Mexico: Don't Blame Salinas For Zedillo's Mistakes

The reputation of former Mexican President Carlos Salinas de Gortari, one of history's great reformers, is being blackened by the consequences of his successor's ill-considered peso devaluation--an act that Salinas' government had the good sense to avoid. More is at risk in the campaign against Salinas than his reputation. The fate of Mexico is at stake. The attack on Salinas is an effort to discredit his reforms, which gave the Mexican people their first taste of economic freedom and the rule of law in their history.

Mexico's historic break from a corrupt patrimonialist state, which politicized the economy and handed out economic privileges based on favoritism, began under Salinas' predecessor, Miguel de la Madrid, who struck a new path when he privatized 122 companies during 1982-86. But it was his protege and successor, Salinas, who brought the powerful scepter of the Mexican presidency crashing down upon the heads of the corrupt old guard that had made Mexico an influence-peddler's paradise.

Salinas (PhD, Harvard University) and his band of reformers, Pedro Aspe Armella (PhD, Massachusetts Institute of Technology), Jaime Serra Puche (PhD, Yale University), Jacques Rogozinski (PhD, University of Colorado) and others dismantled the socialist institutions that had permitted the ruling Institutional Revolutionary Party (PRI) to allocate profit-making opportunities through the political process. They took the only possible course for Mexico to become a modern country, but it was to the great disadvantage of the personal interests of powerful members of the PRI, which has dominated Mexico since 1929. Prior to de la Madrid, becoming a Mexican president was a surefire way to become a billionaire.

The Mexican reforms owe much to the debt crisis of the early 1980s, which dried up commercial bank loans to Mexico, and to the drop in oil prices. The PRI no longer had the money to keep afloat the patrimonialist system it had constructed. The old guard fell on the defensive, and people with a different view of government seized power.

The old economic nationalism was discarded, trade barriers were dismantled, the socialized Mexican economy was sold to private buyers, and the banking system was privatized. Private companies multiplied as the government receded, and for the first time privilege began taking a back seat to merit. Salinas insisted on a rule of law that protected property rights and curtailed the discretionary power of government officials.

All of this was good for Mexico, but it wasn't good for the PRI dinosaurs who found the new rules to their economic disadvantage. Moreover, they no longer inspired the fear that had given them so much weight to throw around.

Their chance came when President Ernesto Zedillo Ponce de Leon succumbed to pressure to devalue the peso by 15% in December, 1994, just after assuming office. The thinking behind the devaluation was that it would make Mexican goods more competitive and reduce the country's trade deficit, which was thought to be the source of a weakening currency.

DASHED HOPES. The devaluation, as outgoing finance minister Pedro Aspe had warned, did not work. Instead, it shattered the pact that had been established between the Mexican government and investors to prevent any abrupt downward movement in the value of the peso. With investors' confidence destroyed and capital fleeing the country (Mexican money left first), the government was unable to hold the line at 15%. It dropped to 40%, and the Mexican stock market followed.

The consequences for Mexico have been dire. A controversial U.S.-led bailout has left Mexico again mired in foreign debt. Worse, the country fell under an International Monetary Fund austerity program that has proven to be a death sentence for emergent private businesses. The country suffers high unemployment, and the devaluation was wildly inflationary.

Dashed hopes are everywhere. The dinosaurs and their media allies blame the economic reforms of Carlos Salinas and are exhorting the country to return to its statist tradition. Salinas' reputation is further hurt by corruption charges against his brother, Raul, and what could be an attempt to frame Raul for the murder of Jose Francisco Ruiz Massieu, a top PRI official who was once married to the Salinases' sister.

Mexicans had best get a grip on themselves. However painful the recession caused by the peso's devaluation, it counts as nothing when measured against life in an unaccountable one-party state where success depends on bootlicking.

Before it's here, it's on the Bloomberg Terminal.