A New Mexico? toward a U.S.-Mexican Partnership

By Lustig, Nora | Brookings Review, Winter 1995 | Go to article overview

A New Mexico? toward a U.S.-Mexican Partnership


Lustig, Nora, Brookings Review


Mexico has been much in the news this past year. On January 1 the long- and rancorously debated North American Free Trade Agreement finally went into effect. In April Mexico was invited to join the Organization for Economic Cooperation and Development, thus taking its place among the world's top industrial countries. In August Mexicans turned out in record numbers to elect Ernesto Zedillo as their new president. But other headlines throughout the year laid bare Mexico's deepseated problems. On the very day NAFTA went into effect, guerrillas in the poor southern state of Chiapas led a violent peasant uprising that took the Mexican army four days to quell. Meanwhile, two kidnappings of important Mexican businessmen and two high-level political assassinations--one on March 23, of Luis Donaldo Colosio, the ruling party presidential candidate, and the other on September 28, of Jose Francisco Ruiz Massieu, the party's secretary general, shocked the country.

As ties between the United States and Mexico deepen and become more formal, particularly as a result of NAFTA, the news from Mexico, both good and bad, will acquire special relevance in the United States. From the U.S. perspective, the growing U.S.-Mexican partnership will be judged primarily on two counts: Mexican economic prosperity and democracy. Mexico's prosperity is crucial to reduce three sources of domestic U.S. political irritation: undocumented migration, the U.S.-Mexico wage gap, and environmental degradation, especially at the border. Economic prosperity is also essential to ensure Mexico's significance as a trade partner. Continued steps toward a fully open and democratic political system are also necessary to prevent potential embarrassment to the U.S. government that could limit its authority and world leadership.

Toward Economic Prosperity

For Mexico economic prosperity entails a combination of price stability, sustained output growth, and social progress. Since the debt crisis of the early 1980s that virtually bankrupted the nation, Mexico's government has pursued painful stabilization and structural reforms, including severe fiscal austerity, tariff reductions, and the sale or closing down of many inefficient state enterprises, including the airlines and the steal complex. Following the debt crisis, during the 1980s growth rates and real wages fell, inflation accelerated, and poverty rose. But starting in 1988, the reforms implemented by President Miguel de la Madrid and continued by President Carlos Salinas after he took office in 1989 began to pay off. Following the introduction of a new wage and price control program called the "Pacto" in 1988, inflation dipped to single-digit rates in 1993 for the first time in two decades. A 1990 debt reduction agreement opened the pipelines for new foreign lending to a capital-starved Mexico, and the reforms, together with the successful negotiation of NAFTA, vastly increased capital inflows. With the return of Mexican and foreign capital, Mexico's economy began to grow. again. Between 1989 and 1992 Mexico registered positive GDP growth rates in per capita terms. In 1993 growth faltered but then resumed in 1994. But to generate enough employment opportunities to stem the tide of illegal migration northward and to eradicate the extreme poverty that affects close to 10 percent of the population, Mexico's output needs to grow at higher and sustainable rates.

In the short run, higher growth rates require continued strong capital inflows. Investment will stay high if investors have confidence in Mexico's economic and political stability--in particular, if they believe that the government will resist populist measures such as expanding the fiscal deficit beyond noninflationary limits or reversing some of the market-oriented reforms.

Zedillo's big win in the August elections--as the candidate of the ruling Institutional Revolutionary Party (PRI), he received nearly half the popular vote, while the center-right National Action Party (PAN) won less than 27 percent and the left-wing Party of the Democratic Revolution (PRD), less than 17 percent--has allayed many such fears. …

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