Inside Mexico: Snow and the bright future

By IAN CAMPBELL, UPI Chief Economics Correspondent

QUERETARO, Mexico, June 14 (UPI) -- De mortuis nil nisi bonum (About the dead speak only good) is a Latin expression. It might be adapted to apply to U.S. Treasury secretaries visiting Mexico. About the neighbor's economy say nothing but good. But "nothing but good" about either a deceased person or an economy risks leaving the truth unsaid.

U.S. Treasury Secretary John Snow's visit was to celebrate the end of Mexico's "Brady Bonds." The bonds, first issued in 1990 and named after a former U.S. Treasury secretary, Nicholas Brady, were part of a rescue operation for distressed Latin American debt. The distress had begun years before, in August 1982, when Mexico, always a pioneer, said that it would be unable to make a debt payment. Other Latin American countries followed Mexico into default. The promising 1970s had ended badly. The debt crisis lingered through the 1980s.


Mexico was the first of the Latin American countries to begin to emerge from it. Its Brady Bonds, all $36.9 billion of them, were the first to be issued. They were to be repaid by 2019. Instead they have been repaid by 2003. That is a success. And so Snow was in Mexico City, in the presence of Mexican President Vicente Fox, Finance Secretary Francisco Gil Diaz, International Monetary Fund Managing Director Horst Koehler and World Bank President Jim Wolfensohn, to, in his own words, "formally recognize the resilience of the Mexican economy... as it has finished repaying these debts ahead of schedule, and is clearly on a path to a bright future."

A bright future? Yes, one day. But at present that day looks as though it is moving further away.

How much is Mexico achieving? The early repayment of its Brady Bonds constitutes a shift in its standing as a debtor. With its debt payments now under control Mexico has been able to issue fresh bonds in recent years on far better terms, paying less interest. It has used the proceeds of the new bond issues to retire Brady Bonds early. This is sensible debt management, taking advantage of reasonable credit fundamentals, and no more than that.


Snow pointed to other Mexican achievements since 1990, "floating its exchange rate, opening markets, privatizing enterprises, resolving its banking crisis and strengthening its financial sector, as well as providing a sound fiscal and monetary framework." These achievements are less clear cut.

Yes, the exchange rate was floated early in 1995, in the midst of profound crisis, and that was a good thing. But it is less of a good thing that the real (inflation adjusted) exchange rate has appreciated significantly in the past four years, in part as a result of deliberate government policy, because that stronger exchange rate is costing Mexico exports, growth and jobs. Just as in 1994, before the so-called Tequila crisis, Mexico is using exchange rate policy to help get inflation down.

Yes, markets have been opened and companies have been privatized, but not enough and not well. Telmex, the telephone company, was privatized badly and given a near monopoly. Its tariffs are high, robbing Mexicans of disposable income and harming the country's competitiveness, and its service is poor. Telmex's regulatory regime must be changed. There is no sign of that happening.

And privatization has not reached the heart of the economy, the oil and gas sector, which remains dominated by Pemex, the state-run oil company notorious for its inefficiency, corruption and high prices. The Pemex monopoly is being left largely intact, greatly damaging Mexico's growth prospects.


Yes, the banking sector has been rescued from crisis, with foreign banks moving in and purchasing their troubled Mexican counterparts. But foreign ownership of the banks has not yet greatly improved banking in Mexico. Total credit continues to stagnate and interest rates on loans continue to be extortionate.

Yes, it might be said that the fiscal and monetary framework is "sound," in that there is no crisis and the government's deficit is under control, but this leaves a number of sins concealed. The government still depends heavily on the oil sector for tax revenues and has failed with its efforts to bring in new sources of revenues from taxation. If the world oil price falls heavily, as it well may do soon, Mexico's government finances will be stretched. And even now, with oil prices high, the poor level of government revenues, at just one fifth of gross domestic product, and much wasteful government bureaucracy, means there is not nearly enough money available for education -— which is appallingly weak, Mexico's greatest obstacle to progress, and, again, not being tackled -- and health care.

What is there to salute in Mexico other than early repayment of debt?

Much vaunted is Mexico's "stability." But it is not stability that creates jobs, raises incomes, alleviates poverty, but growth, and of that there has been precious little.


"Growth has accelerated in the 1990s to double the average rate of the decade before," Snow said. Indeed, Mexico grew at an average rate of just under 4 percent in the 1990s, with, as Snow said, trade opening resulting from the North American Free Trade Agreement providing much of the impetus. Yet the NAFTA is routinely decried in the Mexican press for the supposed damage it has done to the economy and Fox is nervous of attempting further opening.

The growth, meanwhile, has gone. In 2001-2002, with the U.S. economy slowing, Mexico has grown by just 0.6 percent in total (by less than 0.3 percent per year.) That means a historical failure is continuing. In the past twenty years Mexican GDP growth averaged little more than 2 percent per annum, not much more than population growth of 1.8 per cent per annum. In the past ten years (1993-2002), growth averaged just 2.7 percent per year. Annual growth per capita, often seen as a measure of whether the standard of living is rising, comes down to a very poor average of 0.9 percent per year. And growth prospects in 2003 again look poor.

Neither growth nor jobs (nor education nor health care) are being brought to a population that desperately needs them. Mexico is not advancing, it is stagnating. Economic policy in Mexico does not deserve praise at all. It isn't working.


Part of the blame lies with the politicians: those in power, for failing to establish their priorities and going about achieving them; and those in opposition, for doing everything possible to stand in the way. But blocked the reforms are -- thoroughly blocked. In two and a half years of Fox, none of the main economic reforms he hoped for -- and he didn't aim high, such as targeting the privatization of Pemex -- have been passed.

In areas where political obstacles are not the problem and the government does have control of policy the picture is not better. Gil Diaz and the independent central bank have focused not on growth and jobs but on achieving a stable (ergo strong) exchange rate and reducing inflation. Wednesday the finance minister spoke of achieving "the inflation (rate) of the most developed countries." Well, of course, if Mexico has "converged" and has a sub-2 percent inflation rate like the United States, its population will be wealthy like Americans, won't they?

"We are heading towards the first world," said the former Argentine president, Carlos Menem, a decade ago as his stability, based around a strong exchange rate, was preparing the way for a huge loss of competitiveness, recession, and eventual collapse and default on debt. A few thousand miles to the north, Mexico has looked on and appears to have learned little.


It is competitiveness, growth and jobs that matter -- not a point off the inflation rate, bought with recession. And over time stability itself depends on growth and progress, without which the much cherished strong exchange rate and low inflation will go up in the smoke of crisis.

In private it is likely that Snow voiced some concerns. Koehler, often direct, did so publicly, pointing to the need for reforms. But for now in international circles politeness prevails about the Mexican economy. "Conservatively managed." "Fiscal discipline." "Stable."

Yes, so stable it might be dead.

Inside Mexico is a weekly column in which our international economics correspondent reflects on the country in which he lives part of the time. Comments to [email protected]

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