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Mexico's Circle of Misery: How U.S. Bailouts Postpone Reform

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Since the debacle of December 1994, when the peso collapsed and Mexico nearly defaulted on its debt, the country has suffered a series of blows to its self-confidence and stability. Mexico has been through crises before-in 1976, 1982, and 1987-88-but the current situation is far more precarious. The country is mired in its 15th year of economic stagnation, corruption has reached unprecedented depths, public cynicism about government has grown, and political violence has returned. Mexico was never the paragon of middle-class serenity, well-being, and modernity that its champions abroad claimed, but its social cleavages and tensions are more serious than ever.

Nevertheless, the imminent explosion that many have predicted will not take place. And though optimists have argued that the Mexican economy is back on track and that the overhaul of the political system has begun, the country is not poised for rapid political reform and economic growth. Rather, as long as Mexico delays the changes that will bring prosperity to all, the country will remain stalled, divided between a minority whose lot depends on the United States and a majority periodically buffeted by economic and political crisis. Until a new generation of bold leaders arises, Mexico will simply muddle through, enacting superficial reforms while failing to confront its imposing dilemmas.

Not since the late 1920s has Mexico suffered so lengthy an economic depression. Per capita income is, in constant dollars, lower today than in 1980. Mexicans purchased fewer automobiles in 1995 than in 1981, even though the country's population grew by nearly half during that time, from 66 million to 95 million. President Ernesto Zedillo Ponce de Léon correctly points out that only through sustained economic expansion of at least five percent per year will the standard of living of all Mexicans rise, but the last time the economy grew at that rate for two consecutive years was in 1980-81. Even the most sanguine projections foresee no growth in per capita income during Zedillo's six-year term.

As a result of this protracted economic collapse, income inequality has swelled. In 1984 the top decile received 32.8 percent of national income; by 1989 its share had climbed to 37.9 percent and by 1994, before the current depression, to 41 percent. The fraction of national income going to the poorest half of the population has steadily dropped, from 21 percent in 1984 to 17.5 percent in 1989 and 16 percent in 1994. Excluding Africa, Mexico ranks sixth from the bottom in income inequality, better than Brazil or Chile but worse than Argentina, Venezuela, and Bolivia. Today seven out of ten Mexican wage earners-nine million people-earn $300 or less each month. Thanks to the privatization of state industries and the 1992 reform of the land tenure system, which allowed small landholders to sell their property, inequality of wealth has ballooned as well, even more severely than the disparity in income.

In 1995, for the first time in memory, an economic contraction in Mexico generated large-scale layoffs. The country's true level of unemployment has always exceeded official statistics, but historically the lucky few with jobs had managed to keep them through successive economic downturns. Not this time. More than a million Mexicans lost their jobs, their plight exacerbated by the lack of unemployment insurance and by a 50 percent inflation rate that ate into their severance pay. As the government cuts public spending to meet its debt payments and comply with restrictions imposed by the United States and the international financial institutions, the threadbare social safety net on which Mexicans have relied is disintegrating. Even if the country's economic performance improves during the second half of 1996, two or three years of sustained recovery will be required just to regain the ground lost over the past year.

Since the Great Depression, Mexicans have believed that they, virtually alone among the Latin American nations, have enjoyed relative tranquillity and prosperity, but the country's experiences since 1993 have shattered that myth of political and social harmony. Political violence had supposedly been banished from Mexico, albeit at the cost of maintaining the world's longest-lasting authoritarian political system. The list of attacks during the last three years is extensive and disconcerting: an armed uprising of indigenous people in the state of Chiapas; the unsolved assassinations of Cardinal Juan Jesús Posadas Ocampo, Institutional Revolutionary Party (PRI) presidential candidate Luis Donaldo Colosio, and PRI Secretary General José Francisco Ruiz Massieu; the massacre of 17 peasants in the state of Guerrero; the shooting of two leading Mexico City public officials; numerous gangland killings in Guadalajara, the bullet-ridden corpses of drug middlemen deposited daily on the same traffic circle; abuse of police power throughout the countryside; and widespread resort to vigilante justice as townspeople punish, on occasion even threatening to lynch, their tormentors. Finally, while the people have generally tolerated some corruption in Mexican politics, under the administration of the previous president, Carlos Salinas de Gortari, it reached unparalleled proportions.

Despite Zedillo's efforts to reestablish-or perhaps inaugurate-the rule of law in Mexico, most of these breakdowns in law and order have gone unpunished and will probably remain so. The Mexican public, and certainly the middle class, interpret the crime wave in the nation's larger cities as an extension of the assaults on the country's most powerful citizens. Many believe that if such potentates are at risk, then common folk are immeasurably more vulnerable. The onslaught of kidnappings and holdups has confirmed their worst fears. A vicious cycle has emerged out of this maelstrom of violence, insecurity, and impunity. With the high-profile crimes of past years still unsolved, Mexicans have become increasingly doubtful that lesser felonies will receive their just deserts, enhancing doubts about the effectiveness of judicial reform and feeding the impression that anyone can get away with anything.

THE AMERICAN DIVIDE

Although immediate concerns, such as electoral reform, an economic turnaround, and the credibility of the current government, are troubling, longer-term trends within Mexico will have far greater impact on the country's future. The conventional wisdom about Mexico is divided into two camps, one predicting disaster and the other asserting that the solution to Mexico's travails is simple. These developments dispel the forecasts of both groups; neither social explosion nor decisive political reform and economic growth are likely to visit Mexico in the near future.

The events of recent years would appear to bolster the prognoses of the prophets of gloom, but their view overlooks a new cleavage that is rapidly cutting across Mexican society. This split separates those Mexicans plugged into the U.S. economy from those who are not. This division existed in Mexico as far back as the last century, but it manifested itself until recently only in isolated instances. However, since the Salinas years and the subsequent unraveling of the Mexican miracle, it has become the most significant rift in Mexico's society. It divides Mexicans who are highly sensitive to government macroeconomic policy from those who are indifferent to it. It separates those who correctly believe that politics and events in Mexico still determine their destiny from those who just as rightly understand that the decisions most critical to their lives are made in Washington and New York. It parts Mexicans who remain on the margins of global flows of capital, goods, and services, even if they are not on the margins of Mexican society, from those who are steadily being integrated into those flows. This growing group of Mexicans oriented toward the United States is isolated from much of the country's economic tribulation and relatively complacent about its political travails. While these Mexicans are less impervious to the onslaught of violence, they are, consciously or not, retreating into an economic and political world of their own. The minority whose fortunes are not dependent on Mexico's development is large enough to prevent a social cataclysm in the country, and while it will not hamper reform, it also will not facilitate it.

The fracture is not regional, class-based, or ideological. Despite concerns that Mexico's north is being sundered from its south, the more significant cleavage is much more complex. The fate and well-being of vast regions of the Mexican south and east are as directly connected to the United States as cities closer to the border, like Tijuana and Monterrey. Nor is the division rooted in economic class: the wealth and power of many Mexican magnates is devoid of any American connection, and the meager livelihoods of millions of destitute Mexicans depend almost entirely on their association with el otro lado, the other side. Nor does this fissure follow ideological lines. Much of Mexico's left perceives the links with the United States as dangerous to the country's autonomy, but many others on the left encourage bonds with the United States in the hope that they will produce greater respect for human rights, democracy, and social justice. A large portion of the right believes closer ties with their neighbor to the north will lead to their country's salvation, while many free-market conservatives fear American influence as a menace to the nation's mores.

The first and most numerous contingent of Mexican citizens whose affiliation with the United States distinguishes them from their fellows are the migrant workers, the millions who toil in the fields, valleys, and sweatshops of California and Florida and the restaurants and flower shops of New York and Chicago. The precise numbers involved are a bone of contention on both sides of the border, but they are, by any account, very large. According to official statistics, which greatly understate the total, yearly remittances from workers in the United States to their families in Mexico amount to nearly $4 billion. If a remittance of $100 per month per family is a fair estimate, between 3.5 and 4 million Mexican homes receive income from abroad. Even though most migrants are young and either single or just starting their families, it is still safe to say that upwards of ten million Mexicans live directly off money sent home by their sons, husbands, and fathers working north of the border. The number of Mexican migrant workers has greatly increased since the country's economy turned sour in 1982, and the number of Mexicans dependent on resources from abroad has similarly expanded. What was previously a small minority concentrated in the rural areas of the central states now includes large numbers from the sprawling Mexico City metropolitan area, the western sierra running through the state of Puebla, and the states of Oaxaca, Morelos, and Guerrero.

The second group that belongs to the U.S. side of the division comprises those Mexicans-businesspeople, workers, accountants, lawyers-involved in the rapidly expanding export sector. The numbers have been greatly exaggerated by the American press in the debate over the consequences of the North American Free Trade Agreement; over the last 15 years, manufactures have garnered a larger share of total foreign sales in part because the price of oil has dropped dramatically to less than half that of the early 1980s. Moreover, although manufacturing is one of the country's few growth sectors, greater foreign sales have not translated into more jobs. Nevertheless, this trend involves a large number of Mexicans, and their alienation from their surrounding society is made still clearer by the export industries' increasing geographic separation from the rest of the country.

The most obvious example is the border factories, the maquiladoras, which employ over 600,000 Mexicans. Virtually all the inputs for these approximately 2,500 plants are imported, and all of the output is sold abroad. Practically no links with the rest of the country have been constructed over the years, and though the companies are allowed to sell a portion of their wares in Mexico, they choose to ship everything across the border. Thus their influence on employment and the local economy is modest, and since wages are low, even by Mexican industrial standards, and many of the employees are young, single women and men, the spillover effects are limited. Nonetheless, the maquiladoras support at least two million Mexicans. The American economy serves as a life-support system for the border factories: without it, they would disappear.

The maquiladoras, however, represent only a fraction of the booming Mexican export sector. Other export industries-automobiles, steel, garments, cement, mining, and glass-are also thriving. After oil and the maquiladoras, automobiles are Mexico's largest export industry. In 1995 domestic demand plummeted nearly 70 percent, but exports rose 37 percent, resulting in a net loss in total sales of only 15 percent. The greater number of exported vehicles has been accompanied by a growing volume of imported components, and thus overall employment in the industry, around 170,000, has remained stagnant since 1989. But the automobile industry still supports more than half a million Mexicans. The companies, their owners, and their workers are increasingly independent of the performance of the Mexican economy and largely indifferent to the fluctuations of the Mexican business cycle.

Of the country's largest export firms, a growing number sell more than half their output abroad. They range from General Motors de Mexico, the nation's largest private sector exporter, which even in a strong year like 1994 sold 30 percent more vehicles abroad than at home, to Mexico's chief cigarette manufacturer, whose exports account for three-quarters of its sales. They include multinational corporations such as IBM and Kodak as well as steel mills. The manufacturer of Corona beer, Mexico's 28th-largest exporter, with foreign sales exceeding $150 million, has built a strong network throughout Mexico, but even this model of a domestic-based firm now sells nearly one bottle of beer abroad for every one drunk by Mexicans-an indication of its competitiveness and of the shift in its fortunes. The jobs and salaries of its nearly 40,000 workers now depend at least as much on foreign as domestic profits. Cementos Mexicanos, one of the world's largest cement producers, is in a similar predicament. In 1993, a year of virtually no growth in the Mexican economy and a sharp contraction in the domestic construction industry, Cementos Mexicanos sold 90 percent of its output abroad, mostly in the United States. This was an outstanding achievement but also a telltale sign of the company's, and the Mexican economy's, transformation.

The tourism trade is, of course, practically invulnerable to Mexico's economic fluctuations, since its prices are almost universally quoted in dollars. Broad swaths of the country -- Cancún, Baja California, Puerto Vallarta, and, to a lesser extent, Mazatlán, Manzanillo, and Ixtapa -- cater exclusively to foreign tourists, four-fifths of them American, and form a sort of duty-free dollar zone. Airfares, hotel rooms, and other amenities are generally purchased in the United States through tour operators that do not adjust their prices as the exchange rate dips and climbs. Most local stores and restaurants accept dollars, and many of the tourist trade's basic needs, from satellite dishes to Perrier sparkling water, are imported. The 315,000 inhabitants of Cancún and the 600,000-odd Mexicans employed in the tourist industry nationwide are notably insensitive to domestic macroeconomic indicators and even to noneconomic issues such as violence and political strife.

Finally, countless Mexicans have links to the United States of an unspecified nature, from the billionaire with apartments in Vail and Manhattan to the drug lords from Sinaloa, Ciudad Juárez, and Tamaulipas who export their wares to the United States and import most of their inputs from South America. This sweeping category also includes the hundreds of thousands of Mexicans with bank accounts, credit cards, insurance policies, and other assets in the United States, as well as the growing number of professionals-teachers, doctors, dentists, engineers-who spend part of their time working or studying in the United States.

Few of the Mexicans whose lives are increasingly determined by their links with their neighbor to the north would want to cross the line permanently, even if the U.S. government, in a moment of pro-immigration weakness, allowed them to. They prefer to reside in Mexico, but, one way or another, they make their living through the United States. With time, the interests of the Mexicans in the U.S.-connected sphere will displace their traditional affection and concern for Mexico. Because they have a way out of Mexico's misery, they are different from their countrymen. Unfortunately, they are a minority and probably condemned forever to be one.

The key to understanding Mexico's future rests on accurately assessing the impact of this minority, which constitutes between one-fifth and one-quarter of the population. It is sufficiently numerous and dispersed to serve as ballast for the entire country. A nationwide social explosion, such as the Revolution of 1910, is virtually impossible while such a large, regionally well-distributed, broadly based segment of the population is thriving and as long as a sizable portion of those outside this realm hope, however unrealistically, to attain its benefits in the foreseeable future. But the country is simply too populous for all those excluded from this cross-cutting cohort to be embraced by it within any reasonable time frame. Many in the United States and Mexico do not yet grasp a fundamental demographic constraint: there are simply not enough tourists from Chicago, export firms in Monterrey, or low-skill jobs in California to go around.

Yet enough enjoy the gains inherent in these ties to the global economy and enough, despite much evidence to the contrary, expect to join in the prosperity for the status quo to remain indefinitely sustainable. The modern sector of the economy, with its high growth rates and rising wages and employment, supplemented by stable remittances from abroad and adequate revenues from tourism and narcotics, can smoothly function alongside a stagnant, traditional domestic economy. Occasional outbursts of rage and despair from the inward-oriented sector of Mexican society will inevitably erupt, but, as the Zapatista rebellion in Chiapas demonstrated, these can be contained and managed.

WAITING FOR REFORM

The segments of Mexican society linked to the United States include key constituencies and power centers, and their indifference to the course of events in Mexico weakens the chances of meaningful reform. They do not oppose democratization, but without a stake in political change, they also have little reason to foster it. To avoid the indefinite continuation of the status quo and its precarious stability, Mexico would have to abandon its current political system, renegotiate the tradeoffs and sacrifices that lie at the heart of its political and social structures, and create a new order based on a reworked social contract. Mexico's persistent inability to achieve these goals explains the country's decline over the last 20 years. And given the current leadership, a significant upturn in Mexico's fortunes is unlikely.

The political system created after the Revolution of 1910, in the late 1920s and mid-1930s, was authoritarian, but through its processes, the country's elites and organized masses peacefully reached consensus on economic, social, and foreign policy, permitting the economy to grow at an annual rate of six percent for four decades. In exchange for protection from foreign competition, subsidies, and a subdued labor movement, the business community agreed to save and invest at high levels and join foreign investors in limited partnerships. The union bureaucracy traded independence and activism for a limited welfare state, job security, and its very survival. The church acquiesced to the anticlerical constitution of 1917 but was awarded de facto recognition and privileges in return. The peasants tacitly accepted a nefarious but effective bargain: they would stay away from the cities and respect property rights, receiving the promise-and in sufficient cases, the reality-of land ownership. The United States allowed the postrevolutionary regime to do pretty much whatever it pleased as long as Mexico remained stable and within Washington's geopolitical orbit.

In the late 1970s and early 1980s, as economic growth stagnated and the emerging middle class became intolerant of authoritarianism and corruption, the time came to reconstruct the 60-year-old fundamental agreements, but the political system proved dysfunctional. Mexico's success-40 years of economic growth, urbanization, and increasing literacy and social mobility-had transformed the country. The nation's political, intellectual, and business leaders abdicated their ideological positions, and as pressure from abroad mounted, they allowed formal reforms: trade liberalization, the free trade agreement with the United States, privatization, a haphazard dismantling of the welfare state. But the old system could not deliver the new pacts indispensable for the resumption of economic growth, a democratization of Mexican politics that would not jeopardize the country's stability, and even a moderate reduction in inequality. It did retain sufficient strength, though, to impede the birth of a new order.

No political arena or institutional mechanism existed through which Mexico could address the challenges facing it. Thus the country left its dilemmas unresolved: higher taxes and public spending or an efficient private sector; opening the borders to low-priced imports for exporters and the middle class or supporting national industry and agriculture in domestic and world markets; maintaining a strong exchange rate that would encourage low inflation or preserving a lower rate that would promote Mexican products in foreign markets; attracting foreign investment or maintaining autonomy in the design and implementation of economic policy; democratizing the union movement or ensuring labor peace; proceeding rapidly with modernization that would benefit a minority or focusing on the advancement of the throngs who have been left behind.

The current authoritarian political system cannot help Mexicans forge the pacts necessary to sustain a competitive economy. The redistributive effort that Mexico's glaring inequality makes imperative is inconceivable without trust and accountability. Mexico requires a deep, broad alliance among business, labor, and the state along East Asian lines. The wealthy and the middle class will not pay higher taxes unless they can be certain that the funds will not be squandered or stolen, that they will be devoted to educating Mexico's 25 million children, improving health care, and combating poverty. As in other countries at comparable stages of development, the state will have to assume a leading role in building the infrastructure needed for a modern economy, but taxpayers and foreign creditors will be reluctant to contribute their share until the state meets standards of probity and efficiency. And the church and the right must understand that nothing can be done to alleviate Mexico's penury without a draconian birth control program. None of these concessions-or the others for which Mexico clamors-are imaginable under the present political order.

Without new agreements, the country cannot overcome the impediments to growth and welfare and will remain in a prolonged period of economic stagnation, political involution, and social regression. Tinkering with the system by improving electoral fairness and curtailing human rights violations and corruption is a great improvement, but it does not constitute a mechanism that would help Mexico debate and effectively resolve its quandaries. Every now and then, a silver bullet has been hailed as the solution to Mexico's troubles: free-market policies, a closer relationship with the United States, electoral and judicial reform, export growth, increased domestic savings through pension fund privatization. That these minor steps are expected to deliver the country from its misery is indicative of the magnitude of Mexico's problems.

Fashioning an entirely new political system has never come easily to Mexico. For nearly 60 years after independence in 1821, Mexico was ravaged by civil war, economic turmoil, and foreign invasion; only with the strong reign of General Porfirio Díaz, beginning in 1876, did the country achieve some measure of political stability and economic growth. The Revolution of 1910 shattered the existing order, and 25 years passed before the contemporary political system finally emerged. The current interlude began at least 15 years ago with the debt crisis of 1982. None of these transitions was negotiated painlessly. Founding a virtually new republic entails significant costs and turbulence.

Not surprisingly, then, electoral reform, high on Mexico's agenda as recently as 1994 and a goal to which the Zedillo administration seems truly committed, does not seem terribly relevant to most Mexicans today. A comprehensive political opening-beyond free and fair elections to democratization of the country's unions, media, associations, and federal, state, and local institutions-would undoubtedly unleash centrifugal forces that the central government would be hard-pressed to control. Conversely, limited electoral reform, while conceivable and important, does not excite any Mexicans except the politicians involved in negotiating it. Mexican public opinion is largely indifferent to the prospect of electoral reform, and without broad-based support, opposition parties cannot pressure the incumbents to venture beyond cosmetic change. Caught between its wish to legitimize the political system by finally installing free and fair elections and its rational desire to win these contests at any cost, the PRI has confined the scope of reform to technical details, feeding the apathy and cynicism of the electorate. Thus, while growing numbers of Mexicans recognize that elections are becoming cleaner, many also view them as meaningless.

Free elections are the keystone of a new Mexican political system, but they are just one part of a larger structure. The rule of law is essential, but it is inconceivable without an independent judiciary, which in turn cannot be established without imposing an authentic separation of powers. And that will be unattainable as long as the state keeps Mexican civil society under age-old shackles. It must allow industrial workers, indigenous communities, the church, women, peasants, students, intellectuals, and civic groups to fight for their rights on a minimally level playing field. But in the modern era, opening civil society means granting and guaranteeing it access to the media, to the outside world, to Mexico's political and cultural institutions, and that the PRI has not even been willing to consider. While these procedural transformations could not in themselves solve Mexico's problems, they would create a framework in which Mexicans could fashion the substantive bargains that would lie at the core of a new Mexican political order. Allowing this kind of evolution, let alone encouraging it, requires Mexico's elites and the United States to be tolerant of the upheaval that it will inevitably bring. It also calls for a reinvigorated leadership that Mexico has sorely missed for many years.

A PLEA FOR PATIENCE

The United States has bailed out Mexico's rulers and its own interests on four occasions during the past two decades. Mexico's powers have had to endure not only greater financial burdens, but increasing conditionality and humiliation. No matter how exorbitant, however, this price has been far lower than the cost of being held responsible for recurrent deficiencies. The American-provided net has allowed Mexico's authorities to fail miserably yet remain in power. The same party, the same officials, the same coterie of families and friends continue to rule Mexico. While successive American rescues have spared the country some of the grief and misfortune of further collapse and bankruptcy, they have also locked in misguided policies and stunted the emergence of new leadership. For the United States, these bailouts may be worthwhile, but Mexico has paid an enormous price for incompetence, corruption, and the absence of accountability.

Washington will have no attractive options should a future Mexican crisis arise. Rejecting another Mexican plea for help would certainly generate unpleasant consequences. But while not devoid of dangers and repercussions, waiting out the next debacle from the sidelines seems a wiser course than again saving the PRI and its friends in exchange for cautious reforms. Mexico needs new leadership from different walks of life, and it will not flower as long as the old cliques remain in place.

This is the essence of Mexico's plight and the passkey to its future. The creation of a new political system in Mexico calls for exceptional talent, statesmanship, and political skills. It demands sensitivity to the country's illusions and insecurities and a commitment to honesty and public service that Mexico's long-time rulers have sadly lacked. It must be bold and imaginative, yet have the people's consent. It must be rooted in the strength of individual conviction and mission, yet broad enough to incorporate representatives from all sectors of Mexican society. The country would have been extraordinarily fortunate to discover such leadership in accidental appointments, such as that of Ernesto Zedillo, or in the traditional ranks of the PRI, as might have been the case with Luis Donaldo Colosio. History, however, seldom grants such favors and rarely spares societies the effort of seeking vision and direction outside the standard channels.

When one gazes at Mexico's short-term possibilities, scant grounds for optimism present themselves. The country lost its way in 1982, perhaps even as early as 1968, when the student movement first sounded the system's death knell. Everyone concerned-Mexicans and Americans alike-has expected Mexico's ills to be cured quickly and easily, but they have been terribly wrong. The United States must respond to Mexico's misery with patience and farsightedness. With time, a rejuvenated leadership, and consensus, Mexico will overcome its present predicament. The question is when.

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