How Mexico's economy spun out of control

A scant five years ago, oil suddenly propelled Mexico out of the economic doldrums and into a period of unparalleled prosperity.

As a gusher of petrodollars poured into the country, Mexican officials launched a series of ambitious development plans. Businessmen made huge investments. Economic progress was the order of the day.

It looked as if Mexico was shaking off the legacy of its backward past. Then, the bubble burst.

In the short space of nine months this year, Mexico has staggered into the worst financial crisis in its history. Its dollars are gone. Its peso is sagging. Inflation is soaring to record 100 percent-a-year levels. Foreign debt of at least $80 billion has mortgaged Mexico's future and that of 76 million Mexicans.

Mexico, moreover, is virtually bankrupt.

The plaintive words of Heberto Castillo, head of the socialist Mexican Workers' Party, summed up the picture:

''Since the oil boom began in 1976, this government has been telling everyone 'get ready to be rich.' Now, suddenly, we are broke. What happened?''

That haunting question will be with Mexico for years.

What, indeed, did happen?

In short, Mexico overspent, overborrowed, and overextended itself in anticipation of a perpetual El Dorado, based on oil. Overnight, Mexico moved from the world's 16th-largest oil producer to its fourth largest.

But the ''black gold'' proved a fickle commodity upon which to base an economy.

Oil prices began declining in mid-1981. The resulting fall in oil revenues, along with depressed prices for silver, copper, coffee, and other exports, cost Mexico at least $5 billion in 1981.

In 1982 so far, the cost has doubled, perhaps tripled.

Mexico's budget deficit in 1981 was about $28 billion - something between 12. 5 and 15 percent of the gross domestic product. There is no indication how big the deficit will be in 1982.

To overcome these losses, public and private borrowing abroad soared - in 1982 alone it is estimated at $25 billion.

International lenders, particularly in the United States, saw Mexico as a good risk. After all, its oil riches seemed to make Mexico a sound borrower. And the dollar continued to flood into Mexico to fuel the expansionist development plans of both public and private planners here.

There was, in hindsight at least, a recklessness about it all.

Neither Mexican officials, economists, businessmen, nor foreign lenders realized until too late that the boom was about to go bust.

Yet the signs were there. A world recession, a growing oil glut, lower oil prices, and high US interest rates were combining to send signals up loud and clear to anyone who would listen that Mexico's go-go mentality of the late 1970s and early 1980s needed curbing.

That curbing never came. And on top of it, there had been a growing disastrous outflow of dollars from Mexico into the US and elsewhere in the world as Mexicans began investing huge sums - maybe as much as $40 billion - in real estate, stocks and bonds, and just about any other asset abroad, particularly in the US.

US consumer goods, moreover, were being bought up in stores in Texas and California by dollar-rich Mexican consumers and shipped back in huge quantities into Mexico.

The dollar drain was like a sieve. It flowed steadily.

Where the money came from was another matter. Much of it appeared to come from the graft and corruption that had become so much a part of Mexican life. Moreover, there was free convertibility between dollars and pesos. Any Mexican who had the pesos could go into a Mexican bank and after brief paperwork walk out with as many dollars as his or her pesos would buy. What he or she did with the dollars was his or her business.

Although there had been a handful of naysayers all along - a few Mexicans as well as a few US observers who counseled caution - their voices were lost in the pervasive optimism of the era.

Those few voices, however, were augmented early in 1982 as the Mexican government on Feb. 17 temporarily suspended foreign exchange trading, allowing the peso to freely float - a situation that had the effect of devaluing the peso from 26.5 to the dollar to 45 to the dollar.

But rather than slow the go-go mentality by curbing spending, President Jose Lopez Portillo's government pursued a policy of continued growth by borrowing more abroad and printing more money at home.

In addition, the government boosted wages from 10 to 30 percent on March 19 to help workers compensate for the loss of purchasing power occasioned by the February peso devaluation.

By this time Mexicans who were listening began to realize that economic trouble was brewing. Jesus Silva Herzog, a noted economist, took over the Treasury Ministry and discovered what few Mexicans knew: that Mexico was on the verge of going belly-up economically if it did not mend its ways.

He also learned that news of Mexico'a economic troubles was traveling fast. In New York, he managed to secure a $2.5 billion loan from 75 major financial institutions ''with great difficulty'' and he returned to Mexico ''to warn the nation'' of impending disaster.

By summer, shortly after Miguel de la Madrid Hurtado, candidate of Mexico's dominant Institutional Revolutionary Party, was elected Mexico's next president, the government announced staggering price increases on gasoline, bread, tortillas, electricity, and other essential items.

That, in turn, prompted a huge raid on Mexico's dollar reserves as skittish Mexicans began buying up dollars for pesos. Foreign debt interest payments were nearing - and dollar reserves in the Banco de Mexico were being depleted.

What to do? The now lame-duck government of President Lopez Portillo let the peso float again - but no purchases or sales of dollars were permitted. The peso was officially set at 70 to the dollar, marking a 200 percent devaluation in the peso this year alone.

By this time, foreign creditors were getting worried and Mexico found it could no longer renew its bank loans. Payment was being demanded. And the government's only recourse was to use the estimated $12 billion held in private deposits in Mexican banks.

It was only a few days later, on Sept. 1, that President Lopez Portillo delivered his last state-of-the-nation address and dropped the bombshell that he was nationalizing all private banks in Mexico, instantly converting all dollar accounts to pesos, and establishing strict exchange controls.

All this may not be enough to get Mexico out of its financial chaos - even temporarily - but these were the steps of a government aware that Mexico is in desperate straits. Business confidence is lacking and as of this writing the crisis continues unabated.

And for the average Mexican, who thought oil would be the panacea for Mexico's problems, the crisis is a shattering awakening.

Next: What can Mexico do?