The Perils of Perestroika

Mexico still needs economic and legal reform.


In recent months, several violent episodes have shaken observers who had come to see Mexico as a stable, modernizing country led by a benigh, reformist regme. The uprising in Chiapas, the assassination of the ruling party's presidential candidate, the kidnapping of two prominent businessmen, and the killing of Tijuana's police chief may ultimately turn out to be completely unconnected. Yet together these shocking incidents have helped create an environment of uncertainty and concern for the future. President Carlos Salinas can help to dispel these fears during his remaining time in office by guaranteeing free elections and forging ahead with economic reforms.

Salinas's "neoliberal" reforms began as a well-disguised program of shock therapy, including the renegotiation of public and private external debt; government spending cuts; limits on imports; new taxes, including a 2-percent tax on assets; and vigorous tax-collection efforts. The result was an economic contraction that cut inflation but also reduced growth and left many Mexicans resentful of the government and suspicious of economic reform.

But Salinas added a novel element to these austerity measures: an ambitious program of privatization that included all the banks nationalized by the Lopez Portillo administration, the public telephone company, steel mills, and port facilities. The so-called strategic enterprises, such as the oil, electrical, and railroad monopolies, remain untouched. But so far the Mexican government has privatized more than 600 state-owned enterprises.

Unfortunately, the sale prices have often been arbitrary. Some petrochemical plants were sold at very low prices, while other enterprises, including the banks, were sold at very high prices that were far from their market value. Bank customers in Mexico commonly believe that the main reason for the current high fees on banking services—two to three times as much as those in the United States—is the need to recoup exorbitant acquisition costs.

A more significant problem is the lack of deregulation. As in Argentina, Brazil, and other Latin American countries that have sold state-owned enterprises, privatization in Mexico has often meant transferring monopolies from public to private hands. As long as domestic and foreign competition is either minimal (as in banking) or nonexistent (as in the telephone market), customers are not much better off than before privatization.

Another major fault in Salinas's program is a price-control arrangement known as the Stabilization Pact, which covers all the raw materials, foodstuffs, and high-consumption consumer goods whose prices are used to calculate the Mexican Consumer Price Index. This pact among labor unions, the government, and prominent businesses subjects increases of all controlled prices to the approval of representatives from these three constituencies. Among other things, the pact has led to long gas lines, widespread price speculation, and shortages of tortillas, bread, soft drinks, and other foodstuffs. The pact mainly serves to contain the political fallout from workers facing rising prices while their own wages are subject to government control. All wage increases are subject to government approval, and pact negotiations set ceilings on minimum wages. Because the government does not allow the labor market to function, the "minimum wage" has, in practice, become a maximum wage for many workers.

During the most recent stage of Salinas's economic program, popularly called Salinastroika, foreign investors were attracted by artificially high rates of return in the Mexican financial markets. The government keeps stock prices high by buying shares when the market is falling, and government bond rates have gone as high as 32 percent even as U.S. rates were falling to less than 2.5 percent for certificates of deposit. Under those circumstances, the capital flow into Mexico in 1993 was about $15 billion, more than 68 percent of it from the United States. This capital inflow helped mask the Mexican economy's weaknesses. Moreover, it will not last; investors are bound to get nervous and start exiting the stock market, a trend that will be accelerated by the high interest rates on bonds.

The North American Free Trade Agreement was the final piece of Salinastroika. After George Bush lost his re-election bid, the Mexican government had to spend most of its remaining political capital to convince Mexicans of NAFTA's merits. Government and business propaganda raised unwarranted expectations among the Mexican people for short-term economic growth. When this growth fails to materialize, both Salinas's party and his policies could face serious political problems.

Another obstacle to continued economic reform is the widespread feeling that Salinastroika has not been accompanied by a Mexican glasnost. Because Salinas was afraid of how radical political reform would affect the 1994 elections, he has proceeded timidly. Even so, voters probably will dictate the outcome of the presidential campaign, which has not always been the case in the past. To help elect the PRI's new presidential candidate, Ernesto Zedillo Ponce de Leon, Salinas should implement the following economic policies:

  ? Dismantle the remaining price controls, eliminating the Stabilization Pact and freeing wages.

  ? Eliminate the minimum-wage system.

  ? Adopt a 15-percent flat tax on income and reduce the value-added tax to 5 percent.

  ? Repeal the 2-percent tax on assets.

  ? Simplify basic administration procedures such as tax returns.

  ? Restore realism to the stock market by stopping government purchases of shares through Nacional Financiera (a government development bank) when prices market are falling.

  ? Ask the Bank of Mexico to abstain from further interventions to keep the peso in a controlled fluctuation range and cease the manipulation of short- and long-term interest rates.

By adopting these measures, Salinas can free Zedillo from the task of defending the "neoliberal" economic program, which the left has discredited by tying it to false promises about NAFTA. This will allow Zedillo to focus on badly needed legal reform, responding to the electorate's desire for justice and democracy. A new constitution would be a good start. The Mexican Constitution, which dates from 1917, has 146 extremely long articles. After 77 years of bureaucratic legal activism and hundreds of modifications, it is a mess. Writing a new constitution—a short and simple one, similar to the U.S. Constitution—is the first step toward establishing the rule of law in Mexico, the basic prerequisite for the security that one-party rule has failed to provide.

Agustín Navarro G. is president of the Mexican Institute for Social and Economic Studies in Mexico City.