Mexico: The Slippery Road to Stability

Mexico, slowly emerging from its worst economic crisis in decades, is in the midst of a difficult political transition. America’s neighbor to the south is struggling to break free of its authoritarian past to become a true democracy, complete with public accountability, clean and fair elections, and the rule of law. The path of political change, never expected to be smooth, became more unpredictable when, less than a month after President Ernesto Zedillo took office on December 1, 1994, a peso devaluation drove the economy into a sharp crisis.

Today political turbulence is one of the main threats to Mexico’s financial stability and economic recovery. Likewise, a weak economy and volatile financial markets reduce the chances of a successful transition to democracy. A poor economic performance weakens Zedillo. And a weak government will be unlikely to be able to implement the changes necessary to produce genuine democracy and, especially, the rule of law. In addition, continued economic crisis might breed a political reaction that could jeopardize Mexico’s fragile financial stability and the economic reforms under way to assure recovery.

Encouraging Signs

In early 1996 the economic picture brightened—a welcome relief after the bleak performance of 1995, when output contracted by an estimated 7 percent. After a surge in volatility last fall, the financial markets stabilized. The peso appreciated slightly, domestic interest rates and the open unemployment rate fell, and Mexico gained renewed access to private international capital markets. Most economic forecasts for 1996 chart a recovery, but not a brisk one. The official prediction is for output to grow 3 percent in 1996. Most predictions, though, are for 2 percent growth, practically stagnant in per capita terms.

On the political front, the government has shown its willingness to move forward with reform. President Zedillo has repeatedly stated, and taken initial steps on, his commitment to decentralizing power, fostering the separation between government and the long-ruling Institutional Revolutionary Party (PRI), completing ongoing electoral reforms, and strengthening the traditionally weak powers of Congress and the courts. Perhaps most important, Zedillo has indicated his intention to distance himself from the official party and, most significantly, to break with the practice, followed by all past presidents—of hand-picking his successor. Zedillo’s appointment of Antonio Lozano, a member of the opposition National Action Party (PAN), as attorney general is another sign of his apparent intent to govern Mexico by the rule of law. The arrest last year of Raul Salinas, brother of former president Carlos Salinas, in connection with the 1994 assassination of PRI Secretary-General Jose Francisco Ruiz Massieu was a powerful signal that the government was willing to break the unwritten rule of granting legal immunity to a former president and his family.

Political parties, civic organizations, and even the armed Zapatista rebels in Chiapas seem, judged by their actions, to favor a peaceful transition. Most local elections since early in 1995 have been free of violence or post-election rows, and their results, even when the PRI has been the loser, have been respected. The political crisis in Chiapas precipitated by a violent peasant uprising early in 1994 is being handled through peaceful negotiations. And the political parties and the government are in the process of negotiating the new terms that will rule the electoral processes, the relationship between the government and its party, and the allocation of power among the executive, the legislative, and the judicial powers and the federal and state and local governments.

But despite these bright spots, political reform is still vulnerable and financial stability fragile.

Party Bosses Do Not Like Democracy

A primary threat to Mexico’s democratic transition is the so-called old guard of the PRI, those who stand to lose if the political system becomes more open and competitive and if corruption is no longer tolerated. Members of the old guard, some now governors or leaders of blocs within the PRI, are well organized, have followers, and have access to financial resources.

They could create unmanageable conflicts within the party and exert considerable influence on its actions and programs. In exchange for their support, they could force even a well-intentioned Zedillo to look the other way while elections in some states continue to be fraudulent and while local governments continue their corrupt practices. The PRI governor of Tabasco, for example, though accused of spending outrageously far beyond Mexico’s legal campaign limit, has successfully resisted pressure from the federal government to resign. The incident may be the first of more to come. In that case, Mexico’s political picture would be mixed, with democratic practices being fully implemented in some areas, geographic and functional, and the old pattern of patronage and authoritarianism remaining in others. But what pattern will dominate cannot be answered yet.

Ironically, if Zedillo carries out his promise to give state and local governments more powers and financial resources, allowing them to raise more revenues locally, he could also increase the resources and autonomy of the local bosses and caciques. Any moves toward decentralization must therefore be accompanied by democratization. There is a danger that decentralization will not help political reform if local governments cannot be held accountable.

The PRI in Crisis

Together with the PRI’s difficulty in coming to terms with political reform, revelations surrounding the investigations of two 1994 political assassinations and the economic crisis have touched off a crisis within the PRI itself. If the party’s current crisis is not solved, the old guard is likely to be more successful in opposing reform.

One facet of the PRI crisis is financial. Long dependent on contributions from (or raised through) the government, the party is ill-prepared to find alternatives. It now faces the challenge of organizing to raise money. In this process, one particular danger is the temptation, on the part of some militants, to turn to “donations” from unsavory sources, such as narco-traffickers.

The party is also in the midst of an identity crisis. For many decades, the party, a product of the Mexican Revolution, endorsed a closed, largely state-led economy. The market-oriented reforms, particularly trade liberalization and privatization, introduced in the mid-1980s by President Miguel de la Madrid and his successor Carlos Salinas, were viewed with deep suspicion by most within the party. Although the prestige that Mexico won, particularly under Salinas, had attracted a number of PRI militants, the current economic crisis is raising renewed hostility. PRI candidates in next years legislative elections know they will face an electorate ready to blame the crisis on the PRI government. Understandably, they will be strongly tempted to search for a platform both more congruent with the party’s original ideology and more attractive to voters.

The party’s morale is low. The assassination of PRI presidential candidate Luis Donaldo Colosio five months before the 1994 election was unnerving in itself, but the arrest of a presumed second gunman in March of last year gave support to the hypothesis that the assassination was the result of a plot. Though the second gunman has not been prosecuted and no one has been formally accused of orchestrating a plot, the public is convinced not only that there was a plot, but that the intellectual authors of the crime came from within the system itself.

Public rumors that former President Salinas or his foes were behind the plot inevitably create a tense atmosphere in the party since no one can be sure whom to trust or side with. The loss of prestige of former President Salinas following the peso devaluation of December 1994 and, in particular, the arrest of his brother Raul, first in connection with the assassination of Ruis Massieu and later for holding huge bank accounts outside Mexico under a false name, has only made matters worse.

Under these circumstances, the PRI could be ripe for a takeover by disaffected elements who promise to restore confidence, resources, and leadership. Such a takeover could pose severe problems for Zedillo, who would somehow have to govern and carry on the difficult political transition without being able to count on party support. And negotiating to win that support could cost Zedillo dearly.

In any case, discontent within the PRI has important implications for the consolidation of democracy. The “arm’s length” relationship with the party exercised by Zedillo during his first year in office is likely to backfire later. In the upcoming months, the challenge for Zedillo is to work with his party in a number of crucial areas: in defining a platform that is congruent for both sides, organizing the party for fundraising, and making the party’s internal rules of candidate selection more “bottom-up” and transparent. A reorganized, modernized, and energized PRI is all but essential to a successful transition.

The Cleavage between Zedillo and Salinas

Once close allies in the struggle for economic liberalization, Zedillo and former president Salinas have been embroiled in an ugly fight. The tension between the two men reached its peak upon the arrest of Raul Salinas. Former president Salinas went on a hunger strike and demanded that Zedillo’s government publicly acknowledge that he was responsible neither for the peso crisis nor for the assassination of Colosio, a rumor instigated by some of Mexico’s leading columnists. Zedillo made no such public statement but sent a member of his cabinet, a former collaborator and friend of Salinas, as mediator. Following this episode the two men concluded some form of truce, whose terms for the moment remain unknown. At any rate, in March of last year Salinas left Mexico, and the issue seemed to have been put to rest.

Then last December, following the revelation of Raul Salinas’s vast holdings in banks abroad, the former president wrote a long letter to the news media. In it he tried to disentangle himself from his brothers wrongdoings and accused Luis Echeverria, Mexico’s president during the early 1970s, of orchestrating a plot against him. That Echeverria is actually engaged in such a plot is regarded by most observers as unlikely. Apparently the real purpose of the letter is to warn Echeverria, who publicly criticized Salinas last September, to keep quiet or risk the release of damaging information. The letter also implicitly contained a recurrent message from Salinas to Zedillo: my enemies are your enemies. In other words, if Zedillo attacks Salinas or his family, he is strengthening a group within the system that opposes his own program of economic modernization. And Salinas is right in the sense that the more he is attacked, the more Zedilloþs (and his) economic program and Zedillo himself are weakened and the old guard of the PRI strengthened.

Together with Mexico’s poor economic performance and the crisis within the PRI, a rupture between Salinas and Zedillo would imperil Mexico’s ongoing political transition and economic recovery. A cornered Salinas is in many respects a wildcard. As former president, Salinas probably has embarrassing, or worse, information about powerful members of the business community, the bureaucracy, and members of political parties. Last December 12, one day after NBC news reported that the U.S. government was investigating Salinas for his association with narcotics trafficking and money laundering (a report denied by Washington shortly afterwards), a rumor circulated that Salinas had written a letter naming former and current government officials and businessmen involved in shady activities. Although the next evening Salinas sent a short written statement denying writing the letter and called for public support for Zedillo, the possibility that he would implicate members of the business and political elite sent shivers down the backs of many.

In such a climate, powerful businessmen and politicians must be tempted to take their wealth out of the country, perhaps even prepare for some form of exile. If such people were to withdraw their capital in panic, the peso, financial stability, and the prospects for economic recovery could crumble.

Political Assassinations and the Rule of Law

The attorney generals arrest of a second suspect in connection with the assassination of Colosio was deeply troubling. The arrest, which reversed the finding of two former special prosecutors that Colosio had been killed by a lone assassin, raised fears of a plot.

Yet another disturbing possibility hinted at by the continuing investigation is that members of the military could be implicated in the murder.

How will the Zedillo government deal with that possibility? Getting at the truth, assuming that it is possible, poses extremely serious challenges and excruciating dilemmas for the government. If indeed the Colosio assassination was the result of a plot, what might the perpetrators be willing, and able, to do to prevent the truth from coming out? What might they do to confuse, obstruct, distort, and even impede the investigation? Not surprisingly, today Mexicans are prone to see conspiracies almost everywhere.

Are any of these scenarios ominous enough to frighten the government away from the case? Will Zedillo be forced to abandon the rule of law in perhaps the most important case in Mexicoþs recent history? If he does, will it damage irreparably his governments credibility? Will it also undermine the standing of the PAN, the party of the investigating attorney general? Clearly, the investigation can have very important implications for Mexico’s economic and political stability.

Unfortunately, the rule of law is to a certain extent hostage to Mexico’s financial vulnerability. The nations leaders can probably not afford to uncover the questionable or illegal activities committed by prominent members of the political and business elites. The attempt to change the rules of the game too swiftly and prosecute people for past wrongdoings could trigger a wave of capital outflows large enough to threaten the fragile recovery.

Chiapas, Political Discontent, and the Military

At the moment the results of the negotiations in Chiapas are encouraging. But the equilibrium is fragile. Other tensions, those between landless peasants and the propertied, between Catholics and Protestants, between Indians and whites, could derail the peace process. Indeed, even the land redistribution measures envisioned by negotiators as part of the solution to the Chiapas conflict will not ultimately address the main cause of the uprising, which is deprivation without hope. A lasting peace will require a major effort to develop both a capable labor force and jobs.

The Mexican military have followed the instructions of the government and appear to be committed to a peaceful resolution of the Chiapas crisis. But while the increased militarization of the zone of Zapatista influence guarantees the peace by deterring the Zapatistas from making a military move lest they be crushed, it also creates the conditions for bloodshed and violations of human rights. The military presence is also on the rise in other areas of the country where potentially similar movements, connected to the Zapatistas or not, exist. Again, the military presence can discourage other armed groups from violence. But under different circumstances, the military can be used to repress nonviolent protests, hurting innocent civilians in the process.

The possibility thus exists for Mexico to continue moving toward democracy in some areas, such as elections and the decentralization of power, but to remain repressive and authoritarian in others, particularly to be intolerant of civic, peasant, or labor organizations that reject government policies and pose a threat to financial stability.

Economic Performance and Popular Discontent

Despite the chaos produced by the financial crisis and despite important political faux pas, the government has been able to implement a tough adjustment program to counter the capital outflows that followed the peso devaluation and restore confidence in financial markets. Extensive lobbying, bargaining, and armtwisting also enabled Zedilloþs government to win legislative approval of two highly controversial initiatives: increasing the value-added tax (last April) and reforming the social security system (in December).

Popular resistance to the adjustment program has been mild. There were fewer strikes in 1995 than in 1994, and neither labor nor peasant organizations have mobilized massive nationwide protests. Fear of joblessness probably saps workers will to put up a fight. The debtors movement known as “El Barzon” could turn into a powerful political force, but it seems to have been partially neutralized by a government program launched last summer to help debtors. For now, the most visible consequences of the economic crisis the drastic fall in living standards, and the sharp increase in crime, suicides, and domestic violence are—more social than political.

But if economic recovery is slow, or, worse, if further financial instability postpones recovery, the political situation is likely to worsen. A poor economic performance will exacerbate popular discontent and weaken the government’s ability to manage the country in this difficult period. The absence so far of a serious grassroots threat to the economic program or to social peace is no guarantee for the future. Urban riots donþt happen until they happen. New and more militant organizations are likely to appear on Mexicoþs political landscape.

In the upcoming weeks, both major opposition parties, the center-right pan and the left-wing Party of the Democratic Revolution (PRD), will be selecting their new leaders. The choices they make—whether pro-reform negotiators or proponents of greater confrontation with the government—may signal what is to come.

The good news is that discontent may be expressed primarily at the ballot box. But if the economy worsens or improves too slowly, the rise of more populist economic policies pushed by legislators from opposition parties or by the PRI itself becomes a real possibility. Desperation can foster unwise but popular economic policies.

Although the current forecast is for the economy to grow between 2 percent and 3 percent in 1996, the performance of real wages looks much bleaker. Estimated to have fallen about 12 percent in 1995, they could fall another 14 percent in 1996—a two-year plunge of 26 percent. Some optimistic scenarios see a fall of only 5 percent in 1996—still a cumulative drop close to 20 percent. Official predictions are that some 840,000 jobs will be added to the economy—about 400,000 short of the expected increase in the labor force.

Mexicans endured a worse fall in wages during the 1980s debt crisis. In 1983 alone, real wages plummeted about 25 percent. But the current crisis is exacerbated by large private-sector debt. High domestic interest rates combined with falling incomes for families and falling sales for businesses mean increasing defaults and bankruptcies. To the anguish of lower real wages and the fear, or the reality, of joblessness, families must add the threat of losing their homes, as many already have, because they cannot pay the mortgages. This is a new problem for Mexico, and the governments efforts to subsidize indebted families may not be enough, particularly if real interest rates stay high and real wages low throughout 1996.

In the medium term, maybe even as early as 1997, the Mexican economy, led by exports and foreign direct investment, should recover properly. But 1997 is ages away in political time, and even then there are no guarantees. The banking sector continues to be the Mexican economy’s Achilles heel. Further bad economic news or more political turmoil could destabilize Mexicoþs peso and financial markets over and over again.

Clearly, the governments first priority should be economic recovery—but one that is sustainable. Unwise policy could lead to a run on the peso or to a balance of payments crisis. And, in fact, the degrees of freedom for an induced recovery are painfully slim. The government could perhaps relax fiscal and monetary policy, but only very little; it could privatize more state-owned industries and use the proceeds to reduce the debt burden. But the results would not be drastically different in terms of growth in the short run. Here is where the United States could be of great help.

What Can Washington Do?

Although the economic outlook is brighter and the quest for democracy has its own momentum, Mexico’s financial vulnerability remains an important threat to political reform. It vastly complicates government efforts not only to prosecute prominent political leaders or the business and banking communities for past wrongdoing, but also to force local PRI officials to adhere to the new rules of electoral competition. Although the population at large would applaud such action, those under attack are likely to strike back. And although no one really knows how strong or effective these individuals or groups can be, the nations financial volatility—easing now, but far from over—could make it extremely hard for the government to take the risk. Zedillo does not enjoy the full backing of the reform-minded. Many of his potential allies, while believing in his commitment to political reform, are concerned about his capacity to lead such a complex process. Economic improvements are likely to lessen the skepticism, strengthen Zedillo and make it easier for Mexico to undergo political reform.

The Clinton administration could help by clearing up questions about U.S. intentions to implement NAFTA. The president should offer reassurances, in both word and deed, that NAFTA is here to stay in full. The recent decision to postpone the licensing of Mexican trucks to operate in U.S. soil and the row over Mexican tomatoes are not good omens. Uncertainties about NAFTA could drive some direct foreign investment (how much is hard to tell) away from Mexico. If NAFTA is subject to recurrent onsets of U.S. protectionism, Mexican exports would suffer. Both exports and foreign direct investment are key to a sustained economic recovery in Mexico, and the United States is Mexico’s largest market and source of investment flows. But more important than the potential economic loss, the equivocations over NAFTA make President Zedillo look weak and undermine his leadership when precisely the opposite is essential.

Obviously, it would also help if the U. S. government would make available the remaining funds—close to $10 billion—in the Mexican rescue package signed in February 1995. Releasing these funds in the form of guarantees, for example, could allow the Mexican government to borrow in the private capital markets on better terms. Giving the government such an option could enhance the stability of the peso and thereby reduce domestic interest rates further. Lower interest rates would offer relief to debtors, and hence the banking system, and allow lending to begin once again. With more credit available, economic growth could be higher than predicted even in the short run.

But in the current political climate and during a U.S. presidential election year, it is unlikely that the Clinton administration—under constant attack from critics in Congress who oppose lending to Mexico—will be ready to release more funds from the rescue package.

Washington should continue to support Zedillo, at least as long as he pushes Mexico to consolidate democracy. And the United States should treat Mexico as a partner—not as a defeated enemy—in managing the recurrent problems in the bilateral relationship migration, narcotics trafficking, border pollution—as well as new ones arising from the implementation of NAFTA.

Unfortunately, electoral politics are pulling U.S. policy toward Mexico in the opposite direction. The results certainly do not help Mexico. But they do not help the United States either. A prosperous and stable Mexico is good for Mexicans first. But it is also good—in terms of higher exports, lower illegal immigration, fewer illicit activities, and an improved environment at the border—for the United States.