Radical changes forecast for Mexican economy

Mexico is poised to make radical changes in its economy -- slimming down its bureaucracy, boosting private enterprise, and gearing up exports -- all to help service its huge foreign debt. But rising protectionism north of the border worries Mexico.

Mexican exports, says Finance Minister Jes'us Silva Herzog Flores, are ``the only way we can get the foreign exchange in order to service our debt. [But] how is it possible that we are going to be able to do this when we find barriers to our products?''

After Brazil, Mexico is the second biggest debtor in the developing world. Dr. Silva Herzog, who is expected in New York today to complete rescheduling of part of the $96.4 billion in foreign debt his nation owes, told the Monitor in an interview recently that Mexico intends to continue meeting its financial obligations.

The administration of President Miguel de la Madrid Hurtado aims to do this by making Mexico more export oriented, paring government spending, and integrating this traditionally inward-looking economy with the global-trading system.

The government last month eased import restrictions, devalued the peso, cut its oil price, and introduced measures meant to streamline the public sector; layoffs in the public sector are being discussed in the Mexican press. Oil revenues, which account for 70 percent of Mexico's foreign income, get poured into debt payments, and a drop in oil prices has reduced oil income significantly since the 1970s.

Silva Herzog, who many Mexicans consider likely to become Mexico's next president, is said to favor his country's joining the General Agreements on Tariffs and Trade (though in the interview he did not openly endorse entry into GATT). The issue is controversial in Mexico -- a nation with a legacy of highly protected industries and state-run businesses.

If Mexico joins GATT, its businesses gain greater access to markets in other countries. But the trade-off is that Mexico must drop much of its protectionism and open its markets further. That would mean higher-quality and lower-cost imported goods for Mexican consumers.

It would also mean Mexican businesses would suffer competition from Japan, South Korea, Taiwan, and, especially, the United States. Jobs could be lost. Inefficient businesses could fail. Mexico, some economists say, increasingly could be dominated by the US.

Ultimately, economists of both left and right agree, Mexico will have to become a part of the world-trade community -- but not without a hard political fight.

``I am convinced,'' says Silva Herzog, ``that the only possible way Mexico can obtain reasonable rates of growth -- meaning one that will provide a modest increase in the standard of living of the population -- would be through a more export-oriented economy, making Mexico more productive, more efficient, making Mexico in a position to take more advantage of our geography.''

The geography he refers to is Mexico's proximity to the US. ``Sometimes you are really surprised,'' he notes, ``to see a good number of products that could be produced in Mexico and sold in the US and when you see the tag, they are coming from countries 7,000 miles away.''

The finance minister will be leading a delegation in New York to complete the rescheduling of $48.7 billion in principal payments on Mexico's foreign debt -- the latest in a series of adjustments dating back to Aug. 20, 1982, when Mexico informed banks it could not make payments.

Today, Silva Herzog is to sign an agreement that gives Mexico 14 years to pay off $20.1 billion originally due between 1985 and 1990. Nearly 630 banks from 42 countries are participating in the agreement.

Some economists here say the Mexican government is so strapped financially that, even with radical economic reforms, it may eventually be unable to meet a scheduled debt payment. Although Silva Herzog insists Mexico will continue to service the debt, the government's chief debt negotiator, Angel Gurria, told the Associated Press that Mexico may need $2 billion to $3 billion in new credit next year.

Silva Herzog calls for ``new mechanisms'' on the part of developed countries -- especially the US -- ``by which the burden of the debt could be distributed in a more even, equitable manner.''

``There are some Latin American countries,'' he notes, ``that have to be making interest payments that exceed their export earnings. That is not a sustainable position.''

In spite of this unprecedented restructuring of Mexico's debt, ``the burden is very very heavy,'' Silva Herzog says.

In 1982, Mexico embarked on a model austerity program, cutting back imports and encouraging exports in order to pull together the dollars to service its debt.

``We are relatively well off in comparison with other Latin American countries, because we have oil,'' Silva Herzog says. ``But there is no question that the burden of the debt is too heavy, and right now it is exclusively on the shoulders of the debtor countries.''

Although interest rates have been falling over the past year, he points out that they are still very high in real (inflation-adjusted) terms. He feels interest rates are closely linked to the $200 billion federal budget deficit in the US.

Referring to the austerity program that Mexico has been following since 1982, the finance minister notes, ``Sometimes the kind of recipes that we are advised to follow would be very interesting to be applied in the economies of the very large countries of the world.''