QUERETARO, Mexico, Sept. 25 (UPI) -- Mexico's peso has been falling. The central bank took measures Monday to arrest its decline. It ought not to. Why? Let us go back.
Seven years ago in a meeting in London, this writer asked Guillermo Ortiz, then Mexico's finance minister, now head of its central bank, what he would do when an inflow of capital made the peso too strong. It was a question that pleased and surprised the then finance minister.
He, after all, was in London to try to persuade investors that although the peso had lost about two-thirds of its value in the previous year, Mexico was working to re-establish itself and the country was not, despite appearances, heading for chaos.
It was a much devalued peso that was Ortiz's concern at that time, not a strong one -- although even then, the peso was showing signs of stabilizing. But a strong peso was not, it can safely be said, a concern in the forefront of Ortiz's mind.
His response was amusing and diplomatic. "That is a good question," he said, although probably thinking the opposite, "and I don't know the answer. If you do, you should tell me."
Seven years on, here is an answer, which we will come to eventually.
First, the "crisis."
The peso, the headlines tell us, is weak: "plunging," according to a Mexico City newspaper. It has fallen in recent days to about 10.2 pesos to the dollar. As recently as April, the peso/dollar rate was hardly above 9 pesos per dollar. The depreciation of the currency is therefore about 13 percent: an appreciable fall.
But this weakness is not the weakness of seven years ago, when the crisis nicknamed Tequila saw the currency fall from its fixed rate of a little more than 3 pesos per dollar to more than 9 pesos per dollar in a year.
That wasn't weakness it was the utter collapse of a previously controlled and overvalued currency that was a central part of an utterly mistaken economic policy. The weakness that the peso has experienced in recent months is nothing by comparison. It is little more, for example, than the weakness the dollar has experienced against the euro since March this year.
The peso is down because of a variety of pressures. There are the international ones, which we all know about. The U.S. stock market has been falling because President George W. Bush seems bent on attacking Iraq and because investors are beginning to take seriously the risk that the U.S. economy will fall back into recession in 2003.
Meanwhile, Brazil faces a presidential election in less than three weeks that may bring to power a government that will turn its back on the (still inadequate) reforms applied over the past eight years. And Argentina has already gone.
It is a nasty backdrop.
But in the domestic foreground, too, there is something equally nasty and more fundamental to Mexico's medium-term prospects: the fight building up between President Vicente Fox and the corrupt leaders of the corrupt trade union of the corrupt oil company, Pemex, which is central to Mexico's economy.
Pemex workers are threatening a national strike, which, if successful, would cripple economic activity in the country, reduce its export earnings, and reduce its fiscal revenues. Hardly surprising, then, that the peso is falling. The government is being blackmailed by the workers of the country's most important company.
This, as we wrote last week in Inside Mexico, is an important battle and one that Fox must try to win. The corrupt network of the unions, long backed by the former governing party, the Partido Revolucionario Institucional, cannot be allowed to survive as thirsty parasites sucking money out of the most lucrative industries of a poor country. The mafia, for that is what it is, must be beaten.
But that political confrontation is not our prime subject in this article. The question is, what should the government do with the peso at this moment of turbulence, domestic and international?
A question serves to help answer this question. What was it that helped to bring Argentina to default and huge devaluation and that leaves Brazil still vulnerable? Plunging currencies are symptoms, not causes.
For ten years in Argentina's case, from 1991 to 2001, and for five years, in Brazil's, from 1994 to 1999, the currency was fixed, firmly in Argentina, a bit more softly in Brazil, and kept at an overvalued level.
It is partly because of this that in the two giants of South America, export development and growth have been pitiful. Lack of exports, especially when combined with a strong currency that makes imports cheap, means a country is likely to open up trade and current account deficits and to need financing from overseas.
When the financing dries up, the country is left beached -- like Argentina and Brazil, today. A country that exports, on the other hand, is less dependent on foreign capital inflows and able to swim even in stormy waters.
That, to a large degree, has been Mexico's case since the Tequila crisis caused its currency to plummet in 1995. Mexico's exports, fostered, too, by the North American Free Trade Agreement, have done well -- at least, until the past two years.
Mexico has felt no lack of financing. On the contrary, with capital flowing in because of NAFTA-related investments, the peso has tended to strengthen. When it was at its strongest levels in 2001 of not much more than 9 pesos per dollar, the real (allowing for comparative inflation rates) appreciation of the peso against the dollar in the two preceding years was big, at about a quarter of its value.
Small wonder, then, that Mexico's trade position has started to suffer. Last year, hundreds of thousands of jobs were lost in Mexico's border industries. An economy that was bound to struggle when its northern neighbor was struggling fell into a recession deeper than that experienced in the United States.
A strong currency, loss of exports, loss of growth, loss of jobs: these are some (although not all) of the causes of crisis in Argentina and Brazil. Mexico would do better to avoid them.
Instead, Ortiz in Mexico's central bank appears to be focused chiefly on attaining his inflation rate target, although inflation now, at 5 percent, is not overly high. Focusing on inflation when the Mexican economy and world economy are struggling would appear to us a mistake.
Argentina, for example, as Wall Street economists used to point out in their deluded days, was a veritable star on inflation: it was deflationary as its economy, depressed by the strong peso, headed towards collapse.
Further weakening of the peso now would be no bad thing. Mexico needs exports and growth more than it needs 4 percent inflation. A weaker peso also boosts fiscal earnings in peso terms from oil exports. And, most importantly of all, some currency weakening now can help to prevent the sort of crisis Argentina has suffered and Brazil may suffer in which, following years of exaggerated currency strength, poor exports and low growth, the currency collapses -- and inflation soars.
A stitch in time saves nine, goes the proverb. Let us make up a new one for the peso: a little weakness now is better than collapse in the future.
That is our answer to Ortiz.
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