Mexico's shrinking peso

FEW nations may have as much reason for concern about current world economic conditions than Mexico. Sharing a 2,000-mile-long border with the United States, Mexico is like a small homeowner who lives next door to a neighbor with a giant elephant. So long as the elephant is secured and feeling well, there are no problems. But if the elephant starts wandering the neighborhood - or isn't quite up to his best on a particular day - the neighbor is the first to feel the discomfort. Mexico's current ``discomfort,'' not surprisingly, revolves around the prospect that the United States might soon experience an economic downturn. Even a slight dip in the US growth rate, given the proximity of the two nations, has an immediate effect on Mexico. Some 65 percent of Mexico's exports go to the US. Mexico's economy is far less diversified than that of the other US neighbor, Canada, and thus is more sensitive to economic shifts north of the Rio Grande. Finally, thousands of Mexicans work - legally or illegally - in jobs in the small factories and farms in the Southwest US. Many of these workers are the first fired when conditions go bad in the US.

The sharp decline - almost one-third - in the Mexican peso on the free-exchange market in recent days is but one manifestation of the turbulence now affecting Mexico. It has been caught up in the global stock market downturn, and indeed, Mexico's own stock exchange has been one of the fastest falling, plummeting some 70 percent. And the Mexican market decline comes against the backdrop of roaring inflation. The result is that speculators have been exchanging pesos for dollars, thereby threatening the Mexican government's foreign reserves of some $15 billion.

Mexican officials have been going on television to calm rank-and-file Mexicans that all is under control - and that the devaluation of the peso is not in itself a threat to the nation's economic future. Whether this calming effort will work is still uncertain. Time will tell. Mexico's neighbors to the north must be taking comfort that in at least one part of the world people seem to want dollars, rather than get rid of them!

For now, however, Mexico continues to retain a modified two-track system on the peso; there is a more controlled market, which involves some 80 percent of all Mexican financial transactions. And there is the uncontrolled free-exchange market - such as tourism and investment. It is the uncontrolled sector that has been allowed to float downward, leading to the latest devaluation of the peso. The devaluation should help spur tourism and some investment, as well as curb excess currency speculation.

Mexico has made much progress in meeting its huge external debt and in modernizing its industrial sector. Mexican officials are correct in working to ensure that their economy continues to grow - which in turn means keeping a wary eye on the huge elephant next door.