Monday, July 2, 2012

Mexico, the 1994 Peso Crisis and its Democratization Process

Now this year the G20 summit has been held June 18-19 2012 in Los Cabos, Baja California Sur, Mexico. Mexico can call itself the 14th economy in the world (2011 IMF GDP figures). While Argentina may be facing a second Peso crisis in the near future - as discussed here - Mexico recovered quite well from its 1994 peso crisis. Meanwhile The Economist did remove Argentina's official figures from their indicators page this year, because it said these figures became unreliable. And because of the expropriation of YPF, as discussed in this blogpost, the WSJ asked itself: "Why not expel a thieving Buenos Aires from the G-20?". Mexico recovered economically quite well from its 1994 Peso crisis and is still doing well. It is worth to take a closer look to this Mexican story.

The Cause of the Mexican Peso Crisis

Carlos Salinas de Gortari
  (Courtesy to Andrés Monroy) 

Most economists agree upon the cause of the crisis. Under the 6 year administration (1989-1994) of Carlos Salinas de Gortari (PRI Party) Mexico's economy was reviving and a lot of capital flowed into the country. This period of rapid growth coupled with low inflation made Mexico the first of the "newly industrialized nations" to be admitted into the OECD. However, Salinas' economic policies had a price. That price was the the overvaluation of the Peso to the US dollar. The extent of the Mexican economy's vulnerability was kept low profile and downplayed by the government of Salinas. On top of that Salinas created in the election year 1994 a huge budget deficit that was coupled with a current account deficit. To finance the large deficit Salinas issued 'tesobonos', a peso denominated bond whose coupon and principal are indexed to US dollars at the spot rate in effect at the time of the issuance. The EZLN (Ejército Zapatista de Liberación Nacional) uprising in Chiapas and some domestic political murders together with the increasing current account deficit fostered by government spending, caused alarm amongst Mexican and foreign tesobono investors who sold their bonds rapidly, thereby depleting the already very low central bank dollar reserves. To prevent rising interest rates in an election year, the Bank of Mexico decided to buy Mexican Treasury Securities, causing an even more dramatic decline in dollar reserves. The dominoes began to fall...and devaluation of the peso was inevitable. When Ernesto Zedillo Ponce de León (PRI Party) took office in December 1994, the first thing he did was try to clean up Salinas' mess. First he increased the fixed rate peso/dollar band to 15 percent. That wasn't enough, so a floating regime was introduced and thus resulting in a 50% devaluation of the Peso all together in a few weeks time. Salinas exiled himself to Ireland. Salinas remained a controversial person in Mexico. Since leaving office Salinas has been repeatedly charged of massive corruption. Swiss authorities discovered in 1995 more than $100 million stashed in the European bank accounts of Carlos Salinas' older brother Raúl, one of Mexico's most villainized personalities. Former Mexican President Miguel de la Madrid accused in 2009 Salinas and his family of stealing millions of dollars from public spending and said the Salinas family had close links with the drug cartels and mafia.

The Recovery

Ernesto Zedillo Ponce de Léon
With the help of the US Treasury, IMF, Bank of International Settlements and the Bank of Canada, loans and guarantees to Mexico totaled almost $50 billion. By 1996, the economy was growing again and in 1997, Mexico repaid, ahead of schedule, already all US Treasury loans.
Zedillo, a hardcore globalist, who in 1974 pursued his master's and PhD studies at Yale University and whose doctoral thesis was titled: "Mexico's public external debt: recent history and future growth related to oil", must have remembered the saying 'Never waste a good crisis'. Mexico's economy turned in a very short time from protectionism into maximum openness. In a relatively short period debts were sanitized, trade barriers were eliminated and the Central Bank became an autonomous institute. Zedillo initiated political reforms that helped pave the way for a more democratic Mexico. He also instituted a number of reforms (e.g. primary elections) designed to end political corruption and create freer elections.
1989-2010 Annual real GDP Growth Mexico and U.S. (source: USDA)

Zedillo came to power as part of a corrupt, essentially single-party system. He was a member of the Partido Revolucionario Institucional (PRI), which had dominated the country’s government since 1929. By the end of Zedillo’s six-year term, however, the economy had rebounded and the country had held its fairest elections ever. As a result, in 2000 the PRI’s presidential candidate was defeated by Vicente Fox Quesada of the conservative Partido Acción Nacional PAN marking the end of 71 years of continuous rule by the PRI. 

Loose Ends and Challenges

President Vicente Fox Quesada (PAN) (2000-2006) and president Felipe Calderón Hinojosa (PAN) (2007-2012) both tried to continue the democratic path and further opening economy that Zedillo introduced. While Fox' successes were few, Calderón successes are many: boosting National Health Care, creating over 10,000 miles of highway, 1,000 new hospitals, 100 new universities and much more. But they also encountered serious challenges, which still aren't dealt with today.

  •  (Coercive) Monopolies
    While Mexico has been very succesful in opening up its economy for International markets, several domestic markets remained closed. All Petrol stations in Mexico do still have the green logo of state-owned oil-company Pemex. All big television stations are owned by Azteca or Televisa and they are protected from competition. Telmex and Telcel, two Mexican subsidiaries of Carlos Slim's America Movil, control the markets for landlines and mobile networks in Mexico. Mexicans pay considerably more for these telecom services than countries with competitive markets. The huge profits enabled Amercia Movil to extend its business in all of Latin America. 
  • Drug Cartels and Violence 
    The War on Drugs in Mexico seems to be escalating ever more, despite (?) the tough measures of Calderón. More and more civilians are being victimized. As long as drugs demand in the US is high, the problem will worsen, except when more legalisation will be effectuated. 
  • Interest Groups
    The influence of Mexican trades unions on politics and economy is still very huge. Antiquated labor laws and the power of various interest groups (church, business, EZLN, EPR, ERPI) are also causes of relatively sub optimal economic growth. Each of them can block about any reform they want to. The PRI maintained a sort of patronage system between various inters groups in exchange for political support. PRI has still the majority in Congress and in most Mexican States and Mexican States are more autonomous than e.g. US-states.
  • Corruption
    Corruption is still highly 
    spread  (in regard to Western standards) in Mexico. Corruption is still everywhere (PRI, Police, Tax agency, Business and the Army) and widely accepted as a fact of life. The powerful drug cartels do corrupt many officials (plomo o plata...). As explained here corruption doesn't go away overnight, unfortunately it's increasing again in Mexico since 2009.

Enrique Peña Nieto
The new president elect Enrique Peña Nieto (again PRI) has pledged in his campaign to restore order by beefing up law enforcement, and to raise economic growth to 6 percent a year. His growth agenda hinges mainly on three economic reforms: liberalizing Mexico's antiquated labor laws, extending the tax base to improve government revenues and allowing more private investment into Pemex. The PRI party has been close to backing the first two in the past, but ultimately blocked (!) them to deny rivals a victory. In the past Fox and Caldéron also said to partially privatize Pemex in their campaigns, but didn't succeed in their presidential terms. During his governorship in Mexico state Peña Nieto also promised to restore order by a stronger law enforcement, but violence increased. 

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