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The Fall Of Carlos Salinas


International Business: MEXICO

THE FALL OF CARLOS SALINAS

On Mar. 10, a short, balding man boarded the corporate jet of his godfather, a Mexican tortilla baron. The doors closed, and the plane took off into the northern sky carrying its passenger to what appeared to be a lengthy exile in the U.S.

The unceremonious departure probably marked the end of the remarkable political career of Carlos Salinas de Gortari. During a six-year term as President of Mexico, Salinas emerged as a courageous economic reformer and an impressive new leader on the world stage. His savvy use of the far-reaching powers of Mexico's imperial presidency combined with an innate understanding of international politics and a finely honed sense of public relations made him a world figure at 40. Now, his drastic fall from favor, coming on the heels of his country's economic collapse, has left many wondering what went wrong.

The answer is probably bound up in the riddle: Who was the real Salinas? The Harvard University-educated economist who dazzled the world with his bold privatizations and market openings? The visionary who co-created the North American Free Trade Agreement? The passionate advocate who convinced nearly everyone that Mexico was capable of leaping from grinding Third World poverty and backwardness to First World prosperity? Or was Salinas the consummate Mexican politician who latched on to the idea of economic modernization merely to allegedly enrich himself and his cronies through the lucrative sell-off of more than 1,000 state-run companies--a man not above engaging in deals with murderous drug traffickers and corrupt party bosses?

What can be said is that Salinas as President took Mexicans on an extraordinary ride that brought them tantalizingly close to developed-world status. In his race to reach that destination, though, he committed errors that will dog Mexicans for years to come.

Salinas' sudden decline closely parallels that of the Mexican economy. Both seemed imbued with such natural promise, such dynamism, such capacity for change. But when the collapse came, people realized Salinas' long-running success story had been a mixture of illusion and reality. "It was all smoke and mirrors," grumbles one foreign banker.

But such anger ignores real accomplishments. Salinas snapped Mexico out of its protective shell. He dragged the economy a long way toward modernization. He pushed Mexico into world markets. And, at least for a time, he put Mexico's long-antagonistic relationship with the U.S. on a far better footing.

Still, Salinas' humble exit calls into question Washington's handling of its increasingly intimate relationship with Mexico. It is becoming clear that the Bush and Clinton Administrations, intent on winning congressional NAFTA approval, did their best to downplay the extent to which some high-level Mexican officials may have been involved in drug trafficking and corruption. There are also indications that U.S. Treasury Dept. officials failed to act on warning signs that the Mexican economy was headed for trouble in 1994. As a result, the U.S. has somewhat blindly hitched its economy to one that will require emergency assistance for a protracted period. And even if the Clinton Administration's $52 billion rescue package steadies Mexico's finances, the upheaval that has been unleashed by the peso crisis could last for years.

SILVER SPOON. Salinas talked the Americans' lingo so well that they tended to forget he was deeply rooted in the Mexican power structure. His father, RaPound l--a former Cabinet secretary and contender for the presidency himself--was also a businessman who with political allies had extensive interests ranging from car dealerships to corn-flour processors. As Commerce Secretary, he followed an age-old tradition of representing this group's interests in government. He brought up his sons to run different sides of the family's affairs. Carlos would stay above the fray and pursue politics. RaPound l would run the finances. Speaking of father RaPound l's efforts to keep Carlos away from the money trail, one source jokes that "the old man wouldn't even let him have a bank account."

His father taught Carlos the art of Mexican dealmaking by introducing him to the country's political elite. Indeed, at Carlos' baptism, the two godfathers were Roberto Gonzlez Barrera, whose jet carried the ex-President to exile, and Carlos Abedrop, a powerful banker and former chairman of Mexicana Airlines. Another friend, an in-law of Gonzlez Airlines Barrera, was Carlos Hank Gonzlez, Salinas' wealthy Agriculture Secretary.

Young Salinas added an international dimension to the clan by going to Harvard, where he studied government and economics. Throughout his career, he also pored over classic books on power, such as Machiavelli's Art of War and The Prince.

For years, people underestimated the political guile of technocratic Salinas. In 1986, as a Budget & Programming Secretary as colorless as he was ambitious, Salinas engineered a coup in the Cabinet of President Miguel de la Madrid, getting rid of one of his chief competitors for the presidency, JesPound s Silva Herzog. That left Salinas as one of the three presidenciables.

From the moment Salinas was named the Institutional Revolutionary Party (PRI) candidate in the fall of 1987, he embarked upon a seven-year war against rampant inflation. Knowing that a presidential election during hyperinflation would spell disaster, he put together that December the first Pacto, the inflation-fighting pact of labor, business, and government. Relying much more on arm-twisting and dealmaking than on pure market forces, he slashed inflation to single digits.

But his budget-cutting threatened the PRI's decades-old system of graft and patronage. His enemies attacked him in the presidential campaign. They circulated a book titled The Assassin President. It told a story of how when Carlos was only 4, he had accidentally shot a young maid while playing with a gun. Most people thought the oil workers union was behind the publication. The labor boss, Joaqun "La Quina" Hernndez, openly opposed Salinas, hinting that he, and not the President, would be running the oil patch under a Salinas administration.

A month after taking office, Salinas got his chance at revenge. In the first of a series of bold, attention-grabbing gestures, Salinas sent the army to arrest La Quina on weapons and corruption charges. Salinas had suddenly shown he had what it took to run Mexico.

FOREIGN CAMPAIGN. This episode set him on a course that would turn him into one of Mexico's most powerful Presidents. For a supremely self-confident 40-year-old, being President was a chance to strut on the world stage, rewrite Latin American history, even redraw the borders of the North American continent. But the job had its Faustian side: After six years as dictators, Mexican Presidents were routinely consigned straight to political obscurity. Luis Echeverra was dispatched to Fiji. Miguel de la Madrid buried himself in a quiet publishing job.

Salinas dreaded becoming a has-been at 46. His strategy to avoid oblivion: build a power base outside Mexico. With privatization and NAFTA, he would win the accolades of statesmen and the international business community.

The trouble was, even as he was establishing himself internationally as the golden boy of the developing world, Salinas was engaging in the rough-and- tumble world of Mexican politics. He seemed to think he couldn't run Mexico, much less modernize it, without using the traditional tools of power. He never hesitated to twist the arms of recalcitrant politicians, even forcing several governors from his ruling PRI to resign in order to give the impression it was loosening its decades-old grip on power. He named notorious hard-liners to key posts. He allegedly turned a blind eye to the less-than-savory activities of key associates, including his brother RaPound l and former Agriculture Secretary Gonzlez, who has accumulated a vast fortune during a long career of low-paid public service.

Salinas bristled at suggestions that he tolerated corruption and drug trafficking, but, nevertheless, the drug trade grew in volume and influence on his watch. From time to time, Salinas would launch major crackdowns, but few major arrests were made. At the end of his term, Salinas' inability or, as some think, unwillingness to deal with the drug lords began to come home to roost. Many observers believe that the devastating assassination of PRI Presidential Candidate Luis Donaldo Colosio in Tijuana in March, 1994, was the work of local party figures and drug bosses worried that Colosio might curb their activities. The killing of PRI Secretary General Jose Francisco Ruiz Massieu, Salinas' former brother-in-law, last September, further destabilized the country.

TURF WAR? Now that Salinas has left office, prosecutors are beginning to unearth what appears to be a seamy network of drug-related corruption among his associates. It turns out that Ruiz Massieu's brother, Mario, whom Salinas had appointed to investigate the assassination and head a crackdown on drug traffickers, has been linked by U.S. officials to drug traffickers. The recent discovery of more than $10 million in Ruiz Massieu's foreign bank accounts tends to reinforce those suspicions. The fact that Salinas named him to such a key post raises questions about how much he knew about Ruiz Massieu's activities. Adding to the doubts about Salinas was the recent arrest of his brother RaPound l for being "the intellectual author" of the assassination of former brother-in-law Ruiz Massieu. While prosecutors have not found a motive for the slaying, speculation focuses on squabbling over turf between these two powerbrokers. Mexican journalists believe Colosio's assassination will eventually be tied to the Ruiz Massieu case.

Salinas was in a sense running parallel administrations: One modern and international, the other backward and ingrown. It's a testament to his skill as a tightrope walker that he kept both running for most of his six years in power.

To develop Mexico economically, Salinas needed massive capital. The only place he was going to get it was from private investors, domestic and foreign. To do this, he undertook a PR campaign that would have been unthinkable for his predecessors. He flaunted his Harvard education and readily spoke English with foreigners--a first for Mexican Presidents. He hired McKinsey & Co. to reorganize state-run companies in preparation for privatization, and Wall Street investment banks were given plum roles.

He never passed up an opportunity to woo corporate chiefs. Heading out of town one day, Salinas ordered his limousine to pick up the visiting General Electric Co. Chairman Jack Welch on the way to the airport. With the personal attention of Salinas and his Cabinet officers, U.S. corporate paperwork zipped through ministries. CEOs raved over Salinas and his team. Government officials marveled, too. Even last year, ex-U.S. Trade Representative Carla A. Hills gushed that Salinas' team was the most impressive Cabinet she had ever seen.

TWICE FOOLED. Foreign bankers, who had swallowed a 30% write-down on Mexico's debt, hailed Salinas as a visionary. With an innocence and a herd mentality recalling those of the bankers who lent indiscriminately to Latin America in the late 1970s, foreign creditors believed Salinas could do no wrong. But Salinas needed more to attract big-time foreign investment. In 1989, he began to push for the massive reordering of North American trade known as NAFTA. The idea was to use American money to pull Mexico up to First World standards.

Even while opening Mexico to foreign investors, he also had to cater to his backers at home. By privatizing companies such as Telefonos de Mexico and the banks, he made big buddies rich but was dogged by charges that he'd gotten rich himself on the side. So golden was the Salinas touch that even those investors trained as economists were willing to overlook the ominous signs of economic imbalance beginning as early as 1993. Everyone from New York brokers to U.S. Treasury officials accepted Salinas' explanations that all developing countries built up trade deficits.

But then the political ground began to shake. Throughout 1994, as Mexico was battered by guerrilla warfare, political assassinations, and election jitters, the country lost nearly $28 billion in foreign reserves as Salinas and his team stubbornly refused to devalue the peso and adopt interest rates high enough to stem the outflow. They managed to convince investors that they could hold the line on the currency. Even after the assassination of PRI presidential candidate Luis Donaldo Colosio in March, 1994, Salinas' smooth Finance Secretary, Pedro Aspe Armella, was able to wow visiting fund managers by pledging to squeeze the economy in order to keep the peso steady at 3.2 to the dollar.

And indeed, things seemed to be calming down when Salinas' successor, Ernesto Zedillo Ponce de Leon, took office on Dec. 1. Salinas placed the presidential sash across Zedillo's shoulders and gave his hand-picked successor a warm abrazo. Just three weeks later, Mexico's reserves were frittered away in speculative panic when Zedillo was forced to devalue the peso.

Salinas watched in pained silence as Zedillo blamed Mexico's mounting economic woes on his predecessor. Until the very end, Salinas remained Washington's top choice for the prestigious job of heading the new global trade agency, the Uorld Trade Organization. But when Zedillo ordered the arrest of RaPound l Salinas, Carlos felt compelled to act. Giving up his WTO campaign, Salinas accused Zedillo's team of mishandling the devaluation. And in a bizarre twist of events, he staged a two-day hunger strike. A pathetic shadow of his former self, Salinas sat upon a child's bed in a poor family's Monterrey shack. He left the country on Mar. 10. "His fall has been incredible," says political scientist Denise Dresser of the Autonomous Technological Institute of Mexico. "Six months ago, he was the most extraordinary Mexican President of the 20th century."

Only the highest climbers can fall as far as Salinas. Just four years ago, he chatted with the tottering Mikhael Gorbachev. On his return from Russia, Salinas rued Gorbachev's judgment. The Russian should have postponed the political opening until the economy was fixed, he said, leaving it clear that he would not make the same mistake.

But now he leaves a broken economy. And the impressive political machinery he wielded has been torn apart by the infighting and assassinations of a party at war with itself. Zedillo, in effect, now follows a conjurer who has taken away all of his tricks. The new President has little choice but to plow ahead with democracy--the one card Salinas was saving for later--and to trust in the talents and resilience of Mexico's people.

Carlos Salinas: A Brief History

AUG. 1988

Salinas elected President

JAN. 1989

Salinas orders arrest of oil workers union chief Joaquin Hernandez

FEB. 1990

Mexican debt rescheduled

DEC. 1990

Telmex privatized

JUNE 1990 Formally proposes NAFTA uith George Bush

NOV. 1993

U.S. Congress approves NAFTA

JAN. 1994

Zapatista guerrillas take over Chiapas towns, rockfing politics

MAR. 1994

Presidential candidate Colosio assassinated, foreign exchange reserves begin falling

AUG. 1994

Zedillo elected

SEP. 1994

PRI Secretary General Francisco Ruiz Massieu assassinated

NOV. 1994

Reserves fall when PRI accoused of obstructing Massieu assassination probe

DEC. 1994

Zedillo inaugurated, soon devalues peso; currency plumments

FEB. 1995

Raul Salinas implicated in Massieu murder

MAR. 1995

Carlos Salinas stages hunger strike, leaves for New York on Friend's private jet

All in the Family

Politics and blood ties are at the center of Mexico's drama

CARLOS SALINAS DE GORTARI

President of Mexico '88-'94

RAUL SALINAS DE GORTARI

Former Commerce Secretary

Carlos' brother, now charged

with masterminding assassination of

Jose Francisco Ruiz Massieu

ADRIANA SALINAS DE GORTARI

Sister of Carlos and RaPound l

Former wife of Jose Francisco Ruiz Massieu

JOSE FRANCISCO RUIZ MASSIEU

Secretary General of PRI

Was married to Adriana Salinas

Assassinated Sept., 1994

MARIO RUIZ MASSIEU

Former Deputy Attorney General

Brother of Jose Francisco

Was assigned to investigate brother's murder

Now charged with aiding coverup

In custody in New York, with millions of

narcodollars in U.S. bank accounts

ROBERTO GONZALEZ BARRERA

Carlos Salinas' godfather

Tortilla baron

Said to have flown Salinas to exileBy Geri Smith in Mexico City and Stephen Baker in Pittsburgh


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