Mexico: Credit Where Credit Is Due

What country is running a surplus in both its trade and budget accounts? Germany? No. Japan? No. The U.S.? Hardly. Mexico, thank you. What country, facing a horrific currency crisis, has had the political courage to ram through huge tax increases on consumption--not investment or personal income--and sell off big stakes in state-owned companies? France? Never. Spain? Not yet. Mexico again. What country, facing grave economic conditions, has kept its capital and trade markets totally open? You guessed it.

Mexico's bad rap on Wall Street is blinding people to the speed with which it is moving through its post-peso-crash deflation and recuperation. The country is running its first trade surplus in seven years. The Bolsa is moving up (it's off 17% for the year, compared with 21% for Japan's Nikkei 225 Index), and the peso appears to have stabilized.

That's why the mischief created by Senator Alfonse M. D'Amato (R-N.Y.) is so destructive. His move to kill the financial-rescue package for Mexico throws just enough doubt into the markets to keep foreign investors from returning.

D'Amato's move doesn't make life easier for President Ernesto Zedillo Ponce de Len, who must meet two challenges. Inflation, now running near 60% annually, must be crushed. The sharply deflating economy, spurred on by a 5% hike in the value-added tax, should do it, allowing interest rates running currently at 100% to drop and revive the private sector.

Corruption is another matter. The great surprise to come out of the Mexican financial crisis is how widespread narco-corruption is within the highest circles of the Mexican political Establishment. The sense that Mexico was about to join the First World group of nations was shattered by the revelation of drug money insinuating itself to the very top of the Salinas government. Zedillo must build a modern bureaucracy--from a truly independent central bank to a modern police force, uncorrupted by drug money. This is no small task for one man in a country that kills its political leaders with appalling frequency.

The "emerging market" euphoria surrounding Mexico in the early 1990s may have been naive, particularly in its ignorance of the political dimension to development. But the gloom surrounding the country's prospects today is equally invalid. Mexico is taking extreme pain to right its economy. It may surprise everyone with how fast it snaps back to health.

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