Bad News, Good News

Colosio's untimely death could mean the rebirth of reform.

Julio Marquez from the July 1994 issue

The assassination of Luis Colosio was utterly reprehensible, but the conspirators may have done Mexico a favor. Following the Chiapas uprising in January, the political situation had become riddled with uncertainty, and the PRI, Mexico's ruling party, was drifting away from sound economic policy. With the pull of a trigger, Colosio's fledgling campaign ended, the uprising lost momentum, and the ambivalent electoral hopes of Manuel Camacho were dashed. Now the next president will almost certainly be Ernesto Zedillo, a candidate more likely than Colosio to continue the successful economic policies of President Carlos Salinas de Gortari.

Salinas's achievements over the past six years are nothing short of remarkable. Having assumed power amid triple-digit inflation (160 percent), negative growth, and a sizable public deficit (16 percent of GDP), Salinas and his team quickly reversed course. They privatized most state enterprises, halved public spending, produced a budget surplus, and stabilized the currency, whose value had plummeted more than 90 percent over the six previous years.

Mexico now enjoys diminishing single-digit inflation (7 percent) and holds nearly $30 billion in reserves--a huge achievement for a country that couldn't meet its interest payments in 1982 and lost close to $80 billion in capital flight in the 1980s. The Mexican stock exchange has had record performances, averaging a dollar return of nearly 50 percent a year since Salinas took office.

But the Salinas modernization is not yet complete. Real GDP growth has averaged 2.4 percent, only slightly above population growth, and, while unemployment is down considerably, real personal income growth has remained stagnant. Inflation and interest rates are still higher in Mexico than in most developed nations and, except for a few large firms, Mexican companies must pay twice as much as their foreign competitors to borrow money.

Federal taxes consume about 25 percent of GDP, compared to less than 23 percent in the United States. And the Center for Economic Study of the Private Sector (CEESP), a highly regarded research institute, puts the effective corporate tax rate near 50 percent: The official rate is 34 percent, but hidden costs such as high taxes on telephone service and energy and a 10-percent national sales tax place Mexican corporations at a significant disadvantage vis-à-vis their international competitors.

And despite the Salinas government's deregulation effort, it is still hard to do business in Mexico. The CEESP estimates that the bureaucratic costs to establish a new mid-size business still average three to four times higher in Mexico than in its principal trading partners. Legally establishing a small business can be almost impossible for people with little capital or experience.

Much reform remains to be accomplished. But the struggle to gain passage of the North American Free Trade Agreement delayed the tax relief and further privatization and deregulation that Salinas had planned to do toward the end of his six-year term. The NAFTA campaign also boosted government spending. To counter the argument that Mexico's living standards are too low to make it a worthy trading partner, Salinas substantially increased "social spending," government programs aimed at reducing poverty. While social spending already represented close to one-third of the government's budget and had been increasing about 18 percent a year since Salinas took office, the NAFTA-related hikes marked an important policy reversal for a president who had been championing tightly controlled budgets.

From then on, Mexico's political debate focused not on maintaining the fiscal surplus or further liberalizing private enterprise but on marshaling government resources to reduce Mexico's vast social inequities. In 1994, Mexico is expected to once again run a budget deficit, albeit a small one, as "economic stimulus" programs take effect and tax revenue falls short of expectations.

Once the NAFTA vote was cast, Salinas turned his attention to picking his party's next presidential candidate. Before the NAFTA debate, Treasury Secretary Pedro Aspe appeared to be the front-runner, despite his unpopularity as an overly tough tax collector. Highly regarded abroad, Aspe was Salinas's economic right-hand man. Had NAFTA not been ratified, the nomination probably would have gone to Aspe, who would have provided economic continuity and thus a sense of security to international investors.

But NAFTA's passage, the artificially high economic hopes it generated, and the government's willingness to undertake new spending gave rise to two contenders with wider popular appeal: Luis Colosio, the secretary of social development, and Manuel Camacho, the mayor of Mexico City and one of the few leading political figures not closely identified with Salinas. Confident that economic development was well under way--and possibly hoping to achieve a political compromise between economic reformers (who presumably favored Aspe) and PRI traditionalists (aligned behind Camacho)--Salinas opted for Colosio.

Colosio's background placed him to the left of Salinas. He came from a rural family and had risen through the party ranks. Though he held a graduate degree from an American university, it was not an economics Ph.D., like Salinas's Harvard degree, but a master's in urban planning from the University of Pennsylvania, financed with a government scholarship. More recently, and perhaps more tellingly, Colosio owed much of his political popularity to administering the Solidarity program, through which the central government gives money to hundreds of communities for public works; its 1993 budget was over $2.3 billion. He had also held elected office, first as a congressman and later as a senator, running on traditional PRI platforms.

From the start, candidate Colosio stressed populist themes. While recognizing the benefits of economic liberalization and fiscal responsibility, he adopted economic policies traditionally favored by the left. He advocated, for example, new state-administered infrastructure and jobs programs to be paid for with increases in property taxes, which he deemed too low. Had nothing extraordinary happened, this popu-list strategy might have produced a sweeping victory at the polls, since the principal opposition candidate, Cuauhtemoc Cardenas from the left-leaning Democratic Revolutionary Party, echoed Colosio's positions without an original platform.

But on January 1, the day NAFTA went into effect, the Chiapas rebellion grabbed the news. Several hundred armed insurgents occupied towns in Mexico's southernmost and poorest state, and the Mexican army was unable to assume control. Quickly accepting the rebels' calls for negotiation, increased spending, and democratization, Salinas appointed Colosio's rival Camacho as special mediator.

The appointment raised Camacho's political standing, and he effectively supplanted Colosio as the standard-bearer for the poor and downtrodden. Camacho's mediator role, together with his ties to the more statist elements within the PRI, made him a more credible and consistent advocate for increased social spending than Colosio. Sensing his new-found popularity and openly dissatisfied with Colosio's nomination (defying PRI tradition, he refused to endorse Colosio's candidacy), Camacho hinted at an independent presidential run.

This situation shifted the post-NAFTA political discourse even more to the left, as Colosio attempted to regain ground by repeatedly promising increased spending. By the time Camacho announced he would not seek the presidency, Colosio was running a completely populist campaign based on the loosely defined concept of "social reform." His platform favored a "redistributive" state but was short on economic specifics. Candidate Colosio probably would have won the election, but President Colosio could have delayed, redirected, or impeded the continuation of Salinas's program and might even have embarked on a government spending spree that the country could not afford.