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High Hurdles Await Zedillo


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HIGH HURDLES AWAIT ZEDILLO

Blanca Estela Morales was pleased. The 34-year-old housewife from the sugarcane-growing town of Jojutla had voted for Ernesto Zedillo Ponce de Len for President. Now, her man, candidate of the long-ruling Institutional Revolutionary Party (PRI), was the winner of a hard-fought race few thought the PRI would win so decisively. But Morales wants to see Zedillo get right to work solving Mexico's deepest problems. "They need to create more jobs," she says. "They can support small shop owners and help companies to mechanize. There's money to do it."

That combination of optimism and impatience is what President-elect Zedillo faces as he is catapulted into Mexico's driver's seat. When he takes over the reins from President Carlos Salinas de Gortari on Dec. 1, he'll be launching the second phase of Mexico's massive modernization. Painful as it has been, Mexicans voted to continue their makeover from a protected economy into an open, trade-oriented nation, tied to the U.S. Despite a nasty recession and a growing gap between rich and poor, apparently there was no going back.

COMPROMISE. That news drew sighs of relief from Mexico City's bolsa to U.S. boardrooms. Despite an unprecedented flurry of political poll-taking, no one really knew just how Mexicans would feel after a tense year of rebellion, assassination, and lousy economic performance. The Mexican stock exchange perked up 3.5% since the election, and analysts predicted it would climb another 20% by yearend. The peso, weakened a bit by preelection devaluation jitters, rose, too, to 3.33 pesos to the dollar. U.S. companies with stakes in Mexico dusted off expansion plans, which had been put on hold pending the election outcome. Says Howard M. Dean, CEO of Dean Foods Inc., a Franklin Park (Ill.) food company: "It's good for us. We're just going to increase [sales] in Mexico as fast as we can."

But if economic reform emerged unscathed, the necessity of political reform was the election's strongest message. For this was like no other election in Mexico's history, generating an unprecedented 75% voter turnout. Never before had the PRI been forced to run so hard or been so scrutinized for election fraud. So while the PRI won nearly 50%, the strong showing of the center-right National Action Party (PAN), with 27% of the vote, along with the smaller, 17% vote for the left-of-center Democratic Revolutionary Party, added up to one of the largest opposition votes ever.

That vote will give the PAN, at least, some clout in a more plural congress. Although the PRI kept its wide majority in the Senate and thin one in the Chamber of Deputies, it will now have to compromise on legislation--something it never had to do in the past. Whether Zedillo, who never held elective office before, has sufficient political savvy to cut such deals is yet to be proven.

What's more, the Yale University-educated economist will be fully challenged getting Mexico's economic balance just right. Salinas leaves his protege with an impressive ledger book for the macroeconomy: single-digit inflation, low public debt, and many successful privatizations. But Salinas is also criticized for cutting too close to the bone, helping to create a new class of billionaires in Mexico as millions got left out of the economic miracle. "Some of the administration's policy gaps were large," says Roberto E. Batres, who heads Arthur D. Little Mexicana consultants.

Now, the big challenge will be to engineer growth. Zedillo's brain trust is well-equipped to help with the fine-tuning. Among his closest advisers are stars of the Salinas cabinet who could be reassigned to the new one, including Jaime Serra Puche, currently Trade & Industrial Development Secretary, and Guillermo Ortiz, the Finance Under Secretary overseeing the opening of Mexico's financial markets to foreign banks and brokerages. Some speculate that current Finance Secretary Pedro Aspe may be named to revamp Pemex, the hugely inefficient state-owned oil company, as a first step toward partial privatization of the monopoly. Although their policies have been criticized as lacking in compassion, their presence would reassure investors at home and abroad. And Zedillo could name a prominent figure to head up the social portfolios to mollify critics.

Already, a few small signs of health are emerging. After nearly a year of recession, the economy expanded by 2.2% in the first half of 1994. Although much of that growth was turbocharged by a 28% boost in preelection spending, a slow recovery may be in sight. More than a dozen foreign banks have applied to operate in Mexico, which will help reduce borrowing costs. And now, with political uncertainty waning, direct foreign investment should rise. Nonportfolio investment was up 25% during the first half of this year, vs. 1993's first half.

The trick will be to make sure more Mexicans get a piece of the action (table). Zedillo must start with jobs, say economists. Job training and education are crucial for the 1 million Mexicans entering the workforce each year. The government also can help smaller companies upgrade manufacturing as they meet importers head-on. And in areas where Mexico could have a competitive advantage under the North American Free Trade Agreement, such as auto parts, construction supplies, and agroindustry, the government "must target several that can serve as locomotives for growth," says Jonathan E. Heath, economist at Macro Asesoria Economica, a Mexico City think tank.

NURTURING. Another sector ripe for change: the maquiladoras. Fewer than 2% of components for these factories are supplied by Mexican companies; most come from U.S. suppliers. Arthur D. Little's Batres figures Mexican suppliers could provide up to 25% of components, worth $2.5 billion a year. All it would take is low-cost, government-backed loans to improve distribution and marketing. But free-market purists in the government nixed the notion when Batres proposed such a program.

Such free-market orthodoxy may be softened in the new sexenio, or six-year term. To pay for new programs, Zedillo, a fiscal conservative, will have to overcome his revulsion for deficit spending. He has already pledged to boost spending by 0.8% of gross domestic product next year. That translates into a deficit of 2% of GDP, hardly enough to throw the economy off course. And with many companies sinking under NAFTA, Zedillo will have to begin nurturing some industries. Some possibilities: tax incentives for research-and-development spending and job training to help move Mexico away from sweatshop employment.

With so many pressing problems, Mexico's new President won't get much of a honeymoon. Not only will he have to justify his supporters' optimism, but he also must overcome the skepticism of citizens who voted against him. Mara del Carmen Surez, 42, who runs a stationery store in a poor neighborhood on Mexico City's outskirts, is convinced Zedillo "will improve things only for himself and for Mexico's 24 billionaires." It will take Zedillo's economic skills, plus his as-yet-undemonstrated political skills, to prove Surez wrong.

HOW ZEDILLO COULD MAKE MEXICO GROW

DECENTRALIZE

FEDERAL POWER

Turn over more tax revenue to the country's 32 states to stimulate regional growth

BOOST ASSISTANCE

TO INDUSTRY

Offer low-cost financing for smaller companies to upgrade technology and give tax incentives to larger ones for R&D

REFRAME EXPORT POLICY

Encourage exports in areas in which Mexico has a competitive advantage, such as auto parts, agroindustry, construction materials, and textiles

SPEND MORE ON INFRASTRUCTURE

Invest in projects such as highways, schools, and hospitals that create jobs and improve social conditions

INVEST IN HUMAN CAPITAL

Spend more on education and job-training programs to prepare for higher value-added jobs

INCREASE COMPETITION

Give the antimonopoly commission more teeth to break up unfair trade practices and encourage competition

DATA: BUSINESS WEEK, MACRO ASESORIA ECONOMICAGeri Smith in Mexico City, with Elisabeth Malkin in Jojutla


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