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MEXICO

Bricia Hernndez, a 35-year-old mother of two, lives in the Valle de Chalco slum area just outside of Mexico City, home to 1 million people. One recent morning, Hernndez trudged through her dust bowl of a front yard, maneuvered past the family outhouse, and dumped an armload of school supplies she hoped to sell on a ramshackle wooden counter. To reach her makeshift shop, schoolchildren must tiptoe across a putrid, open sewer littered with abandoned tires, rat carcasses and huge green puddles of human waste.

But then they clamber up onto a brand-new cement sidewalk. It was partly paid for by the National Solidarity Program, the Mexican government's self-help antipoverty plan. Bricia and her shoemaker husband, who together earn slightly more than $400 a month, had to pay $60 for the section in front of their two-room shack.

"REAL DEMOCRACY." Chalco is supposed to be a showcase for the government's fight against poverty--it's where Solidarity was born when President Carlos Salinas de Gortari took office six years ago. But instead, it may symbolize what went wrong with Salinas' tough economic policies: He underestimated the pent-up demands of the country's poor, who account for nearly half of Mexico's population of 85 million.

The new Mexico is impatient. Mexico's poor and underemployed are no longer content with occasional handouts, such as sidewalks in the middle of slums. They're demanding major improvements in the quality of their lives. For growing numbers, that means new political leadership. "What we want is a real democracy," says Hernndez. "People don't want more of the same."

That challenge to the country's entrenched political elite is fueling tension as the Aug. 21 presidential elections approach. Alarmed by the rebels of Chiapas, whose guerrilla movement dramatized the plight of millions of poor Mexicans, the government has promised the cleanest balloting ever held. Aside from Mexican watchdog groups, hundreds of international observers will be on hand to spot any attempts by the ruling Institutional Revolutionary Party (PRI) to fraudulently extend its 65 years in power. What Mexicans are demanding, in effect, is a new deal. "The PRI has been married to the state for too long," says noted Mexican historian Enrique Krauze. "We need to become a normal democracy in every sense."

Because of that growing sentiment, the PRI almost certainly will not win a majority for the first time since its creation in 1929, and it could even lose. Top government sources, citing official polls and a new independent survey, predict the PRI will win around 43% of the vote--enough to maintain what they call "governability." But other polls show the vote more evenly split among the three main candidates, with at least one-fifth of Mexico's 45.7 million eligible voters still undecided. If no party wins outright, whoever emerges with a mere plurality will face tough negotiations to get legislation approved--unlike the current PRI-dominated Congress that rubber-stamps every Salinas initiative.

Salinas, aware that his place in history depends on a peaceful transition of power, has pledged to turn over the presidential sash to whomever wins. But if PRI candidate Ernesto Zedillo Ponce de Len, a career technocrat with a doctorate in economics, wins with less than a convincing, fraud-free margin, the opposition could protest the results and demand new elections. The guerrillas still at bay in the Chiapas rain forest also could stage violent disruptions. All of which could spell months of wrangling until a successor takes office on Dec. 1.

Such an awkward political transition could rattle Washington, which advocates greater Mexican pluralism--but fears instability. It could spell frustration for U.S. companies trying quickly to reap the opportunities offered by the North American Free Trade Agreement (NAFTA). And it means that investors also must continue to tread carefully. Although some foreigners have returned to Mexico's stock market betting on a conclusive PRI victory, others have switched en masse from peso-denominated Mexican treasury bills into dollar-denominated bills called Tesobonos, hedging against a possible devaluation of the peso.

No matter which party wins, foreign investors will discover that the next President must rule Mexico differently. A more assertive Congress will weaken his ability to dictate policy as Salinas did through the pacto, one of his biggest weapons against inflation and budget deficits. Salinas used the pacto to force business and labor to agree on annual wage and price goals. Without that discipline, labor could now push hard for higher wages, and business may demand subsidies or a slowdown in tariff reductions. "Eventually there will not be a place for the pacto in a democratic society," says economist Rogelio Ramrez de la O.

PILLAR OF GROWTH. Although this new political order may prove unsettling at first, in the long term it's essential for the country's development. Yes, the urgent need to spend more on social needs may result in a slight budget deficit of 1% or 2% of gross national product, which could put pressure on a peso that is already thought to be overvalued by some 20%.

But Mexico won't veer too far from the path that Salinas has carved out--because it can't. NAFTA is locked in, and foreign investment is universally acknowledged as a pillar of growth. None of Mexico's leading parties is advocating a return to the antiforeign days of old. In fact, with finances tight, Mexico may be forced to take its reforms further, raising cash for its social spending by opening new investment opportunities to foreigners in such sensitive industries as electricity, oil, and broadcasting.

By addressing some of the pain inflicted on groups ranging from small business owners to farmers to workers, the new order could set the stage for a more stable Mexico over the long run. All three main parties have pledged to build more schools and health clinics, especially in under-served rural areas. They all call for major spending on such job-intensive infrastructure projects as highways and low-cost housing. Government incentives would stimulate creation of new industrial zones for small-scale manufacturing plants in the country's poorest states, such as Chiapas. Funding for the Solidarity program would be dramatically increased.

RAGTAG ARMY. But before the economy can recover from slow growth (charts) and achieve a stable new course, both domestic and foreign investors will have to be convinced that Salinas' successor can manage. "We're expanding our office and increasing our exposure in Mexico, but it's all contingent on a favorable outcome to the elections," says one foreign banker.

Just eight months ago, few would have dreamed that the PRI could face any danger of losing. Salinas was celebrating NAFTA's approval and was preparing to join the Organization for Economic Cooperation & Development (OECD), the club of industrialized nations. Then came the Chiapas rebellion, in which the masked Subcommander Marcos led a ragtag army of some 2,000 Indian peasants.

Because of that revolt--and the shock accompanying the murder of PRI presidential candidate Luis Donaldo Colosio a few months later--Mexico has undergone dramatic political reforms. Among them: the naming of six prominent, nonpartisan citizens to run the Federal Electoral Institute, which oversees elections. "Democracy is essential for the economic development of Mexico," says Santiago Creel Miranda, 39, a prominent corporate lawyer who is one of the six citizen overseers.

Some of the businesspeople who have struggled to keep pace with the government's economic reforms also think the country's political class needs to take a dose of its own medicine: competition. "It's like free enterprise--you need competition in politics and government, too," says Hermann Mergenthaler, 32, who employs 50 people at a family-owned fiberglass molding company and nautical equipment distributor in Mexico City that has $1 million in annual sales.

Mergenthaler says Salinas' accomplishments in taming inflation and opening markets were good for Mexico but so painful that now it is time for a softer approach. Four years ago, for example, Mergenthaler's company had to stop manufacturing fiberglass boats when imported watercraft grabbed most of the market. More recently, lower tariffs have flooded Mexico with Brazilian-made Mercedes-Benz buses, drastically reducing the market for Mexican-made buses that he supplies with fiberglass parts. "Small businesses like us are really hurting," Mergenthaler says. He hopes the next government will lower interest rates so he can invest in more modern equipment.

"ARM-TWISTING." A microcosm of how Salinas' policies have brought progress--but at a cost--is the state of Aguascalientes. Located in Mexico's geographic center, the state has attracted impressive levels of foreign investment by advertising itself as a business-friendly environment "where there hasn't been a labor strike in 30 years," as Governor Otto Granados Roldn proudly notes. But the reason labor dissent doesn't exist is because it's not allowed. "Sometimes a little arm-twisting is in order," says one state official.

The strong-arm tactics are applied to the political opposition as well: When the Party of the Democratic Revolution (PRD) organized a rally in Aguascalientes for opposition presidential candidate Cuauhtemoc Cardenas in May, they found that the 15 buses they had contracted to bring in the party faithful were suddenly unavailable. Telephone service to a radio station was cut just when Cardenas was scheduled to participate in a call-in talk show.

Most foreign investors are unaware of the opposition's complaints: All they see is an apparently stable investment climate. Nissan Motor Co.'s state-of-the-art auto-assembly plant, built at a cost of $1.2 billion, today employs 5,000 and exports finished vehicles to Japan. Dozens of other industries have set up shop: Izod golf shirts and clothes for GapKids and Dillards Department Stores are made in town. Xerox Corp. has a huge plant manufacturing copiers and fax machines, and Texas Instruments Inc. produces integrated circuit boards.

The new factories have turned Aguascalientes into a boom town, attracting tens of thousands of workers from other states to the slums around the city. Priest Francisco Ibarra has seen the number of slum inhabitants more than double, to 20,000, during the past four years. Overall, wages are a bit higher than in other parts of Mexico. "But what they've done is create two Aguascalientes--one of the haves, and one of the have-nots," he says. There are only two telephones for those 20,000 slum dwellers. And though huge, low-cost housing tracts are going up on nearby hillsides, few slum residents could pay a mortgage.

STINGING INDICTMENT. So Ibarra has been handing out flyers urging his parishioners to vote. At first, they asked him: "Why should I bother to vote, if the PRI always wins?" Now, says Ibarra "they're telling me that maybe this time, their vote could make a difference--that maybe the outspoken guy with the beard could win."

That "guy with the beard" is Diego Fernndez de Cevallos, 53, presidential candidate for the center-right National Action Party (PAN), who soared to the top of opinion polls in May after a stunning performance in the first televised presidential debate ever held in Mexico. Thirty million Mexicans watched as Fernndez, a skilled criminal lawyer, issued a stinging indictment of Salinas' policies, which former Cabinet minister Zedillo helped implement. Turning to Zedillo, Fernndez said: "We know you're a good boy who got good grades, but your plan has left 40 million people in poverty." Mexicans had never seen a PRI candidate so publicly skewered.

Fernndez, known as "El Jefe Diego," or "the Boss," virtually disappeared from the campaign trail in July, perhaps taking time to reflect on what a PAN victory might mean. Party sources say he is all too aware that he might be hamstrung as President, forced to negotiate support from the PRI on almost all policy issues, and dogged by opposition from the left-leaning PRD.

MYSTERIOUS BREAKDOWN. If elected, Fernndez would likely continue along much the same economic path as Salinas, and he has said he might keep some of the same key Cabinet members to reassure the business community. In fact, the PAN might go further than the PRI could in some cases: Fernndez has said he favors privatization of part or all of Pemex, the national oil monopoly.

Cardenas, the 60-year-old son of legendary President Lzaro Cardenas, has run a largely lackluster campaign as the PRD's candidate. Back in 1988, Cardenas staged an independent run for the presidency. Many Mexicans believe he actually won the vote: Government computers mysteriously broke down on election night, and Salinas was proclaimed the winner, with 50.3% of the vote. Since then, Cardenas has done several about-faces on policy matters and now supports the broad principles of NAFTA and privatization. "The country's circumstances have changed, and our priorities are different now," Cardenas explains during a campaign stop in the small town of Matehuala, in San Luis Potos state. But he still believes in greater state control over industry and wants to renegotiate parts of NAFTA.

Even if Cardenas isn't likely to win, his campaigning in places such as Matehuala has helped spotlight urgent needs. Standing at a makeshift podium on the back of a truck, Cardenas tells a crowd of around 1,000 poor campesinos that Mexico needs more jobs. A group of women who had traveled an hour from their village to see Cardenas couldn't have agreed more. Their village is virtually empty of men, who have all left for jobs on the border or in the U.S. Laments Elida Torres, 29, a divorced mother of four: "The boys leave school, and there's no work."

Few would argue that Zedillo, 42, with a doctorate in economics from Yale University, is underqualified to run the country's finances. But he may lack the political skills that Mexico's next President will need to balance fiscal and social concerns. He is an awkward campaigner whose speeches drone on and on with dry, 10-point programs of action for every conceivable issue. "I agree that he comes across as a technocrat, a real nerd," says one top party official. "But no one doubts that he has concrete proposals to solve the country's problems."

No matter which man wins, the broad outlines of Mexico's future economic course are largely charted. What will change, however, is the pace and manner with which the government pursues its strategy. "There's a remarkable consensus on what the agenda of the next administration should be," says Delal Baer, director of Mexico studies at the Center for Strategic & International Studies in Washington. "The macroeconomic house is in order, and now, there will be more emphasis on the micro." In her view, that means significantly more investment for social feeds such as education and health, and on infrastructure such as roads, ports, and telecommunications.

The trick will be to spend more on these programs without aggravating inflation, pressuring the peso, or discouraging foreign capital flows. In short, to keep the Mexicans happy at the same time that foreign investors are happy. The government cannot pay for all its social and physical infrastructure needs while maintaining a balanced budget. That reality alone will deter a post-Salinas government from turning inward and engaging in such old-style tactics as nationalization of assets.

"UNAMBIGUOUS." Quite the opposite, the Mexicans are likely to attempt to attract more foreign investment into restricted sectors. Mexico has received $81 billion in capital inflows over the last three years, but only $15 billion was in direct investment. "We have to open up to foreign investors in a more unambiguous way," says economist Ramrez. That means liberalizing foreign investment laws to afford more protection to minority investors and allowing greater investments in such industries as cement, glass, banking, petrochemicals, and air and road transportation.

In the end, what the August elections represent is a search to find a new balance as the country enters a second, crucial stage of its dash for prosperity. Even if the PRI wins, the country will never be the same. Mexico is undergoing "twin transitions toward an open economy and a competitive, pluralistic political system," says a senior Clinton Administration official. "If Mexico can pull this off, it will be one of the great international success stories of the late 20th century." That's why the task of building a new democracy--brick by brick--is one in which the U.S. and the world at large have a vital stake.

IF PRI'S ZEDILLO WINS:

ECONOMICS

Mastermind of Mexico's budget surplus, Zedillo will continue on same track, going ahead with privatizations and wooing foreign investment.

POLITICS

For first time ever, PRI will not have a rubber-stamp Congress. Legislation will require compromise.

SOCIAL ISSUES

Zedillo will pump more resources into the Solidarity program and into infrastructure projects in poorest states.IF PAN'S FERNANDEZ WINS:

ECONOMICS

Will continue free-market reforms, but may be less rigid in their application. Sensitive to foreign investors.

POLITICS

Prospects of gridlock fairly high. May enjoy brief honeymoon period, but ultimately will have trouble pushing legislation through congress.

SOCIAL ISSUES

Will pay more attention to the poor, but some worry that the devout Catholic will usher in a conservative, perhaps intolerant, era.

DATA: BUSINESS WEEK

IF PRD'S CARDENAS WINS:

ECONOMICS

Cardenas believes in greater state involvement in business and

industry. Wants to renegotiate parts of NAFTA. Foreign investors would be

skittish.

POLITICS

Legislation would be actively blocked by the PRI and PAN alike, creating legislative gridlock.

SOCIAL ISSUES

Would spend more on the poor, even if that risked aggravating inflation.

Geri Smith in Mexico City, with Elizabeth Weiner in Aguascalientes and Elisabeth Malkin in Matehuala


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