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The following article appeared in Left Business Observer #68, March 1995. It was written by Doug Henwood, editor and publisher. It retains its copyright and may not be reprinted or redistributed in any form - print, electronic, facsimile, anything - without the permission of LBO.

The Contract with Mexico

It's a good thing that Mexico's economy is so fundamentally sound, otherwise the present bailout would probably cost $100 billion or more, instead of only 50.

Mexico is not fundamentally sound, of course, but saying so is a requirement for renewal of punditry licenses. And that's by a very conventional definition of soundness. With low growth rates and real investment such a low share of GDP, Mexico's profile resembles a sclerotic rich country more than it does one in the early or middle stages of hyperdevelopment. Instead of enjoying the boom that was promised after the years of harsh "adjustment" - endless rounds of austerity and debt restructurings that culminated in the North American Free Trade Agreement (NAFTA) - Mexico faces another deep recession, and Mexicans face a real income cut of up to 40% over the next year, after the halving of real incomes in the 1980s.

Despite some recovery from the late 1980s, real (inflation-adjusted) per capita GDP is still 9% below 1981's peak, and real per capita investment 28% lower. The 1995 crisis promises to knock both these figures for a loop. This is not what booms, even orthodox booms that can leave the ordinary population in the dust, look like.

The contrast with countries that really are booming is sharp. As was pointed out in LBO #64, while in South Korea, investment levels were approaching 35% of GDP, well up from the 1970s, Mexico's were hovering just above 20%, below the level of the 1970s. That's ignoring the fact that Mexican income distribution is far more unequal than Korea's (the richest fifth of Mexicans claim almost 14 times as much income as the poorest fifth; in Korea, the figure is "only" six times; the U.S. falls about midway between these two countries).

Despite this fundamental weakness, investors came to believe their own propaganda about Mexico's fundamental soundness. Hot to catch a piece of the next economic miracle, plungers poured $85 billion into Mexico from 1991 through mid-1994, almost 80% of it in the form of portfolio investment (paper assets like stocks and bonds), and only 20% in the form of direct investment (real things). The surprise isn't that the bubble burst, but that it swelled to such sublime proportions.

The disaster is rich with political ironies. Ernesto Zedillo was elected by voters who weren't deeply fond of his platform or party, but thought he represented stability. The opposition leftish candidate, Cuauhté