Por Christopher Whalen
www.rcwhalen.com

Puntos Para Salvar a Mexico
Reforma/El Norte
December 29, 1994

	Mexican President Ernesto Zedillo confronts an enormous
national crisis not of his making but which is now his sole
responsibility.  Millions of Mexicans and many others outside the
country are looking to him for a solution to the economic chaos caused
by the more than 40 percent devaluation of the peso against the dollar
over the past week.

	The good news is that the hardest part, namely the
long-delayed adjustment of the bloated Mexican currency, is now
largely complete.  While the peso may continue to fall against the
dollar over the next several weeks and months, the process of
restoring genuine stability to the financial markets has already
advanced a long way and can be completed as soon as Zedillo presents a
credible economic strategy based on continued market liberalization.

	Any viable program must begin with a complete repudiation of
the key flaw in the economic policy of the previous government, namely
pegging the peso to the dollar. Free market economics teaches us that
a pegged currency implies a future devaluation.  From the very outset,
Mexico's new government must publicly admit that in the future the
Banco de Mexico (Banxico) will target internal price stability rather
than a fixed exchange rate as part of a new program for stable
economic growth and investment within the North American Free Trade
Agreement.

	Here are six basic points that must be included in any
successful plan for economic and financial salvation in Mexico:

	First, Zedillo must speak directly to the Mexican people and
say, in the most basic terms, that the peso adjustment was necessary
and long- overdue.  The estimated $30 billion current account deficit
for 1994 and rising interest rates in the U.S., not the guerrillas in
the southern state of Chiapas, were the real causes of the present
market turmoil.  Zedillo might simply say that NAFTA, the August
elections and other factors combined to prevent a change that arguably
should have been made over a year ago.

	Second, Banxico must eliminate future risk of sudden currency
shocks.  The central bank should publicly declare that it will end
open-market intervention to support the peso and allow the currency to
float until it reaches a "natural" level supported by the country's
commercial and investment flows.  Once the peso reaches a truly free
rate against the dollar and the threat of a future maxi- devaluation
is eliminated, interest rates in Mexico will fall and economic growth
will return to a country where many once strong export industries are
on the verge of collapse.

	As Finance Minister Jaime Sera Puche correctly told the
leaders of the G-7 nations several years ago during the EC's currency
crisis, foreign exchange market intervention is an exercise in
futility.  To further bolster the sagging peso, the Zedillo government
must end interventionist restrictions on currency trading and allow
speculative short-selling of pesos and other domestic financial
instruments in order to help expand and strengthen the domestic
capital market inside Mexico.

	Moreover, by liberalizing the currency market, banks and
companies will be able to avoid the type of huge financial losses that
discourage investment and now threaten Mexico's basic financial
stability.  With over $160 billion in total foreign debt and an
economy now 40 percent smaller in dollar terms than at the start of
1994, Mexico now is on the verge of a new debt crisis.  Only through
prompt action to reassure domestic and foreign investors by continuing
to open the economy can Zedillo avoid a complete catastrophe.

	Third, Banxico and the Zedillo government must reject the
misguided and self serving advice now coming from the U.S. Treasury to
respond to the crisis by either throttling internal growth or using
new foreign loans to temporarily restore liquidity to the peso.  By
rejecting austerity and increased foreign debt, Mexico can permanently
solve the current short- term volatility of the peso and build a firm
foundation for fostering new job creation and higher real wages -- two
important aspects that were noticeably absent from the economic
program of the previous government.  The self-serving bankers on Wall
Street will argue for more debt and economic discipline, but Mexico's
people need growth and jobs.

	Fourth, consistent with the ending of foreign exchange market
intervention and lifting controls on short-sales of the peso, the
Mexican government should quickly end its socialist system of wage and
price controls. Just as the peso needs to find a natural and
sustainable level against the dollar, Mexican wages and prices must
also be allowed to float freely to let the Mexican economy to find
competitive "parity" vs. the U.S.  and Canada.  After an immediate,
one- time upward price adjustment to accommodate the recent
devaluation, wages and prices should stabilize and track Mexico's
long-term rate of inflation.
	
	Fifth, before rushing forward with new privatization schemes
recommended by the same avaricious Wall Street banks that engineered
the present crisis, the Zedillo administration should devise a new
approach to selling part or all of the remaining state-run companies
in order to maintain government revenues while encouraging private
initiative in the economy.  Simply selling state-owned assets to
finance an unsustainable foreign exchange rate, current account
deficit or income redistribution program is a mistaken policy of the
previous government that a successful Zedillo administration must
abandon forever.

	Sixth and finally, President Zedillo must tell the Mexican
people that while political tensions in Chiapas may have started the
run on the peso over the last week, the true cause of Mexico's worst
financial crisis since 1981 came from an unsustainable economic
program that emphasized foreign borrowing in dollars rather than real
growth in domestic peso terms. In order to regain badly needed
political credibility, Zedillo must assure Mexicans and foreign
investors that the priority for the future will be jobs and exports,
not new foreign debt and artificial "stability" built on fickle
short-term investment flows.

	Amidst all of the recent bad news about Mexico, the Christmas
crisis of 1994 presents an exciting chance to change many aspects of
the old economic formula, a contradictory mixture of corporate statism
and free market ideas that hurt Mexico's newly opened economy,
destroyed millions of jobs and created the conditions leading to the
current crisis.  By rejecting discredited expedients such as currency
market intervention and wage/price controls, Ernesto Zedillo can turn
the present crisis into an opportunity and complete the free market
opening in Mexico that his successor only just began.

Christopher Whalen is Chief Financial Officer of Legal Research
International in Washington and edits The Mexico Report, a fortnightly
newsletter.  Page 3