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Now, For Mexico's Next Miracle: Democracy


Economic Viewpoint

NOW, FOR MEXICO'S NEXT MIRACLE: DEMOCRACY

As the ritual of Mexico's presidential election moves closer, the tightly

controlled political and economic program of the government of Carlos Salinas de Gortari is in danger of unraveling. Until now, the superstars in the Cabinet remained on their best behavior while the trophy of the presidency awaited bestowal.

But the democratic impulses unleashed by the peasant insurgency in Chiapas have changed all that. From now on, with democracy on the horizon, there are easier and more tempting roads to the presidency. Foreign Minister and peace negotiator Manuel Camacho exploited the unique visibility he received while negotiating with the insurgents to depict himself as the democratic alternative. Although he has decided not to make a run for the presidency, foreign investors are asking themselves anxiously how much of the Mexican miracle is irreversibly in place. Fortunately, most Mexicans seem to feel that the package of reforms are good and are there to last.

The Salinas administration has performed impressively in four areas:

-- Budget stabilization. Debt, whether domestic or external, is no longer an issue. A strategy of a broadening of the tax base, lower tax rates, and better compliance did the trick. Privatization has helped the budget with revenues and cuts in subsidies. The private sector is now allowed to enter areas of infrastructure projects normally reserved for government.

-- Competition. Deregulation and liberalization have created a modern, competitive economy. As the North American Free Trade Agreement opens the door to more trade, Mexican business efficiency is bound to rise sharply. Access to foreign capital and technology reinforces the productivity gains. Most important, the opening spreads a business culture that rejects government interference--and to be competitive internationally, government has to get off business' back. The internationalization of the Mexican economy has set loose this force irreversibly.

-- Public service. The creation of an efficient and accountable public sector is under way--no mean feat in a country where graft is an art form. Customs administration is a case in point. Overnight, the Treasury Ministry fired the entire staff, replacing them with new, well-paid, motivated officials. On the spending side, government has also been retargeted from big public spending to an antipoverty strategy with demonstrable social, economic, and political results.

-- Job retraining. Modernization of agriculture and education will ultimately turn Mexico into an economy capable of adapting to changing trends in world markets. But no quick results should be expected, because the country starts far behind. The shift to productive commercial agriculture will displace millions of farm workers in 10 years rather than 50, as was the case in advanced economies. The challenge will be to turn these people into productive industrial or service workers.

Impressive though it is, the Salinas program has two flaws. Demands for wide-open democracy are increasingly heard from within as well as from without. Supporters of reform and technocracy deplore the approaching demise of a political setting that made breathtaking change an almost daily event. Those who insist on democracy now counter that there is never a good time for political transition. They argue that sweeping political freedom must promptly take the place of one-party rule and corporatism.

Another problem is that the overvalued peso has become a growth inhibitor, and the current-account deficit is uncomfortably large. Election-year spending will boost growth but worsen the trade deficit. Perhaps foreign capital, encouraged by NAFTA, will finance the gap. But what happens after that? The peso overvaluation isn't going to go away, and growth by fiscal stimulus won't last forever. High interest rates will progressively deteriorate the quality of bank credit. Here is a time bomb ticking.

Mexican officials assure their citizens and the world of continuity in policies and personnel. All is well, until further notice! But it would be a mistake to believe that the successes of the six-year Salinas term coming to an end can simply be repeated. There is no one in sight with the leadership potential of Salinas. Carrying the Institutional Revolutionary Party stamp of approval is scarcely a substitute, nor is flamboyance or economic populism. Having taken great strides over the past six years in a politically easy setting, Mexico will now have to practice good economics on the much rougher terrain of open politics.

Of course, economic reform can be far more successful if it runs somewhat ahead of political reform. Reform goes nowhere in young, unstable economies in which no one can afford to take the long view. Russia and Brazil have made that clear. In Mexico, the reforms in place surely create the preconditions for a stable, centrist democracy. Even if it comes earlier and more haphazardly than the Establishment had planned, Mexico is well-positioned for democracy. In any event, who can stop it?RUDI DORNBUSCH


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