Mexico: Bring Flight Capital Home

EXPERTS outside Mexico believe foreign investment, debt reduction, and lower domestic interest rates will solve Mexico's economic problems. This view is not only incorrect, but reflects a misunderstanding of Mexico's complex internal situation. Loans are not to blame for Mexico's $150 billion foreign and domestic debt. Statist economic policies receive too little blame for the country's situation, while excessive importance is attached to debt negotiations. Indeed, ``foreign investment'' will solve Mexico's crisis - but investment funded with capital from Mexicans themselves, not foreigners.

The billions deposited in offshore banks testifies to the thrift of Mexico's people. Yet why, according to Morgan Guaranty Trust Company, is there $85 billion in Mexican flight capital? Because the biggest Mexican government deficit is in public confidence, not pesos or dollars.

Years of inflation and of seizure of private property and bank deposits have taught Mexico's citizens to distrust their government. Since the 1982 bank nationalization, they have sent billions offshore, safe from inflation and expropriation.

With foreign credit cut in 1982, Mexico faced a choice: end subsidies for state industries or borrow internally. President Miquel de la Madrid chose more debt, not austerity, seized bank deposits, and continued spending. Today, Mexico's internal debt exceeds $50 billion and the economy is stagnant.

The 20 percent economic decline since 1982 is directly attributable to the diversion of funds from private to public spending. Economic contraction and growing indebtedness make more sense when considered in the context of the astronomical rates offered to holders of domestic debt - rates making investments in normal business ventures economically unattractive.

The Mexico City stock exchange, for example, received international attention in 1988 by outperforming other world markets.

Few noticed that paying investors 150 percent interest was a major factor in that performance, especially when Mexico refused to devalue the peso against the dollar. Foreign and domestic money poured in, but into government debt rather than productive investment.

Today, foreign commentators make a fatal error by placing too much weight on official pronouncements regarding inflation. Price controls are not price stability. Forcing Mexican workers to accept wage freezes while food prices rise relentlessly does not solve Mexico's inflation problem. While Mexico's domestic debt grows, claims that inflation is ``coming down'' are not convincing. Price and currency controls mask price increases, but inflation is there and Mexico's working people feel it.

Luckily, a solution to both debt and inflation lies within reach - and is not dependent on new foreign capital. By making permanent structural changes in Mexico, President Carlos Salinas de Gortari can restore public confidence and not only revive growth, but eliminate much of the internal debt by bringing flight capital home from foreign banks. This ``Mexican'' solution requires no foreign money, but great political courage. Four basic changes must take place:

Mexico must re-privatize its banks and largest state industries, not simply the smaller entities sold thus far. Voting shares in banks and larger state monopolies could, for example, be exchanged for internal debt in a type of ``domestic debt swap.'' This single step would reduce debt and state ownership, and help control inflation.

Legal and constitutional changes must follow new ``regulations'' for investment in Mexico. Government's right to seize private property must end. Free internal commerce and private investment must be guaranteed in law - not by a regulation which can be later changed.

Government must end its monopoly on land ownership and agriculture. With 70 percent of Mexico's land owned by the state, it is understandable that the country is a major food importer and lacks sufficient housing.

Finally, Mexico should seek a free-trade agreement (FTA) with the United States to recognize the enormous economic integration between the two countries.

An FTA would make permanent the changes above by subjecting Mexico to market competition. Yet an FTA, while politically attractive, is not the first step, or even possible until ownership of basic industries and other monopolistic practices end in Mexico. Economic growth, driven by private Mexican investment, is Mexico's path to independence from foreign and domestic debt.

With support from overseas, President Salinas can initiate major economic change to ensure not only future prosperity, but political independence from foreign governments and banks - and all without new loans.

If presented with a realistic program based upon free enterprise and private Mexican ownership, the majority of Mexico's citizens will support Salinas and make chances of successful reform all the better.