Mexican economist and member of his country's lower house of
Congress, the Chamber of Deputies, was guest speaker on 21 January 2000
at a forum organized jointly by The Development GAP and the Economic
Policy Institute at the Mayflower Hotel in Washington, DC.
Before
he entered the Congress, Carlos served as an official in the Ministry
of Finance, worked with grassroots organizations in Southern Mexico, and
ran the international program of the Mexican NGO Equipo PUEBLO. While
at PUEBLO, he worked at The Development GAP in Washington, informing the
U.S. public of Mexican perspectives during much of the NAFTA debate.
Carlos
was in the States in January representing Cuauhtemoc Cardenas of the
Party of the Democratic Revolution (PRD) in a forum organized in New
York by Chase bank to enable investors and credit-rating agencies to
hear the economic perspectives of Mexico's major presidential
candidates.
Carlos spoke at the Mayflower on a range of issues
related to the Mexican economy and political process. The following is a
transcript of his presentation.
The State of the Mexican Economy
Let me start by putting on the table a central
thesis: I think, and my party thinks, that the economic strategy that
has been in place for the last 18 years is not delivering for the
majority of the people in Mexico. The structural adjustment policies and
trade liberalization policies have sharpened inequality and income
disparity in Mexico. These policies have benefitted only a small circle
of economic agents of corporations, mostly those already connected to
the international economy, to the detriment of the majority of micro and
small and medium businesses, workers and the average Mexican citizen.
So when people say that the fundamentals are sound, that the economy is
performing well, the relevant question up front is for whom? It reminds
me of the saying by our Brazilian friends, when people describe the
macroeconomic outlook in Brazil as working very well, they say the
Brazilian economy is doing fine, it's just most Brazilians that are
suffering.
The same stands true for Mexico. You look at the
macro picture and you say, well, inflation is under control, the current
account deficit is manageable, the fiscal and monetary policies are
disciplined, exports are growing, and so forth, but then when you break
down growth into different sectors, you find that it's only the economy
connected to multinationals established in Mexico that is growing. In
fact, you may find negative growth when it comes to Mexican companies.
When you look at the export sector, it's basically the subsidiaries of
multinationals that are exporting, intra-firm trade mostly to the United
States. It is not the Mexican companies that are prospering along this
path. That is the number one challenge for economic policy in Mexico:
how to generate sufficient jobs for the 1.35 million new entrants into
the labor market every year.
All three major candidates say in
very general terms they want to fight poverty, they want to fight
inequality, and they want to support policies that will incorporate all
Mexicans into the alleged benefits of globalization. But when it comes
to the compatibility of objectives and policy instruments, the
differences arise. I believe that we have for too long neglected our
domestic market. I believe a top priority of economic policy today in
Mexico should be to take a look at what has happened to the domestic
market, not only because of the lack of linkages to the export sector,
but also because the purchasing power of most Mexicans has been reduced
in a drastic way. The general minimum wage has fallen for 18 years with
only a couple years' exceptions. The minimum wage in Mexico is now about
$4 per day, which is 13 times less than that of the United States. The
imbalance between those workers who that earn the minimum wage and those
in the top echelons has grown enormously. To give you an example of the
disequlibrium between wage earners and how much the president makes, in
Mexico, President Zedillo makes 127 times the minimum wage. According
to my own calculations, President Clinton makes about 14 times the
minimum wage in this country. So the imbalances in the Mexican economy
have sharpened, have grown, in a very important way.
As you all
know, Mexico has a very difficult fiscal outlook because the burden of
the banking bailout on the economy is enormous. According to one of the
credit rating agencies, Standard and Poors, the amount of money that has
and will be devoted ultimately to the banking bailout now exceeds $100
billion. That's 18.6 percent of Mexican GDP. So you can calculate the
yearly interest on that amount, and in Mexico we have had a stable real
rate of interest above seven percent. That is considered a contingent
liability, which means it is not formally and officially public debt,
but it represents a burden on the budget. Why? Because the PAN and the
PRI passed legislation that forces the Congress to allocate funds for
the banking bailout every year. Every year, when we vote the budget in
December, we have to approve a certain amount of money just to pay the
real interest component of these liabilities. This means that money is
taken out of social expenditures and is allocated to pay, ultimately,
private liabilities with public funds. That's basically the equation
we're looking at. It's ironic, our party has been labeled as a statist
party, people who advocate a greater role for the state, but we are the
only party that has advocated a market solution for the banking bailout.
The other two parties said, no, no, no, we need public funds to pay for
this. We said, let the market solve it. But of course we're talking
about enormous conflicts of interest and complicities here, so they have
gotten away with it so far. Anyway, whoever's president in Mexico after
December 1, 2000 will have to address this issue, because it is
basically taking away the money for other purposes, not only, but mainly
for social expenditure. And we'll have to debate a new way to approach
this.
We have a very strange situation regarding the banking
sector now. Even after all of these subsidies, "subsidies" is a sinful
word. There are no subsidies for tortillas, but there are subsidies for
the banks. Of course, when you allocate subsidies for the banks, you
call that support for healing the financial system, you call that
productive investment, but when there are subsidies for tortillas, that
is an economic sin.
The irony now is that the banking system is
basically dysfunctional. Bank lending has collapsed; it has almost come
to a halt, so the Mexican economy is working without banks. What's the
mystery behind this? All big companies are funded from abroad, from
their headquarters or from international capital markets, while Mexican
companies are eating up their working capital or are not paying their
suppliers, or are borrowing but to a much lesser extent than before
because the rates are unbearable. So how can you have growth in an
economy that has no banks? The answer to that is the dual economy that,
once again, has become a major problem in Mexico. The fact is that only
certain sectors of the economy are growing, while the domestic economy
is depressed.
This fiscal fragility is also emphasized by the
fact that most wage earners can not pay taxes because they don't have
enough income to even survive. The middle class is therefore crunched
because monopolies earn many privileges, and wage earners do not have
enough income to pay taxes, so the government has derived its fiscal
income from the middle class. Multinationals pay taxes in New York or
Tokyo or Stuttgart, but not in Mexico, so even if you have ever greater
investment coming into the country, that doesn't translate into greater
fiscal income for the government.
Since the 1995 crisis, we have
had a currency flotation system, so supposedly, theoretically, the peso
does not become undervalued or overvalued, it just floats freely
according to the market, but in practice, right before the election, the
peso becomes overvalued. Now, once again, the peso, at least for those
of us who come from border states, is overvalued, the dollar is
extremely cheap. People along the border are going to the supermarket in
San Diego or in Brownsville and not in Tijuana or in Matamoros, because
everything is cheaper in the U.S..
Many Mexicans tend to
associate the end of a six-year term with an abrupt peso devaluation.
Zedillo, of course, has said that it will not happen this time. Let me
remind you that we have had five consecutive crises at the end of every
six-year presidential term, because of this periodic overvaluation of
the peso, devaluation at the beginning, overvaluation at the end. We had
a major devaluation in ‘76, then we had the collapse of the financial
system and the privatization of the banks in ‘82, we had the stock
market collapse in ‘87-88, and then we had what was labeled the
"December mistake", the big peso crisis of ‘94, so, although most
international investors are saying it's not going to happen this time,
we tend to be quite careful because of the prior history of the end of
presidential administrations.
The Pattern of Trade
Let me move quickly to trade. The Mexican
economy has experienced a surplus in its bilateral trade with the United
States in recent years, although we have had a deficit in the overall
trade balance. People say that when you have a trade surplus that means
that NAFTA is good. And if you have a trade deficit, then NAFTA is bad.
The real reason for the growth in Mexican exports has been the growth of
the U.S. economy. There are some studies now that are trying to
identify how much of the growth of Mexican exports can be attributed to
the growth of the U.S. economy, and the correlation is very, very close.
So even without NAFTA we would have had an expansion of exports. The
problem is that those exports are not coming from Mexican firms but
mostly from multinationals and foreign corporations established in
Mexico. So the pattern of our foreign trade doesn't necessarily spell
benefits for the overall Mexican population, but only for a small
circle.
The maquiladoras account for 53 percent of total
exports. The pattern of trade has evolved around that kind of exports.
The overall economy is not really integrated into this exporting
pattern, only a small fraction of companies. The assessment of NAFTA
differs by who conducts it. The Mexican Chamber of Deputies, the lower
house of Congress, has just published a review of six years of NAFTA
which establishes how NAFTA has accelerated the imbalances between the
export sector and the rest of the economy. It also describes how Mexican
agriculture has suffered under trade liberalization policies.
I
don't know that the report will be adopted and endorsed by the full
House. It is the product of the work of the Commerce Committee. This is
the first time in Mexico that the legislature has come out with a
sharply different and even opposite assessment of what the Executive
branch is saying about its trade policies and the results of our trade
agreements.
This is especially important in light of the
agreement that Mexico has just reached with the European Union and the
beginning of conversations with Japan about another trade agreement.
Although the design of those trade agreements is different than NAFTA,
the economics behind those agreements are basically the same. So what
does the report of the Commerce Committee emphasize? It again points out
that trade liberalization sharpens structural inequalities and income
disparities in the Mexican economy. This is unequivocal.
A Second Look at Privatization
Finally, let me say a couple of words about
structural reforms, about the privatization of the energy and
telecommunications sectors, because they are probably the last slices of
the cake that are still left in the hands of the government. The
investors (in New York) asked a lot about that. They're looking at PEMEX
(the national oil company) and the Comision Federal de Electricidad
(the power company) as the next companies to be privatized. We still
don't have an independently conducted investigation about the impact of
privatization in Mexico.
But when even the World Bank is taking a
second look at privatization of power facilities in other countries, we
should take second look at the intention of privatizing ours. Why?
Basically because in Mexico the process of privatizing the banks became
an enormous burden for taxpayers. Even now, we have debates in the
Congress about the fact that President Zedillo wants us to give the
green light to the conversion of those private contingent liabilities
into public debt, and what we say up front is, "You want us to convert
private liabilities into public debt, so make all the information
public. If this is to become public debt, then we have to know who
benefited from the banking bailout." But they say no, no, no, you
convert it into public debt, but we won't give the information. The
information is confidential, secret," so that's one more contradiction.
The same thing happened with the toll roads. We privatized many roads,
or the operation of them, and now we're bailing out the companies that
built those roads. So, the lesson is not only that you must have
transparency, accountability, and good regulatory bodies before you
privatize parastatal companies, but also the answer to the question,
what is the purpose of privatizing? Is it only to raise money? To tackle
the fiscal crisis? Or is it a restructuring of the economy to benefit
only a handful of people?
That's a debate that inside Mexico
hasn't even gained full strength, and outside Mexico it is taken for
granted that privatization is good. It supposedly serves the people, it
serves taxpayers, but that hasn't been the case in our country, at least
in those two cases that I just mentioned, and in the case of the phone
company, at least for local service, we have been paying monopoly rates
for the last nine years.
Resolving the Banking Crisis
What has to happen to resume bank lending, to
bring down interest rates? That is a key question that all the campaigns
are being asked. We need to push forward the institutional reforms, the
words that I have repeatedly put on the table -- transparency,
accountability – which are nonexistent now. The investors want a new
bankruptcy law, a new law to guarantee credit so that the banks will be
able to retrieve their money in case the borrower defaults. We don't
have that kind of law in Mexico, and under the current legislation we
had 20, 25 years of stable credit, a very low rate of non-performing
loans, but they say that that is essential to the resumption of credit.
We
also need to increase competition inside the banking system. We don't
have competition, or really very little competition. Foreign
subsidiaries are entering the market, but they work with enormous
margins. So there is bound to be a profound restructuring of the
financial sector that includes those measures to introduce
accountability and competition. As I said in the beginning, we are the
ones advocating the institutional measures that should make markets
work, because the Mexican economy operates according to ologopolistic
rules rather than market rules. Doing away with crony capitalism is a
hard job and it is one of the main challenges facing the Mexican economy
and the candidates that are running for president.
Let me just
finish this round and open it up to the floor by saying that the
conventional wisdom on Mexico could be proven wrong once again.
Investors are basically betting on a Labastida victory and on no crisis
at the end of the six-year administration and they're very upbeat about
it and they're saying that it won't happen this time. I just told them
that knowing our own history, knowing our political and social
volatility, knowing the fragility of the Mexican economy to external
shocks -- you tell me when the next external shock will happen on Wall
Street, or a downturn in the U.S. economy -- I wouldn't bet on permanent
stability for Mexico. The outlook I think is difficult because although
the macroeconomic picture may look different from that of 1994, the
structural problems have not been tackled. They're there, and unless we
have a totally different approach to economic policy, a totally
different strategy, those problems will knock on the door and say we're
still here. Don't forget about that the fact that you have 92 percent of
households with a monthly income of below $500. I will cut here and
thank you for your attention.
The Political Opposition
[Among the three principal presidential
candidates] the main difference is that Cardenas is putting the emphasis
on the domestic market, on the internal situation in Mexico, and the
other two candidates are basically saying we need to go along the lines
of economic globalization. Fox is saying, I'll do it with honest
government officials, as opposed to the PRI government officials. We are
saying there needs to be a shift in economic strategy because the
current economic strategy is unsustainable. And that shift is, to begin
with, not to let domestic economic policy exacerbate the problems
created by the process of economic globalization. So our economic
strategy is centered on the needs of the domestic market. The other
economic strategies are centered on the demands of international
investors, basically.
As for an alliance of the opposition, I
was on the negotiating commission for the PRD in October and November.
We had many meetings with the other parties in the opposition, eight
political parties. The PAN and the PRD are the two major parties, but
there are six other smaller parties. And we couldn't come to terms on a
unified candidacy. Even though we have important differences in the
economic platform that I have just outlined, people agreed that a PAN
government with the social component that the PRD introduces into the
overall picture would be a better government than that of the PRI, or a
PRD government with the PAN component would also be better than a PRI
government. I do believe that, that even though we have important
differences in our economic platforms, the fact of opening up the
political space is essential to introduce accountability in the Mexican
economy, to introduce transparency in the markets, and then to
discussing and settling our differences.
The problem right now
is that in Mexico the sense of the vote doesn't necessarily translate
into policy shifts. In 1997 we had a mid-term election, a congressional
election in which the opposition combined got the majority, but that
didn't translate at all into a policy shift. So the challenge here is,
what do we do now? The polls show Labastida in the lead, then Fox and
Cardenas trailing behind them. There are still five and a half months to
the election and many things could happen. Had anybody said in December
1993, in a few days there's going to be an Indian uprising in
southeastern Mexico, then the PRI presidential candidate is going to be
assassinated, then the party secretary general is going to be
assassinated as well, and then there will be a maxi devaluation of the
peso, he or she would have been accused of being nuts. The control of
the PRI over the electoral process is not as tight as it used to be in
the past, but the machinery is still working extremely well. In the
House we have tried many times to introduce what we call "locks" on the
budget, mechanisms of control for government spending not to be used for
partisan purposes, but the Senate has systematically blocked that. So
the government and the PRI are going to use whatever they can to grab
their hold on power.
Come the end March, the beginning of April,
there's going to be a lot of pressure on the opposition candidate that
is below in the polls to step down in favor of the other candidate. It
wouldn't be possible to do it formally, because the ballots will be
printed by then and the time to do that ended on December 10, 1999. We
could have, although I think it's extremely unlikely, a de facto
alliance of the whole opposition. I see that the two major opposition
candidates are going to go until the end, and I don't anticipate that
there will be a de facto alliance. I'm just saying that there's a remote
possibility that we cannot discard, and I think that basically Fox,
prior to the November 7 PRI "primary" believed that he could win on his
own, and after November 7, when the PRI didn't split, Fox is having
second thoughts about his ability to win on his own, so he's coming to
talk to Cardenas to discuss a de fact alliance, although I sincerely
don't think it will happen.
"Protecting" Mexican Agriculture
While it hasn't been noticed much yet, the
Mexican Congress just established a 30 percent tariff on imports of
basic grains that surpass the NAFTA quotas. That means that all corn
imports from the U.S. that exceed the agreed-upon NAFTA quotas are
charged a 30 percent tariff. Let me tell you that all of the parties
voted for that. There's a lot of pressure from the basic-grains small
farmers because corn growing has basically collapsed in Mexico. The
government didn't really oppose it, and all three major parties voted
for it.
When people use the word protectionism, I always feel
tempted to ask for a specific definition of what protectionism is. And I
think we have a lot of protectionist measures in the Mexican economy
beginning with corporations and bankers. They are the ones who have
enjoyed the highest degree of protectionism. I'm not referring to trade;
I'm referring to the kinds of policies that are implemented in Mexico.
As I said a few minutes ago, when you allocate public funds to pay for
private liabilities, it is called a wise financial decision, and when
you allocate funds to pay for tortillas, it's called bad economics.
The
rural population in Mexico still accounts for 25 percent of the total
population, and, apart from commodity exports, our family farms, our
peasant agriculture, have been totally abandoned. The flood of imports
of basic grains has ravaged the countryside, so the corn growers are
here instead of working in the fields of Jalisco, of Chiapas, Estado de
Mexico, which are the largest corn producers. The design of agricultural
policy that has been followed in Mexico is basically that it is better
to harvest dollars than to harvest food for our own consumption. So the
areas of agriculture that are being supported are those that help us
earn foreign exchange or that help the corporations established in
Mexico to run their business. We do not have a strategy anymore to
ensure our basic needs in terms of food supply. We do not have a
strategy to support our domestic producers; that has been abandoned. So
even if people call it protectionism, we think we should restore that.
The problem is that the provisions in NAFTA put a lot of obstacles in
the way, and that's why we envisage a different kind of agreement.
A
lot of people in the Ministry of Agriculture complain about the fact
that agricultural policy is decided at the Finance Ministry, so they
cannot even undertake the strategies that have been designed by
agricultural producers.
NAFTA
What we're saying regarding NAFTA and all trade
agreements is that we need trade agreements that serve the overall
economy, that serve the different sectors of the economy, not agreements
that are not only geared to serve a handful of people. How is that
done? Well, you know about Seattle, you know about the ongoing debate
about introducing labor rights, environmental issues and especially
migration into the trade agreements. Of course you can say that that
will not fly in the U.S. Congress. There's no way that the U.S. Congress
is going to accept in the near future the renegotiation of NAFTA or the
inclusion of provisions to address migration issues inside the
agreement. But the latter is a proposal that is being put forward by
Cardenas. Manpower is still our main export. Hundreds of thousands of
Mexicans migrate northward every year to look for jobs, and yet that is
not considered inside the trade agreement. So we're not pushing for an
overall renegotiation of NAFTA; we're pushing for the inclusion of those
issues inside the agreement.
Cardenas is not proposing to kill
NAFTA, he is proposing to include labor rights and migration inside the
agreement. Whether that's possible depends a lot on what's happening in
the United States. NAFTA is a fact of life, we don't like it, we
proposed a different kind of agreement. We still think we need a
different kind of agreement, but we don't have the political force, nor
do I see it in this country (USA), to kill NAFTA.
Mexico's Trade with Its Southern Neighbors
Mexico's total trade with Latin America is
almost insignificant. We have trade agreements with Chile, Bolivia,
Nicaragua, and Costa Rica, and we're in the process of ratifying a trade
agreement with the triangle of northern Central America (Guatemala,
Honduras and El Salvador), but total trade with Latin America right now
does not exceed 5 percent of Mexico's overall international trade. So
the decision to associate with the North was explicitly saying that the
Mexican economy should not be associated with the South but with the
North. Pedro Aspe, the former Minister of Finance, said that explicitly.
The Costa Ricans, for instance, have complained that our government
applied to them the same tactics that the U.S. government applied to the
Mexican government. So they do see that those imbalances are imbedded
into the different agreements that Mexico has reached with Latin
American countries, but I don't see that the pattern of Mexico's trade
will change any time in the near future.
The only thing on which
Latin American governments are unified is to demand access to the U.S.
market. I don't see any united force saying, let's put together a
coalition of countries to the south of the U.S.-Mexico border -- Latin
America and the Caribbean -- and establish a firm, solid alliance to
look after our own interests. I don't see it in the WTO; I don't see it
in regional trade agreements. The presidents in Latin America still
believe that their major achievement will be to gain access to the U.S.
market. I said repeatedly here in Washington, and I say it again now,
that most Latin American countries believed that Carlos Salinas would
become their best ambassador to pry open the U.S. market to their
products, and they ended up realizing that Salinas had become the best
U.S. ambassador in Latin America.
Privatization and PEMEX
Regarding the privatization of PEMEX [the
public oil company], our party stands for the energy sector staying
under the control of the state, but a democratized state that is
accountable to its people. We don't want a company that is just used for
the benefit of a bureaucracy, be it the union bureaucracy or the
government's bureaucracy, but we do need to use our energy sector as an
engine for the development of the economy, which we haven't done. PEMEX
is seen as a source of fiscal revenue for the government. About 32
percent of the government's fiscal revenue is derived from PEMEX, from
oil exploitation and from the different taxes and contributions that
PEMEX pays to the federal government. The price of gasoline in Texas is
54 percent of the price of gasoline in my home state [Tamaulipas], for
example, because there are many taxes attached to every liter of
gasoline that is dispensed at the pump.
We need to introduce
mechanisms of accountability and we need to stop sacrificing PEMEX as a
source of forced revenue for the government. The government hasn't
wanted to move forward with a thorough fiscal reform. There are too many
tax havens concentrated in a few hands, all cronies of the PRI, or
corporations that enjoy monopoly status in certain sectors of the
economy, like cement and local telephone service and television
companies. Cuauhtemoc Cardenas has declared a number of times that he
and the PRD welcome private and foreign investment in new plants. He
believes that the existing facilities should stay in the hands of the
state, but, especially in power generation, he has welcomed private and
foreign investment in new plants.
Let me tell you that no
candidate, not Fox, not Labastida, has proposed privatizing PEMEX or the
electricity company. They don't dare say it, even if they wanted to,
because that would bring them a lot of problems. Fox is accused of
coming to New York and saying, I'll privatize oil, and when he is asked
about that in Mexico he always says that he has been misquoted.
Public Debt and the Bank Bailout
The hidden debt in the
Mexican economy is enormous. The total public debt, according to
official figures, is only 23 percent of GDP. When we include the
contingent liabilities of the banking bailout, plus the investment
projects that have been financed by the private sector and ultimately
have to be paid for by the government, plus the cost of restructuring
the pension system, we reach a figure of 55 percent of GDP. This is a
staggering figure. Mexico's GDP is about $500 billion. So you're talking
a total debt of half of that. Servicing that debt is an enormous strain
on the economy. It drains a lot of resources that would have been
devoted to other purposes.
Now, the debt results in a very
difficult fiscal outlook. The current account deficit is growing again.
It has not reached the levels of ‘94, but the trend is there for it to
grow. The Ministry of Finance says that the forecast for 2000 is about a
15 billion dollars current account deficit, and they say that 70
percent of that is financed through foreign direct investment. In that
sense, it's under control. We've heard that line before.
With
the overvaluation of the peso, of at least 10 percent, I think we're
going in the wrong direction. Now again, that only makes the Mexican
economy all the more vulnerable to external shocks. Although Larry
Summers engineered the ‘95 bailout for foreign investors, for foreign
companies, for Mexican investors, I don't see the likelihood this time
of any external rescue. And the path that our Administration has taken
is that they'll just transfer the cost to taxpayers, to most Mexicans,
who did not benefit from those loans but are still paying them.
The
government and especially the Banco de Mexico, which is now autonomous,
say that there cannot be under or overvaluation of a currency when you
have a free flotation. But in practice, we see otherwise. I think that
we should have a competitive exchange rate. What we have now is a
"dirty" flotation in the sense that the exchange rate tends to be
overvalued at the end of a six-year term. That serves the purpose of
luring the votes of the middle class, people who may be not very
numerous in demographic terms but are significant in terms of still
remaining purchasing power. So I think the issue of capital controls is
not on the table now, but it could be if we have another external shock.
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