member of the PRI, familiar with the workings
of the party, part of the ruling elite. He has thus been able to tap not
only the profound desire of the working classes for a better life, but
also the growing disaffection of PRI members with the party's ideological
complacency. "The PRI only calls on people when there are elections," explains
one senior Mexican official. "It has become a political machine, not a
political party. Politically and ideologically, the PRIstas want to be
more active."
Mexico's ruling party draws its strength from three organized
sectors of society--the peasants or campesinos, labor and the middle classes.
Candidates for political office have been chosen--after fierce in-fighting--in
a way that maintains a balance of power between the three party pillars.
The system worked well enough to keep the PRI on top for more than 60 years.
Now it is under increasing stress. This year in many parts of the country,
candidates acceptable to the party machinery were rejected by voters. One
senior PRI official bluntly says: "The party lost because it chose bad
candidates. We can no longer choose candidates because of the corporatist
elements they represent. We need now to produce good candidates." The poor
showing at the polls shocked the PRI and convinced most party leaders that
fundamental change is needed in order to prevent an even worse defeat--losing
the presidency--the next time around.
But the PRI's promises of political reform and economic opening pale beside Cardenas' calls for debt repudiation,
tighter controls on foreign investment and better living standards for
workers. From the right, long-standing opposition from the National Action
Party (PAN) has also grown. The foreign debt is a particular sore point.
Debt
Foreign debt has been a sensitive issue in Mexico at least since 1861,
when president Benito Juarez' decision to suspend debt payments gave Napoleon
II an excuse to send in his troops and occupy the country for three years.
More recently, Mexico has been something of a model debtor in creditors'
eyes: not once late on payments due, committed to negotiation not confrontation,
pursuing IMF-approved economic policies intended to spur growth and make
it possible to keep paying the debt.
But Mexicans themselves are fed up, and most do not believe the years of economic sacrifice will pay off any
time soon. Salinas' proposal to negotiate with creditor banks drew more
ridicule one lunch hour in Mexico City's Chapultapec Park than a slew of
favorite jokes about the "gringos." A man, swaggering about on a scaffold
stage, compared Mexico to Brazil and Peru, two other big Latin debtors.
"In Brazil, Jose Sarney says he's fed up with $110 billion of debt and
stops payments for eleven months! In Peru, Alan Garcia keeps debt service
e payments down to 10 percent of export earnings! What does Dr. Carlos
Salinas de Gortari say? 'We must keep our promises to pay.'" Says one stock-broker
in Mexico City, "I don't think there's a single person in Mexico--private,
public, rightist, leftist, who doesn't want a tougher stand on debt.
That wasn't the case six years ago." Francisco Suarez Davila, Mexico's under-secretary
of finance, agrees that public demands for debt relief are getting louder
each day. Moreover, he insists, Mexico cannot both continue paying $8.5
billion in interest each year and start to grow again. In order to grow,
Suarez says, the government needs to take about half the money it is spending
on debt service and pump it into productive investments. "Somehow, the
transfer of real resources abroad has to be reduced by about three to four
billion dollars."
How this will be achieved remains unclear. Suarez outlines
two possibilities: borrow more or reduce debt principal. He also hints
at an obvious third: a unilateral cap on payments to creditors. Borrowing
more seems out of the question. "Mexico doesn't want it and the foreign
banks don't want to put it up," sums up one British banker. In the long
run, though, new money is probably the only answer. Unless oil prices boom
again, Mexico left to itself simply cannot generate enough money to develop.
Right now, Suarez figures the commercial banks would need to lend about
$2 billion a year in new money, with another $2 billion coming from the
World Bank and smaller suppliers' credits combined. World Bank disbursements
in the past three years have dropped far below this mark: in 1986, the
Bank lent $1.31 billion to Mexico, in 1987, $982 million and in the first
half of 1988, $486 million, according to the Mexican embassy in Washington.
For the time being, the second option is the favored one: reducing the
debt itself. Mexican officials and commercial bankers are working on a
wide range of schemes to reduce debt, but ultimately these are not likely
to solve the problem. The schemes are all based on the fact that commercial
banks trade Mexican debt among themselves for only about 50 cents on the
dollar. But the banks still insist that the government pay back its debt
at full face value. The aim of the debt reduction techniques is to let
the government trade its debt as cheaply as the banks do.
Part of the problem with this idea is supply and demand: any deal big enough to give significant
savings to Mexico City is also big enough to hike the market price of Mexican
debt, thereby reducing the discount. The government is expected to try
again to trade some of its debt at a discount with bankers for long-term
bonds. A similar scheme tried last year knocked only $1.8 billion off the
total $105 billion debt; the government had hoped for about 10 times as
much. This time around, Mexico City wants to sweeten the deal by offering
banks a guarantee on interest payments, and will probably ask for a reduction
in interest rates as well. Suarez, though reluctant to set a goal, says,
"If we can withdraw $20 billion in this way, that starts to become a sensible
thing." Commercial bank sources in Mexico City say it is unlikely that
this kind of reduction will be achieved.
Debt-equity swaps are another way to ease the debt burden, but the government's swap program was suspended
in late 1987 due to fears that it would fuel inflation. In these swaps,
an investor buys discounted Mexican debt and sells it back to the government
for pesos, which are then used to invest. (See box - omitted here.) The
inflationary threat comes when the government has to print the pesos. Salinas
is expected to open a new, much more restricted program sometime in 1989,
but the potential for significant commercial bank participation is low.
One Mexican banker explained, "What does a bank know about managing a petrochemical
company? These kinds of propositions are very difficult to sell to a credit
committee." Within Mexico, there are political pressures not to give investors
the discounts that debt-equity swaps provide. "Buyers think they will get
a very good price [for the equity] because the government is forced to
sell," explains Alejandro Palma, assistant director general of the commercial
National Bank of Mexico (Banamex). "Then you have a problem. You don't
want to sell at all costs. You want to make a reasonable sale."
More promising is the idea of leasing investments to bankers through an intermediary investor.
Such transactions involve a commercial bank swapping Mexican government
debt for new debt from a private investor. That way, the private investor
carries the equity risk and the bank is assured of a return on the new
loan. The government, meanwhile, cancels some of its foreign debt. Such
deals have already been used to finance most new hotels in the seaside
resort of Cancun. Perhaps more important than their impact on debt reduction,
these leasing arrangements could stimulate growth next year, when Salinas
will try to ease out of the anti-inflationary pact and will still need
to keep the lid on public spending. Leasing targeted towards investment
in Mexico's neglected infrastructure--such as roads, bridges, ports, telephone
lines-- "may become an important engine for growth next year," says one
informed Mexican source. Another source who brokers swaps agrees. "This
country needs infrastructure. We need to do over the next six years what
we haven't done in the past six years. For this, swaps have plenty of potential."
But many analysts are skeptical that debt reduction techniques will eliminate
enough of the debt to make a difference. Says Marco Voljc, the World Bank's
representative in Mexico City, "I quite frankly don't see [debt reduction]
coming soon enough and in sufficiently high volume to be significant in
political terms." If this is the case, Suarez suggests, Mexico will have
no choice but to suspend part of its interest payments. "Then we have to
get into the tougher scenario, and say look, the country needs to grow
and we're not getting the money we need. We have to do something different
toward achieving that. We only transfer abroad one-half of what we're transferring
now." And if this happens, the undersecretary adds, bankers should not
be surprised. "The signals have been very clear. There is a huge elephant
that's growing by the day--not just here, but in Peru, Venezuela, Brazil.
We have never made progress on the debt unless there was a crisis."
Samantha Sparks writes frequently for Multinational Monitor.
Samantha Sparks writes frequently for Multinational Monitor.
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