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August 1995, Volume 2, Number 8

Mexico Stabilizes and Reforms

The Mexican stock market is up 50 percent since its February 27, 1995 low of 1448, but there are fears that political scandals and violence will slow the recovery from the current recession.

The government now projects that Mexican GDP will shrink two percent in 1995, and grow by three percent in 1996. But domestic consumption has fallen drastically in the wake of two million layoffs since December 1995, and increased exports have not been able to absorb many unemployed workers.

The US House Representatives on July 19 voted to prohibit the US Treasury from lending more money to Mexico. In January 1995, the US promised Mexico up to $20 billion in funds to support the peso; about $12.5 billion has been sent to Mexico so far.

In a review of what went wrong in Mexico in December 1994, much of the blame was laid on ex-Finance minister Pedro Aspe, who successfully resisted a Salinas-Zedillo agreement to devalue the peso on November 20, 1994, shortly before Salinas left office. Aspe was afraid that a devaluation would halt the influx of foreign investment in Mexico.

Mexican officials argued that the country could continue to run a trade deficit financed by foreign investors because Mexico was importing capital goods that would accelerate its growth rate. But less than one-fourth of Mexico's imports in 1994 were capital goods.

Some US investors reinforced Mexico's decision not to devalue, and encouraged Mexico to issue so-called tesobonos, government debt that was repaid in pesos at a pre-announced exchange rate. If Mexico devalued, these tesobonos would increase the country's foreign debt in dollar terms.

Mexico in 1995 has been running a trade surplus with the US, largely because the peso devaluation made exports cheaper and imports more expensive.

A profile of a tobacco firm in Nayarit, about 400 miles northwest of Mexico City, demonstrated the positive role that large companies can play in reforming Mexico's agricultural sector. Mexico has about six million farmers scattered across 400 million acres of arable land, but they generate only about eight percent of Mexico's $350 million GDP. [The US has about two million farmers and one billion acres of farm land, although crops are harvested from only 300 million acres].

About 20 percent of Mexico's farm land is held in small farms of less than 10 acres each. The tobacco company coordinates farmers willing to work together in 150 to 200 acre blocks. The farmers then farm as instructed, with equipment, seeds, and loans provided by the tobacco company. Profits are split 50-50--four acres of low-grade tobacco returns about $4,000 annually for the farm family's labor. The tobacco company, La Moderna, also exported $130 million worth of fresh produce to the US in 1994.

The Solidarity program, which spent $15 billion in federal funds between 1988 and 1994 to help Mexican communities build infrastructure, is yet another Salinas-era program under attack in Mexico. Salinas hoped to be remembered for NAFTA and Solidarity, but critics now charge that Solidarity was simply a program to keep poor Mexicans voting PRI while the country restricted its economy.

In addition to charges that some communities built projects such as baseball stadiums, it has been alleged that the temporary jobs created by Solidarity do little to help Mexico's 15 million very poor people. One analysis found that Solidarity funds were targeted in swing districts, and that every one percent increase in PRI votes in 1991 midterm elections was rewarded with an additional $2.50 per voter spent on Solidarity projects.

The government argues that Solidarity funds are spent in all 31 Mexican states, including the four governed by the opposition.

Mexico built 6,000 kilometers of new roads during Salinas' six-year term between 1988-1994, with $14 billion in private foreign investment. The government is being forced to bail out several of these projects, largely because private construction companies far overestimated usage and revenues from high tolls when obtaining loans from state-owned banks.

The government often awarded road concessions to the bidder that offered the shortest time period of private ownership, usually 14 years until the project was to be turned over to the government. Road concessions are being lengthened up to 30 years. Roads are a high priority in Mexico because 80 percent of Mexican exports move by land.

Maquiladoras are foreign-owned factories in Mexico that import components and assemble electronics, auto parts, and other products to export, usually back to the US. After the 1982 peso devaluation, the number of maquiladoras mushroomed, so that, in the early 1990s, some 2,000 factories employed about 500,000 Mexican workers.

Maquiladoras were expected to shrink as NAFTA eliminated tariffs, but they have not. Recent projections are that almost 400 maquiladoras will be added by the year 2000, raising the Mexican work force employed in foreign-owned factories from 579,000 in 1994 to 943,000 in 2000. Wages and benefits in the maquiladoras averaged about $1.80 per hour in mid-1995, and are projected to remain below $2.50 per hour until the year 2000.

Ciudad Juarez, which lies across the US-Mexican border from El Paso, added about 40,000 jobs in the last year. Juarez expects to add another 30,000 jobs this year despite the peso devaluation and economic crisis. NAFTA is credited with creating these jobs, most of which are in Juarez's 300 maquiladoras.

El Paso is the fourth-largest city in Texas, and the third-fastest growing metropolitan area in the US. Juarez is Mexico's fourth-largest urban center. El Paso grows through middle-class suburban developments, while Juarez adds shantytowns west of the city's garbage dump.

Despite maquiladora jobs, many Mexicans still try to find work in El Paso. But Operation Hold the Line seems to be making it more difficult to commute regularly as an illegal alien to a job in El Paso. The INS plans to build a ten foot high wall along about 1.3 miles of border in a New Mexico suburb of El Paso to discourage aliens from going around Operation Hold the Line agents.

Some downtown merchants have lost as much as 50 percent of their business since Hold the Line, although the peso devaluation and NAFTA also undoubtedly contributed to declining sales. Car thefts and car and home burglaries are down about 30 percent in El Paso.

The US is reportedly worried about the booming drug trade in Mexico; Mexico earned an estimated $7 billion in 1994 by shipping Colombian drugs into the US, or almost twice as much as remittances from Mexican workers in the US. Some of the money used to buy newly-privatized companies in Mexico was reportedly drug money. Some US officials fear that the police in Mexico have been largely compromised by accepting money to protect drug barons.

Tim Golden, "Mexican Drug Trade Booming," New York Times, July 31, 1995; Craig Torres, "Mexico Tobacco Firm is Changing the way small farmers work," Wall Street Journal, July 26, 1995; Strife, delay in reform deepen Mexico's sense of crisis, Associated Press, July 5, 1995. Anthony de Palma, "Anti-Poverty Program under fire in Mexico," New York Times, July 3, 1995. Miguel Perez, "Turned Back in Bid for New Life," The Record, July 24, 1995. Miguel Perez, "Stemming the Tide," the Record, July 23, 1995. House votes to limit Mexico bailout," Associated Press, July 20, 1995; Anthony de Palma, "After the Fall: 2 Faces of Mexico's Economy," New York Times, July 16, 1995. Thaddeus Herrick, "Job seekers overwhelming border cities," Houston Chronicle, July 16, 1995.