Winter's chill has settled early over Mexico's markets. With the peso hitting record lows, the stock market sagging, and interest rates up, the government is doing all it can to calm the jitters. President Ernesto Zedillo Ponce de Leon pushed through a business-labor pact to jump-start the economy with tax incentives. Exporters and the Bank of Mexico proposed a $5 billion fund to shore up the peso. But the markets hardly noticed. Investors are so jaded that they even ignored one of the year's most potentially important initiatives: pension reform. The proposal to move retirement savings into private funds could pump billions into the markets over the next few years.
NO QUICK FIX. Pension fund reform is the cornerstone of an effort to raise the national savings rate, reducing Mexico's dependence on the fickle foreign capital that helped cause last December's meltdown. It comes as part of a promised overhaul of the bankrupt, state-funded Mexican Social Security Institute (IMSS), which also provides health care. A bill in Congress is promised before yearend. Zedillo is adapting Chile's private pension system, which since 1981 has accumulated a savings base equal to 41% of gross domestic product. Most other Latin American countries have followed with some form of private system.
But Mexico isn't Chile. It has almost seven times as many people, greater income disparity, and a less educated workforce. And pension reform won't give Mexico a quick fix. The government's goal is to raise the personal savings rate to 24% by 2000, from an estimated 16% in 1994. Analysts say that to fund enough investment to fuel annual economic growth between 4% and 7%, domestic savings will need to reach 25% to 30% of GDP.
The proposal would shift part of the payroll contribution that now goes to the IMSS into private funds. Fund managers from Santiago to New York are watching with interest. But many Mexicans don't trust them, and key Mexican business and labor groups oppose ending the 51-year-old state pension system. For example, Alejandro Hazas of the employers' federation worries that private funds on their own won't provide enough to live on. To counter such complaints, the government plans to let workers stay in the old system if they choose.
Implementing the reform will be a logistical nightmare. Three years ago, Mexico set up an individual savings system as a precursor to the current reform. That Retirement Savings System, or SAR, has collected more than $6 billion, but the accounts are a mess. High job turnover means workers often have several accounts in different banks. Many don't know how much they have socked away--or where.
Even supporters warn that pension-fund reform is no panacea; other policies are needed, such as tax reform to spur savings and better income distribution. In Chile, for instance, high growth in the 1980s helped spur pension-fund savings. Reform alone is "not a magic wand," warns John Lipsky, chief economist at Salomon Brothers Inc.
"TIED UP IN GOATS." One big challenge facing the government will be trying to lure the estimated one-third of the workforce in the underground economy to sign up for pension reform. And some analysts believe Mexico has overlooked a key source of savings--the poor. Says Catherine Mansell, an economist at the Autonomous Technological Institute of Mexico: "My guess is that Mexican savings are already large enough to meet development needs, but all the money is under mattresses or tied up in goats and chickens." To remedy that, the government has revived the National Savings Board, which lets depositors open a savings account with as little as $7.
So far, President Zedillo's moves to boost investor confidence haven't worked. In the short term, speculators could batter the peso even further. But pension reform could turn millions of Mexicans into investors. They will be the most effective bulwark against other people's money.