Markets Cheer Zedillo But Business Boos Plan

Mexico economic plan cuts spending, ups taxes

MEXICAN President Ernesto Zedillo Ponce de Leon came to office in December on a platform of ''well-being for the family,'' but Mexico's harsh emergency economic program announced last week leaves Carlos Gomez wondering whose family Mr. Zedillo was talking about.

''Back then he put the emphasis on well-being, but what he's doing now is all to the contrary,'' says Mr. Gomez, the owner of a Mexico City clothing-label manufacturing company. ''This plan puts small and medium-sized companies like ours on the verge of disappearing from the national scene, and they represent a lot of families.''

Mexico is reeling from the new economic emergency program that cuts government spending while sharply increasing taxes and the price of public services. The plan, which took Mexicans by surprise for its severity, was described by Mr. Zedillo before a meeting of stone-faced business leaders Friday as ''the only option'' open to the country. ''There is no alternative, it is an ineluctable effort, but we have what it takes to do it,'' he said.

Few Mexicans appear to agree. While Zedillo's second emergency plan since the peso collapsed Dec. 20 was well received by the Clinton administration, the International Monetary Fund, and other foreign partners, Mexico's opposition parties, business organizations, and leading labor groups say the program calls for too much sacrifice from individual Mexicans and not enough from the government.

Busines and labor balk

The Zedillo government was forced to issue the program by decree, rather than as the customary ''pact'' providing at least the guise of national unity, after business and labor sectors refused to sign on.

Designed to restore financial stability, strengthen public finances, and ''reinforce the groundwork for long-term sustainable growth,'' according to Finance Ministry officials, the plan even by government estimates will throw Mexico into a recession and produce inflation above 40 percent. The government predicts a 2 percent retreat in GNP and a loss of 750,000 jobs this year.

The plan includes an immediate 35 percent jump in gasoline and diesel prices, a 20 percent jump in natural gas and electricity prices, and a 50 percent increase, to 15 percent, in Mexico's value-added tax. Minimum wages are to increase by 10 percent. Other wages are left to employer-employee negotiations -- a recognition that the 4 percent salary hike the government called for in its January plan is now unrealistic.

The government says it will reduce its spending by the equivalent of an additional 0.6 percent of gross national product, on top of the 1 percent of GNP in cuts already programmed, making for a nearly 10 percent cut in real spending.

Peso recovers

The plan won an immediate nod from Mexican and foreign financial markets. The peso, which Thursday skidded to a historically low 7.45 to the dollar, bounced back to 6.3 in the plan's wake. The Mexican stock market jumped more than 3 percent, while New York and Latin American markets also moved up.

''It's not surprising the markets like it,'' says Ruben Barrios Graf, of the National Association of Business Managers. ''This is not a program designed so our economic problems can be solved, but so that Mexico can pay its foreign debt.''

The Zedillo plan sets up a $10 billion debt-restructuring fund for small business. But many business owners are skeptical that the fund will help. ''We've heard this before,'' says Salvador Garcia Linan, director of the Mexican Institute for Small and Medium Companies.

Many owners of such companies also scoff at the notion that they will be helped as a lower peso encourages Mexican exports. ''About 80 percent of Mexican exports come from 150 companies, mostly big ones,'' says Barrios. ''The rest of us depend on domestic consumption, but that is what is going to plummet with the higher taxes and inflation.''

Mr. Gomez and his BeuRibe clothing label company stand as a case in point. ''We've done everything the way we were supposed to under Mexico's 'new' economy, developing a desirable product with new technology,'' he says. ''But if the consumers are too strapped to buy clothes, we're sunk.'' BeuRibe has already reduced employees to 20 from 40 last year.

Gomez says his company's last hope is a foreign investor.''But nobody has the confidence to invest in Mexico right now,'' he says.

That confidence is of course what Zedillo is aiming to build back. But will the government's plan work?

We'll begin to know better in a month or two, US economist Rudiger Dornbusch told a group of business leaders here Friday. A specialist in Latin American economies, Mr. Dornbusch praised Zedillo's new program but said it should have included deeper spending cuts.

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