The Real Lesson From the Peso

IN the Mexican election campaign last August, the ruling Institutional Revolutionary Party, the PRI, asserted that if the opposition won the presidency, there would be an undermining of confidence, capital flight, a peso devaluation, and consequent inflation. The PRI won, but now all the above-mentioned horrors have come to pass anyway.

For anyone to have been surprised by the recent peso devaluation shows that nothing has been learned from history. Explanations for the weak peso have been superficial. Other US investors are likely to get burned again.

This true story is a tragic lesson: In early 1976 my friend ``Joe'' retired in Mexico. He converted his savings of $180,000 to 2,250,000 pesos and bought Mexican state and municipal pagares, promissory notes whose annual interest would have meant a comfortable annual income of about $41,400 (in addition to the sunshine). Joe had been assured that the peso was healthy, with an exchange rate unchanged since 1953.

But when I met Joe in 1985, he had gone back to work at a local English-language newspaper. The value of the peso had been cut nearly in half in September 1976, from 12.5 to the dollar to 24 pesos to the dollar. By 1985, it was 500 to the dollar, and there was no market for his pagares, which then had a face value equivalent to $4,500. In nine years, Joe had lost almost his entire nest egg.

His story is hardly unique. Anyone who invested in long-term interest-bearing Mexican instruments at the time Joe told me his story in 1985 saw his capital shrink to 17 percent of its original value by 1993, when the peso dropped below 3,000 to the dollar.

The Mexican government then eliminated three zeroes and created the ``new peso,'' devalued at a controlled rate to 3.46 to the dollar until Dec. 20, when it ``floated'' or, more accurately, sank to less than 5 pesos (5,000 old pesos) to the dollar.

Experts have pointed to a widening trade imbalance as the direct cause of the debacle, but they fail to place the blame where it really belongs: on the whole Mexican system of doing business, which fails to provide globally competitive goods and services.

The ``economic miracle'' wrought by the administration of former president Carlos Salinas de Gortari really wasn't a miracle after all. Mexico remains a third-world country. Hundreds of government-owned businesses were privatized, which substantially reduced the national debt, but on a one-time basis. Inflation was lowered to ``only'' about three times the US level by freezing wages and giving workers annual raises that didn't come close to covering the increase in the cost of living. The wealthy have profited from NAFTA, but the country as a whole has seen no ``miracle.'' Its goods remain overpriced: Mexico can compete against the US in the manufacture of shoes, but not against China.

MEXICAN companies face chronic problems such as inadequate management skills, an uneducated labor force, obsolete plant and equipment, unsatisfactory quality control, and uneconomically short production runs. The overburdening government bureaucracy helps keep Mexican goods internationally uncompetitive.

One of the main culprits, however, is almost never mentioned in polite circles: corruption. Big-time corruption impedes Mexican business and industry at an enormous hidden cost. Inspectors expect bribes, ``contributions'' (protection money) to the PRI are solicited, and, most costly of all, ``commissions'' (kickbacks) are the norm for those awarding public or private contracts.

The other defects might be addressed through reform, education, and hard work, but corruption is different. It has been ingrained in Mexico from the days of Spanish colonialism, as a result of factors such as the lack of a well-defined judicial system.

A concentrated campaign with presidential leadership and full financial disclosure laws will be essential to fundamentally changing Mexico's ``business as usual.'' The Opinion/Essay Page welcomes manuscripts. Authors of articles we accept will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts by mail to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHEL.CSPS.COM.

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