[Congressional Record Volume 141, Number 20 (Wednesday, February 1, 1995)]
[Senate]
[Pages S1869-S1871]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                      THE MEXICO CRISIS IN CONTEXT

  Mr. BRADLEY. Mr. President, anyone attuned to the news over the past 
6 weeks has been subjected to a daily barrage of articles and 
statements on Mexico's economic crisis. We read of devaluations, 
floats, and market slides. We hear of lines of credit, loan guarantees, 
IMF programs, and conditionality. We follow the daily barometers of 
President Clinton, Secretary Rubin, Majority Leader Dole, and 
Congressman Leach.
  What we have not been getting, however, is an adequate sense of the 
social and political context for Mexico's troubles. But Mexico is not 
just an economist's case history. Mexico is a country, with people and 
history. Unless we understand how the current financial crunch grew out 
of and, in turn, affects Mexico's political and social dynamics, we 
will not be capable of developing a response that works for Mexico or 
in the Congress for us.
  The financial dimensions of the Mexico problem are well understood. 
Like many developing countries--such as the United States in the 19th 
and early 20th centuries--Mexico imports foreign capital to finance 
growth. However, because of its relatively low domestic savings rate, 
Mexico's appetite for foreign capital is exceptionally high. In a 
sense, Mexico is similar to the United States in the 1980's, financing 
investment from the savings of foreigners. In 1994, for example, Mexico 
imported a net $28 billion in foreign capital, 8 percent of its GDP.
  Less than half of that $28 billion was invested in productive assets, 
such as plant and machinery. The rest was volatile portfolio 
investment, known with justification as hot money. What made this money 
even hotter was the fact that much was invested in short-term debt that 
matures in bunches. As a result, the Mexican Government must find the 
resources to redeem or rollover around $52 billion in debt in 1995.
  Mexico, like any other country, can attract capital from abroad only 
as long as investors remain confident that the return compensates for 
the perceived risk. This requires investor confidence in Mexico's 
economic, political, and social stability. It also requires relatively 
high interest rates, declining inflation, and a stable currency--in 
other words, relatively high return for relatively low risk.
  The Salinas government in the late 80's cut their internal budget 
deficit by the equivalent of three Gramm-Rudmans. Inflation plummeted, 
privatization exploded. Protectionist barriers and government subsidies 
came tumbling down. Mexico pursued a strong peso policy both as an end 
in itself and as a symbol of the new Mexico. This led the Salinas 
government to resist the economic forces that threatened to push the 
peso down and, in the short run, it was successful.
  Just over a year ago, the North American Free-Trade Agreement came 
into force and gave a huge boost to investor confidence in Mexico. 
However, on the very day NAFTA took effect--January 1, 1994--the 
Zapatista revolt began in Mexico's Chiapas State. That revolt was an 
attack on democratic forces from the left. Thus began a year in which 
social and political, as well as economic, events undermined investor 
confidence in Mexico. As the year unfolded, we witnessed the 
assassination of the ruling party Presidential candidate, and the 
assassination of the ruling party secretary-general amid allegations of 
involvement by party dinosaurs. These were attacks on democratic forces 
in Mexico from the right.
  At the same time, the peso came under increasing economic pressure as 
the PRI-dominated Government turned on the fiscal and monetary taps for 
the elections to win the first really contested election in Mexico's 
history.
  There was another joker in the pack, one the Mexican Government could 
not control. That was the Federal Reserve's decision to raise United 
States interest rates. The higher yields made American securities more 
attractive relative to Mexican securities. Because a high percentage of 
the capital flowing into Mexico came not from banks, as in the 1970's 
and 1980's, but from mutual funds and pension funds, the impact of 
higher American rates was magnified.
  According to a study by Guillermo Calvo, professor of economics at 
the University of Maryland, much of the mutual fund money that flowed 
into Mexico came more as a response to lower interest rates in the 
United 
[[Page S1870]]  States than as a result of a profound understanding of 
Mexican economic fundamentals. When interest rates rose in the United 
States during 1994, this money was ready to bolt out of Mexico.
  So, when the Zapatistas moved again last December, jittery foreign 
investors began converting their money into dollars and taking it out 
of the country. Mexico's foreign reserves melted away. The Government 
botched the resulting peso devaluation. The markets smelled fear, and 
the rout was on.
  Governments and international financial institutions, viewing the 
problem as a liquidity crunch, have prescribed standard fiscal and 
monetary responses, which are designed to reduce domestic consumption 
and make exports more competitive by lowering real wages. In other 
words, the economists are prescribing recession to reduce the demand 
for foreign capital.
  That is why the economists oppose political conditionality so 
strongly. For inserting a requirement that Mexico's wages rise in line 
with productivity or that Mexico try to repeg the peso at 3.5 to the 
dollar destroys the economic underpinning for eventual recovery.
  However, the economic cure ignores Mexico's political and social 
context. It ignores both the pacto which lay at the heart of the 
Mexican model, and the new social pact upon which President Zedillo 
based his legitimacy.
  Ernesto Zedillo was elected head of state of a country exhausted by a 
decade of economic reform--three Gramm-Rudmans in a matter of 4 or 5 
years--and hungry for justice. He took over a population unwilling to 
continue to sacrifice for the benefit of others.
  Zedillo promised the Mexican masses a share in the prosperity bought 
with their sacrifice. He promised more open politics and an overhauled 
justice system. He promised a secondary education to the 45 million 
Mexicans under age 19. In short, unlike Boris Yeltsin in Russia, he 
promised his people a vision.
  However, Zedillo's vision threatened old-line entrenched interests in 
Mexico. It threatened an end to the old PRI-government gravy train. 
Since Zedillo does not head an old-style Leninist party, he lacks the 
brute party power of his predecessors to override opposition and 
implement his vision. In fact, he is presiding at the time when a 
regime is in greatest danger, the time when it tries to reform.
  The only way to square the circle is economic growth, not just the 5 
percent necessary to create a million jobs a year, but enough to spread 
the benefits to the masses and at the same time buy off the party 
dinosaurs, who would like nothing more than to regain their subsidies 
and deny the people a real voice. This growth was the instrument 
promised by NAFTA. It is the instrument which the crisis has taken out 
of Zedillo's hands. Having lost the instrument, Zedillo will be hard 
pressed to restore the vision.
  We see the erosion already. Chiapas is active. The opposition PRD 
party has taken new life. As have the PRI dinosaurs. For example, when 
President Zedillo concluded a pact with three opposition parties that 
would have removed the PRI Governors of Chiapas and Tabasco States, who 
won disputed elections, the Governor of Tabasco brought his supporters 
into the streets. When President Zedillo was scheduled to announce the 
new social compact, the industrialists and labor leaders balked, 
forcing him to cancel a nationwide TV address and reveal the extent of 
his obligation.
  This, then, is the context for the loan guarantee debate. How can the 
Mexican Government negotiate the fine line between financial meltdown 
and social-political meltdown? Let me suggest a few guidelines.
  First, the United States needed to act quickly to shore up Mexico's 
financial system. The President has acted because the Congress delayed. 
If Mexico's financial system collapses, there is no hope of generating 
the needed growth, now or in the future. The President's support 
package is not to bail out Wall Street, or even individual American 
investors, but to give Mexico the chance to grow into social and 
political stability and become an even better market for American 
exports that create American jobs.
  If Mexico's financial system collapsed because the Americans reneged 
on a promise--if having announced the $40 billion loan guarantees, the 
administration was unable to deliver anything--we would have put at 
risk a decade of changing Mexican attitudes toward the United States. 
We would have confirmed Mexico's traditional anti-Americanism that is 
now latent, but still lurks just beneath the surface.
  Now we have a support package, we have a support package. But that 
package only buys time. It is up to the Mexican Government to put that 
time to work to generate popular support for the continued sacrifices 
necessary to overcome this financial setback.
  So the second step must be for the Mexican Government to return 
decisionmaking on Mexico's economy to Mexico City. The Mexican 
Government must develop, announce, and implement itself a plan to pull 
Mexico through the crisis and prevent this problem from happening 
again.
  That plan must not simply prescribe recession as the cure for 
Mexico's current account ills. It must hold out a way to grow and 
reduce the risk of hot money at the same time. Otherwise, Mexico is 
consigned to a continuing cycle of recession and currency crisis--
social crisis and economic crisis.
  To grow without generating a crisis, Mexico must finance more of its 
growth itself. That means the Mexican Government plan must increase 
Mexico's savings rate. The Asian dragons, for example, enjoy sources of 
domestically generated capital resulting from savings rates twice as 
high as Mexico's.
  The Government plan must also encourage foreign direct investment 
over portfolio investment. Investment in productive assets both implies 
an understanding of the underlying fundamentals that reduces volatility 
and is more difficult to pull out with a panicked phone call.
  There are many ways to do this, as countries as diverse as Chile, 
Indonesia, and Thailand have shown. Capital controls, however, are not 
an option. The means to shift the balance in favor of foreign direct 
investment must increase the integration of the Mexican economy, not 
its isolation.
  It should be clear that this plan cannot be dictated by Washington. 
No Mexican Government can allow Washington to load up support with a 
wish-list of conditions and still generate the popular support required 
to carry it out. If we need a support package to make the economic plan 
work, we need a clean package to let the economic plan work.
  Third, and finally, the Mexican Government must broaden its 
legitimacy among the Mexican people. Only democracy or dictatorship 
will see Mexico through the sacrifices President Zedillo will be asking 
of his people. Mexicans who are asked to sacrifice for the good of the 
system will also want a say in that system. Zedillo made an important 
statement with his four-party pact to open up the political system, but 
may be backing away in the face of resistance from the dinosaurs. That 
simply cannot happen.
  There are those who say that we can contain the fallout if Mexico 
goes belly up, that, despite dire predictions of systemic risk, this is 
a problem, not an emerging market problem. Mexico's crisis results from 
the market's misjudging of the balance between risk and reward in 
Mexico's financial markets, this argument goes. An investment that was 
profitable in, for example, the Philippines 2 months ago should still 
be profitable.
  I ask unanimous consent for 1 minute.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. BRADLEY. Unfortunately, our vulnerability is deeper than this. 
Many emerging markets have gotten out of control and are due for a 
readjustment. Investors have been blinded by high returns in many 
developing countries.
  Thus far, outside of Mexico, investors are merely chastened, not 
panicked. We can expect to see a sounder evaluation of the risk-reward 
trade off that will play out over time. But, if Mexico melts down, we 
could well see the bubble burst in a global withdrawal from emerging 
markets. We and our OECD partners are not equipped to handle a 
worldwide panic that would produce a collapse in the fastest growing 
export market we now have and, prospectively, the biggest source of 
continued worldwide growth.
  [[Page S1871]] So it is not only investors and developing countries 
who should view Mexico as a wake up call. We in the OECD and the 
international financial institutions must begin now to put in place the 
institutional arrangements to handle the next Mexico. The United States 
simply cannot be the permanent ad hoc lender of last resort.
  The current Mexico faces a long road as it pursues democratization 
and economic reform. During the NAFTA debate, we heard why Mexico's 
success is important to us in the United States. We need a stable, 
democratic and prosperous neighbor to our south for reasons of our own 
stability, democracy, and prosperity.
  Nothing that has happened since December 20 has changed that 
calculation. We cannot turn our backs on Mexico, and Mexico cannot lose 
faith with itself.
  Mr. GRAMS addressed the Chair.
  The PRESIDING OFFICER. The Senator from Minnesota [Mr. Grams].

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