There is a distinct sense of deja vu in the arguments that are emerging on Capitol Hill regarding congressional approval of the $40 billion loan guarantee package to Mexico following its recent peso devaluation and associated financial crisis. The same battle lines were drawn and arguments rehearsed only 18 months ago during the NAFTA debate.
Then, as now, the WIFA (What's In It For America) is: substantial net job gains; a decline in immigration from Mexico; hemispherical strengthening for trade and political relations; the strategic importance of Mexican political stability for the United States; and so on. The current crisis has given some of those who opposed NAFTA to call for U.S. withdrawal from the agreement, and others to say "We told you so." Once again, President Clinton has been obliged to focus his attention primarily upon the laggards in his own party, as Newt Gingrich so delightedly pointed out last weekend.
Like NAFTA, this rescue package is critically important both economically and politically for Mexico and for the United States. Comments such as those of Jesse Helms, who claimed that the Mexican government is corrupt and taking advantage of the United States, or of the banker who referred to the scheming of "Latin liars" are ill-informed and unhelpful. Indeed, international bankers, more than anyone else, were well-aware several months ago that financial crisis was waiting to happen.
It was inevitable for three reasons: First, Mexico's foreign reserves (the money available to pay back loans and investments as their due date came up) had declined severely during 1994, to an estimated low of $5.5 billion. Second, most analysts in the United States recognized that the peso had become substantially overvalued (by 15 percent to 20 percent). Third, Mexico was running a continuing trade deficit that was not being put to rights. Added to all this, investors were getting jittery because Mexico had become overly dependent for its foreign investment upon short-term bonds, offering attractive earnings but with short turnover (rollover) periods. This is a highly vulnerable strategy because once confidence in the economy ebbs, investors withdraw their deposits, and this places a direct drain on the level of foreign reserves.
Although the crisis was inevitable, Mexican governments handled it poorly. I say governments, plural, because President Carlos Salinas de Gortari should have taken the hit and devalued before handing over to President Ernesto Zedillo Ponce de Leon on Dec. 1. Unlike in transitions in the recent past, President Salinas kept a firm grip upon economic and political power, and refused to engage in any "slate cleaning" exercises, thereby denying his successor a clear run into the presidency.
Nor, when it came Dec. 15, was the actual devaluation and aftermath well-managed. Treasury Secretary Jaime Serra had denied that a devaluation was imminent, only to devalue the peso formally by 15 percent two days later. That enraged international investors who had expected the costly relationship they enjoyed with former Treasury officials to continue, and who had probably anticipated some form of "managed" adjustment in which their help would be sought. The lack of consultation meant that they pulled the plug, intensified the loss of confidence, and contributed to throwing Mexico into a financial tailspin.
The peso was allowed to float (and devalued by 40 percent); interest rates were raised; and early this month the Mexican stock market saw 12 percent shaved off the value of stocks in two days. Well before Christmas, Jaime Serra had been sacked, and the new finance chief, Guillermo Ortiz, had begun the process of financial shuttle diplomacy to New York and Washington, in which he sought to win back and reassure investors and to win support for the package. This is where we are now.
So, there is some justification for U.S. chagrin that it should be obliged to step in and support its new trading partner only a year after embarking upon the venture. But it is also important to understand what is being offered here. This is not a bail-out loan, but a massive government-led loan guarantee program designed reassure investors that: a) the United States is totally committed to free trade with Mexico and has confidence in that nation's future, and b) future investments will be underwritten with copper-bottomed guarantees (as though they were in dollars). In short, it replaces one kind of debt relationship with another that is more secure. It was modeled on a similar $10 billion package offered to Israel. It will not add to the U.S. debt.
It is important that people in the United States also be realistic about what sort of package can be negotiated. Mexico will probably have to accede to U.S. demands that it offer oil revenues (a little over $8 billion in 1994) as collateral. But it will be quite counterproductive, and Mexico will balk at any attempt in the United States, to seek to tie the package to privatization of the state-owned petroleum enterprise (PEMEX) or to an anti-migration "militarization" of the U.S. border.
If it is approved by Congress, this package will help the United States and Mexico politically and financially. Financially, for Mexico, it will stabilize investment, reduce the outflow of capital and encourage fresh investments. It will reassure the stock market. It will allow President Zedillo to proceed with his economic adjustment package, which includes measures requiring major sacrifices in Mexico. (This includes a 7 percent cap on wages, while inflation is expected to rise to between 20 percent and 30 percent in 1995.)
Economically for the United States, the package will reassure investors, for whom the prospects are potentially very good in the medium and long term. It will facilitate existing as well as new manufacturing and commercial ventures in Mexico. It will secure the estimated jobs in the United States that depend directly upon producing goods and services for the Mexican market.
Politically, too, the United States will remain secure in its newly formed Northern Hemispherical relationship, which will now be able to flourish, albeit somewhat more slowly in the next year or two. Long-term immigration pressures will continue to decline as employment opportunities grow in Mexico, and as wage differentials narrow.
In the Mexican political sphere, there are also crucial benefits deriving from this package. President Zedillo needs economic recovery so that he can continue and intensify the political reform program that will ultimately be the acid test of his mandate. The crisis has exposed both the opportunities and the vulnerabilities of the democratization and political reform program in Mexico. On the positive side, it has increased the political space and room for maneuver of opposition parties from whom Mr. Zedillo must seek support for his economic package. This crisis has underscored the importance of strengthening democratic institutions. It will help moves toward greater autonomy for the states and local governments in Mexico. It will also strengthen the position of the reformers within Mr. Zedillo's own party, the PRI.
The dangers, of course, are that economic collapse in Mexico could bring about a reversal of the political opening that Mexico has embarked upon in recent years. Specifically, the old hard-liners in the PRI could gain ground and resist internal reforms. Hard-line technocrats could sideline the wider political and electoral reform agenda and the government could resort to repression in order to maintain a fragile stability that would be unsustainable. In this way, the volatile spiral of economic crisis leading to political crisis, leading to economic crisis would begin. That would be a disaster for the political aspirations of the Mexican people. It would also be a strategic and economic disaster for the United States. That is why it is so important that this package be approved swiftly by Congress.
Peter Ward is a professor in the department of sociology at the Lyndon B. Johnson School of Public Affairs, at the University of Texas at Austin, where he also directs the Mexican Center.