WALL STREET JOURNAL March 8, 1999
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The Outlook
MEXICO CITY
Mexico is coming off one of its best years in a decade. The economy grew at a rate of 4.8% last year, adding 100,000 new manufacturing jobs. Production of television sets, auto parts and clothing set records. Tourist arrivals are strong, and farm products are surging into U.S. supermarkets.
Since 1993 and the passage of the North American Free Trade Agreement, total trade between the U.S. and Mexico has doubled to $159 billion a year from $77 billion. That puts Mexico ahead of Japan and trailing only Canada as the U.S.'s leading trade partner.
Yet for most Mexicans, these statistics offer little solace. In terms of what they can buy for themselves, most consumers are worse off today than they were a decade ago. Even those lucky enough to have one of the new assembly-plant jobs can't buy as much as they could have five years ago, before Mexico abandoned its fixed exchange rate.
Since Mexico's big 1994 currency devaluation, consumers here have suffered a staggering 39% drop in their purchasing power. Just since 1997, the number of people living in extreme poverty -- defined as workers earning less than $2 a day -- has grown by four million, or twice the growth of the population.
Yet Mexico's economy enjoys a stellar reputation. The prevailing view from Wall Street and Washington is of a country that got over a bad patch a few years ago, and whose experience should serve as a lesson for other emerging markets in crisis.
In fact, Mexico's lesson for other troubled economies is something very different: Sometimes macroeconomic health is achieved at the cost of mass hardship -- and even then, timing may be just as important as policy.
After its devaluation, Mexico followed almost to the letter the advice of the International Monetary Fund and the U.S. Treasury -- the same advice that has since been offered to Asian countries like Indonesia and South Korea and which is now forming the basis of a rescue scenario for Brazil.
In exchange for $41 billion in international loans, President Ernesto Zedillo's government agreed to float the peso and slash public spending to a bare minimum. The funding helped offset capital outflows, the cheaper currency made Mexican exports competitive and budgetary restraint allowed sky-high interest rates to fall. Growth was restored within 18 months of the devaluation, and inflation fell dramatically.
Yet according to a new study by the United Nations Development Program, while just one of seven Mexicans lived in dire poverty before the crisis, two years later the proportion was one in five. Adding those a rung up -- workers living in "moderate" poverty, with daily incomes of $3 -- almost two-thirds of the citizenry is considered "poor" today. Fewer than half fit that description before the crisis.
"Assuming the economy can keep growing at 5% a year, it's still going to take five more years for Mexico to reduce poverty to 1984 levels," says Miguel Szekely, an economist with the Inter-American Development Bank in Washington and co-author of the U.N. study. In other words, despite three straight years of impressive post-devaluation growth, the peso crash virtually wiped out a generation of progress, leaving most Mexicans today poorer than their parents.
What's more, Mexico's recovery was aided by several factors not enjoyed by the countries now being exhorted to follow its example. Chief among them is Nafta, which went into effect in 1994. Thanks to the trade agreement and a broad U.S. expansion, Mexico since the crisis has attracted $12 billion in export-manufacturing investment alone, creating 600,000 new jobs that helped replace those lost in the 1995 recession.
Another factor: Mexico entered the crisis with a balanced budget; at the time it was a highly centralized one-party state that could maintain fiscal discipline. Finally, Mexico benefited from rising prices for oil, its leading hard-currency export. When the crisis hit, oil was trading at an average of just under $14 a barrel. By 1996, it was at $19 a barrel. Since the start of the year, by contrast, the export price of Mexican crude has been around $8.50. Each one dollar change in the price of oil is roughly equivalent to $1 billion in national revenue.
"Let's face it," says Nora Lustig, an economist associated with the Brookings Institution, a Washington think tank, "if Mexico had to devalue in 1998, instead of in 1994, it never would have had the results it had."
Indeed, Brazil has none of the positive breaks Mexico had. Its only free-trade arrangement is with capital-importing Latin American neighbors, making it unlikely that lower wages for Brazilian workers will translate into the same kind of investment surge that Nafta brought to Mexico. Brazil also isn't benefiting from rising commodity prices -- soybeans, its leading agricultural export, are currently selling at their cheapest level in 23 years.
Perhaps most important, Brazil doesn't have the federal leadership capable of enforcing the level of belt-tightening necessary to balance its books. And its fiscal deficit at the time of devaluation was around 8% of gross domestic product. That raises the specter of high interest rates for a protracted period.
Mexico alone enjoyed one other benefit in facing its crisis: a safety valve in the U.S. For many Mexicans, the quickest route to recovering spending power lies just over the border. Leonel Gomez Flores, a technician working at a television plant in the frontier city of Ciudad Juarez, points out that his wife makes more in one day cleaning homes in El Paso, Texas, than he makes in a week at his plant. That isn't an option open to Brazil's massive underclass.
--Joel Millman