Mexico's Petroleum Hangover

By Alexander L. Taylor III

After a spending spree, economic upset arrives

With sudden and bruising harshness, Mexico's five-year economic joyride on the crest of rising worldwide petroleum prices has come to an end. Instead of enjoying swelling financial reserves and broadening prosperity for Mexico's 72 million citizens, the government of President Jose Lopez Portillo finds itself confronting a witch's brew of staggering unemployment, rising inflation and pyramiding foreign debts.

In a high-risk maneuver to boost exports and slow the drain on the country's financial reserves, Lopez Portillo's finance secretary, David Ibarra Munoz, last month orchestrated a 40% devaluation of the Mexican peso. Unfortunately, the action has done little yet to ease any of the economy's underlying woes. Last week Munoz resigned, to be replaced by Jesus Silva Herzog, a Yale-educated economist and close friend of Miguel de la Madrid Hurtado, Lopez Portillo's hand-picked presidential successor when nationwide elections are held in July.

Hardest hit of all by the devaluation have been Mexico's middle and lower classes, who have been devastated by the diminished ability of their paychecks to buy imported goods that range from powdered milk to electrical appliances. Late last week the Secretary of Labor announced that all workers will get wage increases between 10% and 30% to compensate for the devaluation. Meanwhile, in an effort to prevent a potential price explosion from shattering the entire economy, which is already suffering from 30%-plus inflation, the government has imposed controls on more than 5,000 goods, ranging from chocolate and ham to automobiles, and has closed down businesses that are not complying.

About the only obvious beneficiaries of devaluation so far have been the Mexi can businesses that are nestled along the U.S. border from Tijuana to Matamoros. They are enjoying a virtual stampede of U.S. consumers, who are swarming south from San Diego to cash in on lower prices resulting from a U.S. dollar that suddenly buys nearly twice as much in Mexico as it did a month ago. Bargains include unleaded gasoline, which now sells for 87-c- per gal., vs. $1.50 in early February, and white rice, which goes for a mere 30-c- per Ib. By contrast, business in many big shopping centers on the U.S. side of the border has all but collapsed.

Despite its best intentions, Mexico has fallen into the same economic trap that ensnared Nigeria, Iran and other developing nations that found themselves suddenly oil-rich in 1974. Instead of using its wealth to pay for a program of slow and steady economic development, the country plunged headlong into accelerated industrialization. For a while, the campaign produced impressive results, creating nearly 1 million new jobs per year and propelling Mexico to the rank of the world's fourth largest oil producer, with an output of 2.7 million bbl. per day.

Yet social and economic strains soon began to multiply. With a birth rate of about 32 per 1,000 inhabitants, Mexico has one of the fastest-growing populations in the Western Hemisphere. In the rush toward modernization, impoverished rural Mexicans by the millions began pouring into crowded urban centers like Mexico City and Guadalajara looking for jobs. This has not only turned the nation's capital into an environmental nightmare of sprawling slums and traffic-choked streets, but has also put a drain on farm labor that has helped rock agricultural output. The country has become a chronic importer of such typically Mexican food staples as corn and beans.

Inflationary pressures also began to boil up, pinching nonoil exports and flattening the tourist industry, the country's second leading supplier of hard currency. To keep the economy's accounts in balance, the government has been forced to turn more and more to foreign borrowings. Since 1975, foreign debts have shot up from $14.5 billion to $48.7 billion, and Mexico has surpassed Brazil to become the most heavily indebted developing nation on earth. Meanwhile, capital investment has slowed and, according to unofficial estimates, as much as half the labor force is not fully employed.

In an attempt to hold on to its political popularity as July's election approaches, the government two weeks ago announced a twelve-point program designed to stabilize the economy and hold down price increases. As President Lopez Portillo himself admitted: "If we let inflation get out of hand, we run the risk of unleashing a class struggle in an election year."

For half a century, the Institutional Revolutionary Party (P.R.I.) has stifled true opposition and preserved its system of de facto one-party rule by almost automatically broadening government programs to keep its base of support. Now the Mexican economy can no longer support such largesse. As a result, the government has been driven in an election year to a package of unpopular, and so far largely ineffectual, austerity measures. Blessed as it is with an abundance of natural resources and an eagerness to exploit them for the common benefit, Mexico ought to have a bright economic future. But even the most cohesive social system is bound to be tested by the sort of strains now at work on the country's economy. Unless the government acts with wisdom and caution, the nation that has always hoped to join the U.S. and Canada in a triumvirate of North American prosperity could instead find itself slipping toward the revolutionary chaos of its Central American neighbors.

--By Alexander L. Taylor III. Reported by Laura Lopez/Mexico City

With reporting by Laura L

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