Inside Mexico: Greenspan in reverse

QUERETARO, Mexico, May 17 (UPI) -- The big punch has come from a wobbling U.S. giant, and the Mexican economy has hit the canvas. It's in recession. No surprise in that. Unavoidable, in fact.

But there is an important difference from the United States. While Federal Reserve Chairman Alan Greenspan and U.S. President George W. Bush dance around the wobbly-kneed U.S. economy with smelling salts, wagging towel, wet sponge and wads of cash, Mexican policy-makers merely count and wait -- and even tighten policy a bit, as though they want to keep their man on the floor.

The numbers reflect the policy difference, though first we have to put them on a comparable basis. This week the Mexican government reported that GDP had fallen in the first quarter by 2.0 percent compared with a year earlier. In the United States, the first-quarter figure in people's minds is of 5.8 percent growth, but that is a quite different measure of GDP: The growth in the economy between the fourth quarter of 2001 and the first quarter of 2002, raised to the power of four (annualized), in order to give an impression of the current annual rate of growth.

A U.S. year-on-year growth figure in the first quarter -- therefore calculated on the same basis as Mexico's -- gives a growth rate of 1.6 percent. So that is the comparison we should make: a 2 percent contraction of the Mexican economy in the past year vs. a 1.6 percent expansion of the U.S. economy.

That Mexico's performance should be weaker is hardly surprising for a number of reasons. Mexico sends about 85 percent of its exports to the United States, and it depends much more on exports to achieve overall growth than does the United States, with its huge domestic economy.

But there is another reason for the different performance. While the United States has loosened economic policy drastically, Mexico has tightened its.

Just compare. Greenspan has slashed the short-term interest rate to 1.75 percent, a 40-year low. Bush has cut taxes and raised spending (especially on defense), turning a sizable fiscal surplus into what looks like being a sizable fiscal deficit. U.S. economic policy, in short, has been highly stimulatory. Both fiscally and monetarily every effort has been made to banish recession.

In Mexico, there has been no such effort to fight recession with government spending and cheap money. On the contrary, Mexico cut government spending three times in 2001, and Tuesday, the under-secretary at the Ministry of Finance, Agustín Carstens, said that it is possible another cut in government spending will be necessary this year.

That is classical economics: Spend as much as you have coming in -- and revenues are down. Mexico believes it must be this strict because otherwise it will lose credibility in international markets, in a way that the United States is unlikely to. We can agree or disagree with that, but, clearly, the government has a point.

It is on the monetary side that policy is more questionable. The so-called corto, or short, by which the central bank withdraws money from the money market was raised again in February this year. The central bank has been hawkish on inflation, bringing it down over the past year to less than 5 percent from over 7 percent and aiming to achieve U.S.-level inflation in coming years. A final element to this monetary tightness is that the central bank has issued bonds in order to mop up any increase in liquidity provoked by rising international reserves.

All this monetary tightness has had two main effects. First, domestic credit fell in 2001, having fallen already in 2000. This is almost the polar opposite of the United States, where Greenspan has encouraged a lending boom in the housing market.

The second impact is that the peso has appreciated against the dollar, which itself, until recent weeks, has been very strong against other currencies. Mexican policy, of tight fiscal and monetary discipline, has helped to make the peso perhaps the world's strongest currency in the past two years.

That is an unfamiliar position for a Mexican or indeed a Latin American currency to be in, and many, especially outside the country, have pointed to it as a sign of new-found strength. But an appreciating currency has harmed Mexican exports and growth. Mexico's export-oriented maquiladora industry is reported to have lost several hundred thousand jobs. Those jobs may not be so easy to recover. Was this the time to be focusing intently on an inflation target?

It could be argued that the weakness in growth and employment does not matter so much. As soon as the U.S. economy recovers, demand for Mexican manufactures will pick up and disciplined Mexico will be well-placed to grow. But this view may be too sanguine. The United States has played all its policy cards, and the U.S. economy still does not look sure to recover strongly. Our own view is bearish: After U.S. consumption was stimulated by the asset price boom of the late 1990s (still continuing now in housing), the U.S. economy may now prove depressed for many years to come.

Mexico, meanwhile, has lost competitiveness, markets and jobs and needs to regain them. The central bank should be worrying less about inflation -- which a weak economy is likely, in any event, to help to contain -- and worrying more about the level of the peso, which has dropped a little in recent weeks but needs to fall further.

Another side to this is still more grim. While the technocrats have been keeping policy tight, the politicians have been fiddling. Rather than simplifying the VAT tax last year, the Congress made it more complex. The opening up of the energy sector to private investment, which is vital to medium-term growth prospects, just does not look like it's going through.

President Vicente Fox is frustrated by the opposition parties' lack of willingness to cooperate. But until they do, it is going to be hard for the Mexican economy to get off the canvas and leap to its feet.

Mexico is taking its fight against a U.S.-provoked recession seriously. But it takes more than discipline to be a winner. Some bold punches must be landed. With policy tight and reform stalled, international optimism on Mexico seems overdone. There is little sign that the Mexican economy will leap to its feet, ready to win battles in years to come. Yet that is what the country's army of poor people have been promised and need.

Inside Mexico is a weekly column in which our international economics correspondent reflects on the country in which he lives. Comments to icampbell@upi.com.