Documents on Mexican Politics.

There are options: Plan for Economic Recovery and Sustainable Development

by Economic Analysis Technical Group

Number 1 - April 10, 1995
Mexico City
March 23-24, 1995
This forum, organized by RMALC, evaluated the balance of the
North American Free Trade Agreement's first year.  The balance
insisted on the negative effects that NAFTA has had in Mexico: 
unemployment, breaking businesses, lack of a solid fiscal policy,
etc.  In light of this balance, the Plan for Sustainable
Development, developed by RMALC, was mentioned as an alternative.
The plan diagnoses the crisis and proposes alternatives,
different from those of the government, which design a long-run
economic policy that truly solves the problems of Mexico's
economic policy.
Plan for Economic Recovery and Sustainable Development
(The Plan)
Economic Analysis Technical Group
Mexican Network On Free Trade (RMALC)
The grave crisis the Mexican economy is going through is
rooted in the economic model imposed during the last 12 years.
The government emergency program is limited to confronting
problems of insolvency and short-term debt, in exchange accepting
external conditions regarding economic policy and the loss of
sovereignty over our petroleum resources.  The program will
worsen the effects of the crisis, increasing unemployment,
sending thousands of productive units to the sidelines in
bankruptcy, and leading to the collapse of the domestic market. 
All this implies foreclosing all means of getting the country on
track to real, sustainable development.
There are realistic, technically well-founded alternatives,
that would allow us to face the economic and financial crisis
head-on, attacking the problems it generated at their roots.
The crisis
The model in effect for the last 12 years is based on two
premises:  a) that indiscriminate openness would lead the country
to sustained growth; and b) that reducing the role of the State
in regulating the pace and orientation of economic activity would
allow market forces to allocate resources efficiently and
identify niches of competitiveness for the Mexican economy.  
The reduced inflation rate, presented as one of the most
outstanding achievements of the past administration, was in
reality a wholly fragile outcome of external vulnerability.  The
lack of equilibrium in the trade balance was paid off with
financial resources attracted not by the possibility of
productive investment in a healthy economy, but by high interest
rates.  Speculative capital was a key piece in the scheme.  When
it was withdrawn, inflation recovered its virulence and
The present crisis demonstrates that the macroeconomic
achievements of the last few years rest on very weak supports. 
Indiscriminate aperture didn't result in an open, robust and
healthy economy, but rather in a vulnerable, weak and disjointed
economy.  The crisis reveals the necessity of redefining the role
of the State in the Mexican economy:  we can't go back to a
large, inefficient State, but we should seek a democratic State
capable of preventing the Mexican economy from falling into the
vulnerable conditions in which it now finds itself.
The government's diagnosis of the crisis located its causes
not in the model, but rather in financial factors.  Its response
has accentuated the negative traits of the model and deepened the
effects of the crisis.  A restrictive monetary and credit policy,
on top of drastic fiscal adjustment, doesn't represent a solution
to the Mexican economy's current problems.  The package of
contraction measures is already intensifying the negative effects
of the crisis.  It is therefore urgent to put the brakes on and
change direction.
The gravity of the crisis requires a redefinition of
Mexico's economic strategy such that the process of growth is
sustained by a balance between the necessities of the domestic
market and a true export capacity.
The Plan would be part of a general strategy to achieve
economic improvement and development, and to better the quality
of life and environmental conservation.  Its immediate objectives
are preserving the industrial base and generating productive and
stable employment.
The Plan attempts to articulate the short, medium and long
terms, integrating the domestic market into a strategy for
economic growth and development and restoring the consumption
necessities of the Mexican people.
The Plan proposes to democratize the decision-making process
for economic policy.
Macroeconomic Policy and the External Sector
We must stabilize the chief macroeconomic variables, but not
at the cost of drowning the economy and dismantling industry. 
Instruments of monetary, fiscal and credit policy must be made
more flexible to alleviate the pressure that exists on the
external sector.
Two steps in this direction would be to:  a) renegotiate
foreign debt, both public and private, starting with a suspension
of payments; and b) apply emergency measures to reduce imports,
maintaining only those that are indispensable for productive
The North American Free Trade Agreement (NAFTA) imposes
severe limitations on economic policy, representing an obstacle
to the adoption of measures aimed at alleviating pressure on the
external sector.  It is therefore necessary to submit the
agreement to revisions that would allow Mexico to implement
measures that would reduce the vulnerability of its economy.
Incentives for Productive Investment
Easing pressure on the external sector would allow reduction
of interest rates in that would be unnecessary to attract masses
of speculative capital to finance the external deficit.  But this
process must be accompanied by a redefinition of the central
bank's role in financing productive activity.  This would imply a
more flexible credit policy, which would in turn help commercial
banks to ease up on credit.
With respect to fiscal policy, the Plan proposes to:
1.  Substitute a tax on speculative profits, including those
derived from stock market operations, for the 2% tax on business
2.  Stimulate productive investment incentives and job
3.  Increase the pool of taxpayers via administrative
simplification, not harassment of taxpayers.
4.  Revise the Rent Tax Law to make the tax structure fairer.
5.  Revise the special regimen for mercantile corporations,
particularly for the maquiladora [foreign-owned factories]
Internal Debt
In terms of the Plan, Congress should expedite a
Reconstruction of Domestic Debt Act, under which short-term
debits would be exchanged for long-term debt at a low, fixed real
interest rate (similar to that of the Ajustabonos [government
bonds]).  The conditions and terms of this operation would be
defined by different types of credit securities and operations. 
Commercial creditor banks could charge this interest rate plus a
reasonable percentage.
Wage Policy and Employment
Wage policy should no longer be a piece in the anti-
inflation fight, nor constitute an attraction for foreign
investment.  It should instead become a lever for growth.
The minimum wage should tend to adjust itself to the
criterion established by the Constitution:  sufficient to provide
for the all-around necessities of a family.  It would thus power
development, since workers would become strategic consumers whose
welfare would benefit the whole of the economy.
The Plan contemplates:  a general emergency salary raise;
freeing up salary negotiations between business and labor, thus
ending wage ceilings; abolishing the 1% payroll tax; creating
emergency jobs to rebuild and wide infrastructure, with funds
from the Secretariat of Social Development.
Anti-inflation Policy
The Plan doesn't leave the fight against inflation
unattended, but assumes that it is one variable to be considered
as part of an overall economic policy.  Therefore, the Plan
proposes to:
1.  Diminish interest rates, reducing inflationary
2.  Stimulate growth and productivity, both factors that
play a part in lowering costs.
3.  Diminish imported content in national production.
4.  Create a strong peso, strengthening the internal market.
5.  Reduce inflation's social effects on the majority of the
Sectorial Policy and the Role of the State
The Plan must be complemented by sectorial policies that
strengthen the industrial base and make it competitive, not only
in the domestic market, but also internationally.  This requires
measures that consistently promote formation of human resources,
scientific development, and investment in infrastructure and
communications.  The foregoing presupposes a redefined role for
the State in promoting and regulating economic activity.