It's Time For Family Income To Grow

Just a few months ago, Mexico was being held up as a paragon of emerging market virtue. It had done everything right--privatizing state-owned companies, opening its capital markets to foreign investors, running a tight fiscal budget, and pegging the peso to the dollar. Democratic and Republican leaders in Washington, big business, and free-trade advocates exerted enormous political muscle in Congress to pass the North American Free Trade Agreement, the crowning glory of Mexico's liberalization.

Today, Mexico is in economic meltdown, plunging toward recession after a calamitous peso devaluation. In Washington, isolationists and globalists are battling over the merits of free trade and why American taxpayers should provide $20 billion to bail out Mexico when government programs are being cut back home. What went wrong?

Truth is, there is nothing fundamentally wrong with Mexico's real economy or with the principles of free trade. The peso crisis is a political crisis caused not by NAFTA but by an Institutional Revolutionary Party secretly printing money to win an election that would continue its one-party dominance of Mexico. Despite the existence of what was supposed to be an independent central bank, statistics on the money supply and hard-currency reserves were treated as state secrets. Markets and both domestic and foreign investors were kept in the dark as the reserves backing an overvalued peso shriveled.

If there was a failure to anticipate, it was born of political naivete. Just about everybody, from multinationals to mutual-fund managers, misread Mexico because they ignored the politics of emerging-market countries. America's obsessive belief in the very real benefits of economic liberalization led to a blindness toward political problems. We cheered while Mexico and other developing nations such as China moved quickly toward First World open economies. We chose to ignore the backwardness of their corrupt Third World political systems.

U.S. globalists are now paying the price for naively expecting too much too fast. It took centuries for Europe to make the transition from feudalism to democratic capitalism. Technology will undoubtedly speed up the time frame in today's emerging economies. But setbacks are inevitable as the entire globe, for the first time in history, shifts to open markets. Politics will prove as crucial a component as the markets themselves, and the two may not progress at the same pace. That is the real lesson of Mexico.

For the U.S., a retreat to protectionism would be a disaster. The U.S. economy is linked to the engine of global growth. But America--and America's taxpayers--cannot be expected to finance the expansion of capitalism around the world without sharing in its benefits. The U.S. cannot be expected to export jobs and income forever. It cannot be expected to keep its hugely rich domestic market wide open while China, Japan, Korea, and other countries keep theirs relatively closed.

At the beginning of the cold war, America financed the Marshall Plan that kept Europe free and capitalist because it was in America's self-interest. In the post-cold-war era, we have the same self-interest in promoting free trade and free markets. Given the failure of government, Wall Street, multinationals, and the media to anticipate the debacle in Mexico, an isolationist backlash against Clinton's rescue package is understandable. Nevertheless, the nativist tide that is rising in Washington runs the risk of pushing the economic clock back to the 1930s. And we know what happened then.

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