What Mexico Needs

January 6, 1995

THE Mexican government's new peso-rescue plan aims to halt the currency's slide and inspire Mexicans to make the sacrifices necessary to put the weakened economy back on a sound footing. But hardly anyone seems convinced.

Foreign investors remain wary and many Mexicans - facing low wages and rising prices - feel betrayed by a ruling party reelected on the basis that it had pulled the country out of decades of economic crisis and set it on a path toward prosperity.

The surprise devaluation, which followed highly optimistic economic forecasts by the new administration and economists, led opposition members to charge that the former government of Carlos Salinas de Gortari had deliberately postponed corrective steps so as not to harm his image as he sought backing to head the new World Trade Organization.

The rescue plan announced Tuesday would cut government spending by 1.3 percent of GDP; hold wage increases to the 10 percent agreed to a December pact; seek to keep inflation to 19 percent; reduce the current accounts deficit from $28 billion to $14 billion; and let the peso continue to float. The government concedes that the size and financing of the current accounts deficit and the delay in dealing with it were major factors in the crisis, but insists the new measures will have the needed effects.

Investors, however, are demanding to know where the currency will settle and how the government intends to pay for short-term bonds that mature over the next month. Privatization of key state-run businesses is being discussed. Finance Minister Guillermo Ortiz headed to New York yesterday to try to assuage investor concerns.

But serious damage control is also needed at home. Mexicans worry that inflation may not be controllable and that the population in poverty could rise to 45 percent. This is a far cry from the supposed ``economic miracle'' that has made Mexico a model.

Mexicans' confidence in their government has been severely shaken. To restore their faith will require more than cajoling. Only the transition to a genuine, open democracy will ensure that signs of economic troubles will be seen and dealt with early. Without such political progress, the economic progress Mexico has made will be further jeopardized. Along with giving $18 billion in credits to shore up the peso, the United States and other governments, as friends of Mexico, should heartily press that case.