New economic plan threatens to split Mexico

Just two days after Mexicans received the first dose of a potent new economic austerity program, the sharply divided response already indicates a basic underlying split in Mexican society. And it threatens the government's hopes to eventually wean the country from inflation. ``The government is taking steps that are really going to create the syndrome of two Mexicos,'' an economist from a local consulting firm says.

``If you are in the foreign-export sector, then you'll probably do well. If you're not, as most Mexicans are not, then you are really going to be hurt,'' the economist adds.

The widening chasm hurts the government at a time when it urgently needs to inspire unity and confidence to prevent its economic crisis from worsening, according to analysts.

Over the past two months, the collapse of the Mexican stock market and the drastic peso devaluation have eroded public faith, which had been slowly gaining strength during the first 10 months of the year. Now, with perhaps its most challenging presidential election ever just seven months away, the ruling Institutional Revolutionary Party (PRI) needs to regain the trust, not just of investors but also of the voting public.

That's something the new plan has apparently not done. Widespread distrust only intensified Wednesday when Mexicans awoke to gas prices 85 percent higher than the day before and sugar prices that were up 81 percent - among other sharp rises in public-sector prices. The gas hike, in particular, is expected to be a catalyst for across-the-board price rises.

On the streets and in the stores of Mexico City, people have been reacting with confusion and anger. They don't understand how the government could promise to suspend all new public investments when it has already spent the past five years scrimping on projects to fix roads and build infrastructures.

And they don't understand how longtime labor leader Fidel Vel'azquez could agree to the new salary package, which falls well short of his 46 percent demand. But they are most angry - and most convinced - that prices are sure to continue skyrocketing.

``We no longer have any confidence in our government,'' said Margarita Tovar, a house maid leaving a local market where many Mexicans were buying goods to hoard before the expected price hikes took effect.

``They have fed us a mountain of stories and programs, but the prices keep going up,'' Mrs. Tovar said, complaining that her $36-a-month salary is no longer enough. ``I don't think they will ever stop.''

The government of President Miguel de la Madrid Hurtado admits that the 144-percent inflation rate will go up even further in January and February.

It hopes, however, that wage and public-sector price freezes during these months, along with reduced public spending, will reverse the steady climb of inflation. Then in March, when wages and public-sector prices start being indexed monthly according to the price of a basic basket of consumer goods, they will reflect inflation's downward trend.

Independent economic analysts are skeptical. Under the plan, they say, the cycle of inflation must be broken in the next two and a half months, or else the planned indexation would only lock in a high inflation rate. But there may not be enough time.

``You cannot reasonably expect in the first two months of next year that the back of inflation will have been broken - either in real or psychological terms,'' says John Christman, director of Asesor'ia Econ'omica Especializada, a local consulting firm. ``I don't think any economy in this situation could pull it off in two months.''

And you can't pull it off just by addressing ``real'' inflationary factors, according to most analysts. The expectations of inflation that have been confirmed over the past year pose a more intangible and intractable obstacle, they say.

By initiating their program with a quick boost in public-sector prices, and gas prices in particular, the government makes it much more difficult to eradicate this psychological component.

Says one United States expert on the Mexican economy: ``It's a risky strategy because it validates inflationary expectations, which might make it difficult to squeeze inflation out of the system in an orthodox way.''