The Perils of Perestroika: Mexico Still Needs Economic and Legal Reform

By Navarro, Agustin G. | Reason, July 1994 | Go to article overview

The Perils of Perestroika: Mexico Still Needs Economic and Legal Reform


Navarro, Agustin G., Reason


In recent months, several violent episodes have shaken observers who had come to see Mexico as a stable, modernizing country led by a benign, reformist regime. The uprising in Chiapas, the assassination of the ruling party's presidential candidate, the kidnapping of two prominent businessmen, and the killing of Tijuana's police chief may ultimately turn out to be completely unconnected. Yet together these shocking incidents have helped create an environment of uncertainty and concern for the future. President Carlos Salinas can help to dispel these fears during his remaining time in office by guaranteeing free elections and forging ahead with economic reforms.

Salinas's "neoliberal" reforms began as a well-disguised program of shock therapy, including the renegotiation of public and private external debt; government spending cuts; limits on imports; new taxes, including a 2-percent tax on assets; and vigorous tax-collection efforts. The result was an economic contraction that cut inflation but also reduced growth and left many Mexicans resentful of the government and suspicious of economic reform.

But Salinas added a novel element to these austerity measures: an ambitious program of privatization that included all the banks nationalized by the Lopez Portillo administration, the public telephone company, steel mills, and port facilities. The so-called strategic enterprises, such as the oil, electrical, and railroad monopolies, remain untouched. But so far the Mexican government has privatized more than 600 state-owned enterprises.

Unfortunately, the sale prices have often been arbitrary. Some petrochemical plants were sold at very low prices, while other enterprises, including the banks, were sold at very high prices that were far from their market value. Bank customers in Mexico commonly believe that the main reason for the current high fees on banking services--two to three times as much as those in the United States--is the need to recoup exorbitant acquisition costs.

A more significant problem is the lack of deregulation. As in Argentina, Brazil, and other Latin American countries that have sold state-owned enterprises, privatization in Mexico has often meant transferring monopolies from public to private hands. As long as domestic and foreign competition is either minimal (as in banking) or nonexistent (as in the telephone market), customers are not much better off than before privatization.

Another major fault in Salinas's program is a price-control arrangement known as the Stabilization Pact, which covers all the raw materials, foodstuffs, and high-consumption consumer goods whose prices are used to calculate the Mexican Consumer Price Index. This pact among labor unions, the government, and prominent businesses subjects increases of all controlled prices to the approval of representatives from these three constituencies. Among other things, the pact has led to long gas lines, widespread price speculation, and shortages of tortillas, bread, soft drinks, and other foodstuffs. The pact mainly serves to contain the political fallout from workers facing rising prices while their own wages are subject to government control. All wage increases are subject to government approval, and pact negotiations set ceilings on minimum wages. Because the government does not allow the labor market to function, the "minimum wage" has, in practice, become a maximum wage for many workers. …

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