Mexico's economic crisis has deepened, and appears headed toward what a New York Times columnist described as "not merely a cleansing recession but a revolutionary depression". The fifty billion dollars in new loans which the U.S. and IMF have arranged are going just where we had anticipated -- to pay off Mexico's American and European `investors'. This is how the Times columnist Thomas Friedman described the process on March 8: "The banks are getting the dollars to pay the foreigners from the Mexica n government, and the Mexican government is getting the dollars on loan from the U.S. Treasury. That is not a pretty picture."
The picture had in fact been ugly and getting uglier for two years. No one in Washington, the Wall Street, or Times Square took notice, perhaps because people were being bled in a distant land while American banks and investment houses were taking handso me returns home. Until eight weeks ago, one read and heard nothing but praise from officials, bond czars, and media pundits of Mexico's ivy league whiz kids and its visionary "Harvard educated" president Carlos Salinas de Gortari, now retired and under cr iminal suspicion. But the chickens of greed do occasionally come home to roost. The fifty billion dollar loan has not stabilized the Mexican peso. It has continued to fall reaching record low levels this week. So the American investors who repatriate the ir money from Mexico are also hurting as they drain the remaining life out of Mexico's fallen economy. The American dollar has responded by falling to a new post-world war 11 low against the Japanese yen and German mark. Not a big deal, but an embarrassme nt nevertheless.
Therein lies Mexico's first lesson: do not keep your currency overvalued. At 3.45 to a dollar, the peso was grossly overvalued. It pleased American investment banks which were pouring money in bonds, stocks, and high yield certificates of deposit becaus e they converted profits into dollars at favorable rates. For many Mexican businesses the cheap dollar meant excellent opportunity for imports and an unfavorable export environment. So they exported less and imported liberally matching Mexico with Japan as the second largest importers of American goods. In 1994, Mexico ran an exorbitant trade deficit of $30 billion which, of course, the government financed in order to keep the peso's value to its investors' liking.
The new government of Ernesto Zedillo inherited a structural crisis. It attempted a mild adjustment by devaluing the peso by 15%. It ran counter to past practice. The Times reported, as though amazed, that American financiers were not consulted. After al l, Pedro Aspe, President Salinas' finance minister always made sure that "important New York bankers and money-fund managers ...were consulted before any important shift in economic policy."
The second lesson is an extension of the first: do not view your currency exchange rate as an indicator of economic strength. Some times it reflects the state of an economy; often it does not. In some countries like Pakistan, the exchange rate is seen as
a decisive symbol of sovereignty and healthy economy. In the last election campaign, it played an important role. Its an old habit with us. In the early fifties, India devalued. Pakistan did not. Mr. Liaquat Ali Khan and other Muslim League leaders made
much of it, speech after speech. Even the humorist poet Mohammed Jaafri wrote a poem on our presumed achievement and India's failure:
Woh but-i-seemeen badan ke dollar naam hai jis ka
Apnay sacchay aashiqon se ho gai bilkul khafa ....
In reality, India's economy was much stronger than Pakistan's at the time. Exchange rates are just that -- a medium of regulating exchange. A country must regulate it in accordance with how it needs to balance the relationship of export and import. To for
get this fundamental principle and to regulate rates of exchange to suit the proclivities of maney managers is to quote disaster as Mexico did.
The third lesson is as follows: economic planners and informed public must distinguish constantly and clearly between money and capital, mere profit seekers and investors, the consumer and the producer, between bonds and factories. Third world countrie s have sunk deeply in recent years into the morass of equating the two types of investment. The foreign money that seeks profit through buying equities, bonds, and certificates is a nomadic phenomenon. It roams in search of high yields in the so-called de regulated economies, buoys them artificially, and creates illusions of dynamism and prosperity in `hot emerging markets'. Large sums of money in small markets push up the value of existing assets, raise stock prices astronomically, create false optimism, and stimulate greedy and irresponsible leaders to pursue risky monetary and trade policies.
Simple common sense tells you that one can not run away with a factory. Very little of such money is invested in plants, and factories. Thus, from 1989 onwards $10-15 billion of foreign money flowed into Mexico annually. It is estimated that only 5% of i t went into augmenting the domestic capital holdings. At the first sign of reduced profits, or a modicum of regulation such `investors' take the money and run, creating panic, and severely fracturing the structure of economy as they did when Mexico announ ced a 15% devaluation.
Mexico is not an exception. Turkey's economy was starting to grow steadily when it rushed to become a `hot market'. Its stocks climbed up by 200 per cent in 1993. When the Islamic Welfare Party won municipal elections in Istanbul, the Turkish market p lunged 60%. That signalled Turkey's down turn. Inflation has now reached 150% annually. Gross domestic product fell more than 6% in 1994. The external debt has climbed to $62 billion. Now, goaded by IMF, it is pursuing a privatization program in order, so the government says, to pay off some debts. The architect of the policies that has brought Turkey to grief is actually the former prime minister, then president Turgut Ozal. He spent liberally and borrowed heavily disguising the debt with high yield trea sury bonds sold to foreign investors. Prime Minister Tansu Ciller has inherited a mess she is hard put to cleaning. Her rating slides down a slippery slope. "She is a national disaster", the New York Times quotes Mesut Yilmaz, Turkey's leader of oppositio n. An IMF austerity program hits, as every where, the vulnerable and poor people.
The fourth and final lesson is for those third world leaders who take pride on being popular and liked in western capitals especially in Washington D.C. If memory serves, they should recall such luminaries as Ngo Dinh Diem of Vietnam, the Shah of Iran, and Ferdinand and Imelda Marcos of the Philippines. They waltzed with the high and mighty in the west, and were described there widely and variously as nation-builders, islands in a sea of instability, men of vision and wisdom. Eventually, they were cast like used tissues -- murdered in one case, abondoned in the other instances, they buffeted about looking for a home to live, a hospital to die in.
Since power erodes memory, they might look nearer in time. It was late last year, December 7 to be exact, that the Capital's glitterati joined New York's money managers at the Washington Hilton for $400 a plate dinner to honor Carlos Salinas de Gortari . As speech after gratuitous speech extolled his "contributions to improved public policy and social welfare", Don Carlos cut a figure of complacency. After all, he was the great reformer, a `Harvard educated' visionary who had brought Mexico into the mo dern world, and crowned it with a membership in the North Atlantic Free Trade Alliance. Barely three weeks later the `thing', as Americans folks say, `hit the fan'. Soon thereafter, the entire de Gortari family was exposed to charges of theft and murder. In desperation, the former president staged a hunger strikes to save his "honor". He looked abandoned and alone without those friends he had made. His troubles are in the news almost daily but the American media does not refer to him any more as a ref ormer and visionary. Not even as `Harvard educated' -- which he is. (END)
@Eqbal Ahmad. March 10, 1995