On September 1, Mexican President Ernesto Zedillo Ponce de Leon delivered his first State of the Nation address to the Mexican Congress. After the presentation, investors signaled their applause by pumping up Mexican stocks to a nine-month high.

As stated by Zedillo, if Mexico had taken a less resolute path in order to prevent the breakdown of the national economy, the outcome could have been considerably different. In fact, he said "The process of recovery would have taken several years and perhaps decades."

Mexico's stiff austerity measures have indeed paid off. The Mexican economy is showing increasingly strong signs of rebounding from the financial crisis which began last December 20th. As a result of President Zedillo's economic recovery plan implemented some months ago, the peso, which surpassed 7.5% last March, has stabilized at an averaged of 6.19% per dollar from June through August; inflation is estimated to have declined to about 2% for the month of August; and the interbank interest rate, which reached almost 110% in March, dropped to less than 40% in August.

New trade figures also show a strong correction in Mexico’s previously large trade imbalance. A 32.1% surge in exports and more moderate 7.5% decline in imports has resulted in a trade surplus of $3.7 billion for the first seven months of 1995. Almost 90% of Mexico’s troublesome “Tesobono” short-term debt has been retired, and very importantly, both the government and private sector have been able to reenter the capital markets sooner than expected.

As recently reported in The Exporter, a survey conducted by the American Chamber of Commerce indicated that capital investment in Mexico by member firms is projected to actually increase by 5.1% this year -- in spite of the crisis. Some of the investment is anticipated to flow into new privatizations and openings in areas such as telecommunications, satellite operations, power generation, rail transport, secondary petrochemicals and ports.

The economic path chosen by the Zedillo administration is a courageous course, but also a difficult one, entailing significant short-term hardships. It should not be taken for granted.

In response to Mexico's earlier debt crisis in 1982, then President Jose Lopez Portillo chose a very different path -- one which nationalized banks, imposed exchange controls, and raised import restrictions and other protectionist barriers. The results were years of protracted economic stagnation.

When the December crisis erupted, Mexican authorities never wavered from their determined adherence to free markets and increased modernization. While some tariffs have increased against some non-NAFTA countries, Mexican authorities have maintained their commitment to continued trade liberalization with NAFTA members and other trade agreement partners.

Mexico has learned its lesson well. Unfortunately, the alternative of protectionism is still seen as an option by some in the region.

During the early 1990s, Venezuela was hit hard by a severe economic downturn. High interest rates and political turmoil precipitated a crisis that caused foreign investment to flee. Unfortunately, Venezuela’s protectionist response only made the situation worse.

Like Mexico in the 1980s, Venezuela nationalized its banks, imposed capital controls, and increased trade barriers. Predictably, the consequences have been dismal. Investment continues to slump and inflation and interest rates remain high.

Other countries in Latin America, feeling the pressure from the Mexican financial crisis and other factors, have also flirted with the temptation of protectionist policies. In March, for example, Brazil raised import tariffs on 109 items. In an action which negatively affected it closest trading partners, Brazil increased duties on automobile imports from 32% to 70%. Argentina recently raised tariffs by 3%. By and large, however, most countries in the region have remained committed to open markets.

Over the last decade Mexico has been an important test case for the free market model of development. Today, its steadfast commitment to free markets and trade liberalization -- while also pressing ahead with important legal, judicial and political reforms -- continues to make Mexico a role model for other developing countries.

This commitment, with assistance of the U.S. led financial package, has laid the foundation for a remarkably quick economic rebound. It is also ensuring a speedy resumption of the strong, two-way trade expansion that has characterized the growing, mutually beneficial, U.S.-Mexican trade alliance. This is a model that should continue to be encouraged.

This article appeared in The Exporter, October 1995.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the ManzellaReport.com, is a world-recognized speaker, author of several books, and a nationally syndicated columnist on global business, trade policy, labor, and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.

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