Manana is another day: Mexico can no longer afford PRI politics as usual - nor IMF austerity as usual - failing economic policies of the Institutional Revolutionary Party and the International Monetary Fund

National Review, June 27, 1994 by Lawrence A. Kudlow

Could Mexico's Institutional Revolutionary Party (PRI), the corporatist behemoth that has governed the country for 65 years, actually lose the presidential election this August? It sounds unthinkable. Conventional wisdom suggests that the PRI will be victorious once again, even if it has to steal the election. But this wisdom ignores how longtime ruling parties like Japan's Liberal Democrats and Canada's Tories have disappeared down history's plughole in the last year - not to mention how Silvio Berlusconi defeated a corrupt status quo in Italy on a clear program of tax reduction, deregulation, and electoral reform.

In Mexico the PRI, rife with corruption from top to bottom, is now menaced by a different sort of scandal. New evidence suggests that Luis Donaldo Colosio, its original presidential candidate, was assassinated by agents connected to PRI barons. So a PRI defeat is no longer out of the question. Indeed, unless President Salinas reverses the widespread dissatisfaction now gripping Mexicans, it may even be likely.

In fairness to Salinas, he carried out historic economic reforms in 1989 - stabilizing the currency, privatizing key industries such as telecommunications and banking, liberalizing trade (he got NAFTA under way), and reducing Mexico's sky-high taxes. This last reform was too modest: the top income tax rate, though reduced from 62 per cent to about 35 per cent, continued to fall on people earning as tittle as $11,000 per year. Still, the reforms did produce a significant, if shortlived, economic revival. Economic activity expanded at a rate of nearly 4 per cent for three years, and inflation dropped from 150 per cent to 8 per cent.

But the engine started to sputter in 1992 when the growth rate slipped to 2.6 per cent, falling to a mere 0.4 per cent in 1993. Recession set in late last year, with no recovery yet sighted.

Why did the animal spirits flag? Much of the downturn can be traced to a U-turn in Mexican policy, first signaled by Finance Minister Pedro Aspe in a speech in New York in early 1993. He told a Wall Street audience that 3 per cent would be the maximum growth target; anything above that would reignite inflation, and therefore should be curbed. He also expressed concern over the growing Mexican trade deficit.

This directly contradicted his boss's earlier speech to the Economics Club of New York. In October 1992 Salinas had said that strong growth was the primary economic goal and that the trade deficit was not a problem, offset as it was by huge capital inflows.

Why the U-turn? Because of the IMF. In early 1993, IMF officials told the Mexican government to raise interest rates in order to slow growth, and to depreciate the peso in order to restore the trade balance. They also thwarted a new round of Mexican tax relief, arguing that tax cuts would raise inflation by increasing consumer demand. Of course, these are exactly the same austerity policies that Mexico and the rest of Latin America, notably Brazil and Argentina, pursued during the 1970s and |80s. The result was the rise of left-wing politics and/or military dictatorships throughout Latin America. Indeed, Brazil is still pursuing IMF austerity, plunging into triple-digit inflation and deep recession with a desperate consistency.

Salinas initially rejected the IMF's formula in 1989 - apparently understanding that an economic recovery should produce a trade deficit as investment demand, consumer spending, and rates of return on capital all rise. He also seemed to grasp that lower tax rates would boost economic output by improving incentives for work effort, investment, and productivity (which, indeed, is exactly what happened in the first round of Mexican tax reform in the early 1990s). But, ignoring his own success, he inexplicably returned to the IMF formula in 1993.

With Brazilian results. Interest rates shot up to over 20 per cent, and have recently settled in around 16 per cent. With 8 per cent inflation, that leaves a real interest rate of 8 per cent - an economy-scorching rate. Small businesses, if they are able to get a loan, have to pay an unaffordable 25 to 30 per cent.

Variations on One Theme

It is against this unappetizing economic backdrop that the campaign for the presidency is being fought. So far, the candidates have hardly distinguished themselves by either courage or sound economic analysis. The PRI candidate, reformer Ernesto Zedillo, has spoken only in vague democratic generalities. Even worse, Cuauhtemoc Cardenas, of the leftist Party of Democratic Revolution (PRD), has spoken only in vague socialist generalities. Somewhat more promising is Diego Fenandez of the conservative National Action Party (PAN), who has drawn even with Zedillo in recent polls by campaigning on a platform of social conservatism and pro-business economics. At least he has hinted at pro-growth tax reforms to help small and medium-sized businesses.

But even reformers' political imaginations are still limited by the PRI's top-down corporatist model, which inevitably leads to greater welfarism, bureaucratization, and corruption. No candidate has yet fully grasped - or at least fully articulated - that reform must not be confined to large corporations. Farmers, small businessmen, and the middle class throughout the country must also benefit, and visibly. Democracy and prosperity can only be achieved by policies that provide incentives for all workers, and make it easier for all businesses - large and small - to get the capital necessary to expand employment and create new wealth.