Mexico takes strong steps to boost economy. Devaluation part of broader plan

Mexico's sharp devaluation of its currency Monday is part of an economic package designed to encourage exports, cut the public sector deficit, and combat triple-digit inflation. An important counterbalance to the 22.2 percent devaluation of Mexico's controlled currency was a decrease in the maximum import duty from 40 to 20 percent. This measure is aimed at both restraining inflation and maintaining imports, which otherwise would have been hard hit by the devaluation.

At press time, only some details were known about the pact to be signed Tuesday by officials, labor leaders, and private businessmen. But sources close to the negotiations sketched out some tentative outlines:

Loosening price controls on public-sector goods like gasoline, basic foods, and telephone services.

Cutting the public-sector deficit by sharply restricting public spending, reducing subsidies, and privatizing some parastatal industries.

Opening up freer export and import markets by devaluating the peso, reducing state control over prices, and lowering tariff restrictions.

Increasing workers' salaries at a rate lower than the 46 percent retroactive raise labor leaders had previously demanded.

Most economists here agree that such strong steps are necessary to bolster Mexico's economic standing, which has been battered by the recent decline in world stock markets and its own 135 percent inflation rate. Such a plan would seem amenable to Mexico's largest trading partner, the United States. The US has long encouraged Mexico to loosen trade restrictions, and lighten its public-sector load.

But there are two potentially negative side effects. First, analysts warn that the package - while intent on inflation - could further alienate a population grown weary from six years of austerity. Second, by lowering tariffs and opening up internal markets to foreign competition, the government could endanger a number of small- to medium-size companies formerly protected by high tariff walls.

Most analysts consider the devaluation a necessary, if painful, first step. ``With the devaluation, the government is biting the bullet, bringing the peso closer to its real levels, and then trying to hold it there,'' says one economist at a leading stock brokerage firm. ``It goes in line with the government's efforts to keep demand as normal as possible,'' he says, contrasting the move with Brazil and Argentina, where an artificially stimulated demand led to hyperinflation.

But for the average Mexican worker, the ``bullet'' is another dose of austerity after six troubling years of declining public spending and deteriorating wages. Labor leader Fidel Vel'azquez remains dissatisfied with the salary negotiations, in which the government has proposed a 15 percent wage hike effective Tuesday to be followed by a 20 percent increase on Jan. 1. That falls well short of the 46 percent Mr. Vel'azquez had been demanding, and seemed to be the pact's one remaining obstacle.

Most diplomats and private-sector economists agree Monday's controlled-rate devaluation will be less wrenching for consumers than the 32.8 percent plunge by the free-market peso Nov. 18. That might seem odd, since the controlled rate is used in 75 percent of all dollar transactions in Mexico, including most major exports and imports.

But economists cite one major reason: The government offset the effects of the devaluation by lowering the maximum import duties. If that measure had not been taken, economists note, shop owners would have automatically paid more for imported materials, passing on the added costs to consumers.

Another reason for the calm reaction to the devaluation is that many saw it coming. After the free-market plunge, many shop owners increased prices anticipating a devaluation.

``Everybody knew you could not maintain such a wide gap between the controlled and free-market rates,'' says economist Jorge Castaneda. ``If the gap gets over 10 percent, money will flow naturally from one to the other,'' increasing corruption and the need for a large bureaucracy. ``The day the government devaluated the free rate, the other became inevitable.''