NAFTA, partie 3

            In 1970, Luis Echeverría Alvarez assumed presidency and once again government intervention was strongly preferred over the laissez-faire market economics. The Echeverría economic plan was referred to as ¨Shared Development¨ (desarrollo compartido) that translated to greater presence and role of state in the economic affairs of the nation. Leftist tendencies and disdain toward the US did little to foster improved trade relations between countries; Mexico's trade with the US dropped without generating sufficient new trade with other countries to offset this decline.This administration is remembered for revitalizing the nationalistic theme, robust protectionism, large public debt, squandering of oil-produced revenues, irresponsible emissions of currency, cyclical growth accompanied by inflation, monetary devaluations, and severe economic crisis.

  Under the next president, José López Portillo (1976-1982), spending continued; despite the entanglement of international debt handed down from the previous administration. Lopez-Portillo siphoned the last of the oil-boom earnings from the public treasury in order to increase the number of government offices, state entities and government-owned enterprises.  He is particularly remembered for the expropriation and nationalization of the Mexican banking system in 1982. Under his direction, the government, spurred by an ever-increasing foreign debt, expropriated-confiscated all Mexican and foreign held dollar accounts in the country and converted them into peso accounts at a very low and unfavorable exchange rate for investors creating tremendous and lasting mistrust of Mexican monetary politics.  Although the Mexican market was already one of the most closed economies in the world at this time, the government further tightened its protectionist policy in attempt to discourage imports and prevent capital from leaving the country. Black markets supplied consumers with both prohibited foreign goods and dollars.

            The Echeverría-López Portillo administrations emphasized nationalism and were plagued by a mixture of progress, setbacks, growth, recession, inflation, speculation, devaluations, and particularity acute social inequalities. The growth of previous decades was not maintained and confidence among public and private investors was shattered.  The severe protectionism, nationalistic policy, uninviting restrictions on foreign ownership, and currency controls made it virtually impossible to generate funds necessary for economic growth.

    When the next president, Miguel de la Madrid, assumed office (1982-1988), he inherited the political stance and enormous debt of his predecessors.  For the first three years of his administration he followed the preset path until a looming government debt, unprecedented currency devaluations, rampant inflation, and a stagnant economy with little hope for recovery led to a dramatic about-face in macro economic policy. In 1986, De la Madrid discarded the closed-border macroeconomic politics of preceding decades and Mexico joined GATT (General Agreement of Tariffs and Trade).  In less than five years, foreign portfolio and direct investment doubled, most of which came from the US.  Modern technology, foreign business culture, practices, and protocol flooded the Mexican market rewarding private investment with productivity gains and rewarding consumers with lower prices.  However, aggregate results of this administration presented a six-year inflation of 4771%  (four thousand seven hundred seventy-one percent!) and a scant 1% nominal growth in gross domestic product.  Many of the economic and social woes of this administration stemmed from previous presidential politics, accumulated debt and interest, stifling IMF (International Monetary Fund) conditions for emergency balance-of-payments relief, backlashes from decades of protectionism, the frequent printing of currency not backed by reserves, and a dismal lack of investor confidence in the Mexican system. Despite its poor economic performance (or perhaps because of this), the De la Madrid administration became the pivotal point in national macroeconomic trade policy.  Traditional protectionism, adopted and in effect to varying degrees since 1893, was finally abandoned in favor of a gradual barrier-free trade approach.

    From 1986 on, trade barriers kept falling in Mexico; most notably from 1988 on; under the presidency of Carlos Salinas de Gortari.  Although uncommon continuity between the Salinas and De la Madrid administrations ensued, both national and foreign investors remained wary of Mexico's newly professed pledges to free-market reforms.  The public was not forgetting Mexico's well-deserved reputation for capricious policy swings, property seizures, and nationalization of private enterprises, restrictive and inconsistent foreign capital regulations, and erratic Marxist ways.   To instill confidence in the system and reestablish the corporate bond between the government and the private sector, Salinas privatized the Mexican banking system (overturning Lopez Portillo's expropriations), state telephone monopoly and over three hundred government-owned enterprises.  He proceeded to sign the North American Free Trade Agreement (NAFTA) thus promising excellent growth expectations and long-term security for investors in an eventually barrier-free economy.   In addition, the peso was maintained stable but over-valued relative to the US dollar to subdue fear of loss by currency devaluation. US companies and products streamed into the Mexican market completely transforming the retailing, franchising and industry environments. Mexican firms faced true competition for the first time.  Meanwhile, under this long-run strategy; about a twenty-year time horizon; for sustained growth and development, Mexican private enterprise had been cajoled into investing in the modernization of value-producing infrastructure to compete effectively with foreign products and competitors expected to enter the Mexican market as a consequence of NAFTA. Contrary to original plans that sought stabilizing foreign direct investment, much of this modernization was financed by bank loans and volatile foreign portfolio capital.  Although Salinas' plan was heralded during his administration as the strategic economic panacea, the measures taken for its implementation inevitably resulted in an exorbitant current-account deficit.

    The debt crisis had been brewing quietly but fervently during Salinas' administration.  It finally erupted under the following administration of Ernesto Zedillo Ponce de León, who took office in December 1994.  Facing a foreign debt exposure of over $USD 28 billion, Zedillo and his financial advisers shocked investors by drastically devaluating the peso in an attempt to confront (by making imports expensive and exports inexpensive) the deficit problem. Although currency devaluation is a classic response to reverse foreign debt trends, Mexicans and foreigners alike felt deceived by this brutal decision.  Their confidence, gradually won-over by the Salinas' no-surprise strategy of upholding the pesos' value, was shattered. In 1995 the stock market crashed, sales plummeted, unemployment jumped, the economy was paralyzed as the country tumbled into a deep recession. Mexican companies who had borrowed both dollars and pesos faced bankruptcy. (Interest rates in pesos float to reflect global trends.  Without interest adjustments, Mexican banks with outstanding international loans would not be able to survive.)  A strict monetary policy designed to keep inflation low (approximately 10-20% annually) made capital expensive and further discouraged investment and growth. From 1996 on signs of economic recovery began to surface, especially in export related sectors. NAFTA helped to mitigate the effects of the crisis and accelerate recovery.  Undeniably, the special relationship that Mexico formed with the US and Canada helped reinstate Mexico's credibility in the eyes of global investors.  Without this credibility, Mexico could not have lured billions of dollars in stock investments, production installations, retail establishments, franchises and service related businesses; all of which bring with them fresh capital, state-of-the-art technology, new opportunities, jobs, and the competitive spirit that Mexico badly needs to succeed.