Not for the first time, the U.S. will have to do whatever it takes to rescue Mexico from financial crisis. Our neighbor to the south is once again convulsed by a run on the peso caused by profligate economic policies designed to ease domestic unrest. And, once again, the government is forced to respond with austerity measures punishing to a huge worker-peasant class that has seen its real earnings diminish despite increasing industrialization.
But that is not Mexico's only problem. As a medium-sized Third World nation that shares a 2,000-mile border with the world's richest, biggest, market, its position is truly unique. And awkward. Just this past year, with the North American Free Trade Agreement in force, it replaced Japan as America's second-largest trading partner (Canada is first). Yet for all the hoopla over NAFTA, seeds of trouble were sprouting as rising U.S. interest rates made Mexico a less attractive haven for short-term investors -- those whose money fed a growing Mexican hunger for imported goods.
The result was the build-up of an unsustainable current account deficit (imports and foreign debt payments less exports) that in turn triggered the December panic that forced the new government headed by President Ernesto Zedillo to let the peso float down to two-thirds of its former value. Now, with an inflation threat rising, the government is frantically trying to hold down wages and prices in an attempt to reassure all those investors who have taken a multi-billion-dollar hit.
As the Yale-trained Zedillo tries to attract investment by selling off major government assets and permitting foreign ownership in Mexican banks (hitherto unthinkable in a fervently nationalist country), the United States is heading an international rescue effort highlighted, for the moment, by an $18 billion line of credit that includes $9 billion of U.S. government funds and $3 billion from the U.S. private banking sector. First market reaction indicated this may not be enough.
If that is the case, even more substantial support will be in order as a matter of vital U.S. security interests. This nation cannot afford to have a collapsed Mexican economy that could lead to political upheaval, vastly increased illegal immigration pressure and the short-circuiting of hopes for hemispheric prosperity and stability.
The Reagan administration had to come to Mexico's rescue in 1982 and 1986. While these crises are testimony to the inherent weakness of Mexico's one-party system, the Clinton administration is wise to calm the financial waters while urging social and political reform.