Bad news, good news: Colosio's untimely death could mean the rebirth of reform - presidential candidate Luis Colosio - Mexico Manana: After Chiapas and Colosio

Reason, July, 1994 by Julio Marquez

The assassination of Luis Colosio was utterly reprehensible, but the conspirators may have done Mexico a favor. Following the Chiapas uprising in January, the political situation had become riddled with uncertainty, and the PRI, Mexico's ruling party, was drifting away from sound economic policy. With the pull of a trigger, Colosio's fledgling campaign ended, the uprising lost momentum, and the ambivalent electoral hopes of Manuel Camacho were dashed. Now the next president will almost certainly be Ernesto Zedillo, a candidate more likely than Colosio to continue the successful economic policies of President Carlos Salinas de Gortari.

Salinas's achievements over the past six years are nothing short of remarkable. Having assumed power amid triple-digit inflation (160 percent), negative growth, and a sizable public deficit (16 percent of GDP), Salinas and his team quickly reversed course. They privatized most state enterprises, halved public spending, produced a budget surplus, and stabilized the currency, whose value had plummeted more than 90 percent over the six previous years.

Mexico now enjoys diminishing single-digit inflation (7 percent) and holds nearly $30 billion in reserves--a huge achievement for a country that couldn't meet its interest payments in 1982 and lost close to $80 billion in capital flight in the 1980s. The Mexican stock exchange has had record performances, averaging a dollar return of nearly 50 percent a year since Salinas took office.

But the Salinas modernization is not yet complete. Real GDP growth has averaged 2.4 percent, only slightly above population growth, and, while unemployment is down considerably, real personal income growth has remained stagnant. Inflation and interest rates are still higher in Mexico than in most developed nations and, except for a few large firms, Mexican companies must pay twice as much as their foreign competitors to borrow money.

Federal taxes consume about 25 percent of GDP, compared to less than 23 percent in the United States. And the Center for Economic Study of the Private Sector (CEESP), a highly regarded research institute, puts the effective corporate tax rate near 50 percent: The official rate is 34 percent, but hidden costs such as high taxes on telephone service and energy and a 10-percent national sales tax place Mexican corporations at a significant disadvantage vis-a-vis their international competitors.

And despite the Salinas government's deregulation effort, it is still hard to do business in Mexico. The CEESP estimates that the bureaucratic costs to establish a new mid-size business still average three to four times higher in Mexico than in its principal trading partners. Legally establishing a small business can be almost impossible for people with little capital or experience.

Much reform remains to be accomplished. But the struggle to gain passage of the North American Free Trade Agreement delayed the tax relief and further privatization and deregulation that Salinas had planned to do toward the end of his six-year term. The NAFTA campaign also boosted government spending. To counter the argument that Mexico's living standards are too low to make it a worthy trading partner, Salinas substantially increased "social spending," government programs aimed at reducing poverty. While social spending already represented close to one-third of the government's budget and had been increasing about 18 percent a year since Salinas took office, the NAFTA-related hikes marked an important policy reversal for a president who had been championing tightly controlled budgets.

From then on, Mexico's political debate focused not on maintaining the fiscal surplus or further liberalizing private enterprise but on marshaling government resources to reduce Mexico's vast social inequities. In 1994, Mexico is expected to once again run a budget deficit, albeit a small one, as "economic stimulus" programs take effect and tax revenue falls short of expectations.

Once the NAFTA vote was cast, Salinas turned his attention to picking his party's next presidential candidate. Before the NAFTA debate, Treasury Secretary Pedro Aspe appeared to be the front-runner, despite his unpopularity as an overly tough tax collector. Highly regarded abroad, Aspe was Salinas's economic right-hand man. Had NAFTA not been ratified, the nomination probably would have gone to Aspe, who would have provided economic continuity and thus a sense of security to international investors.

But NAFTA's passage, the artificially high economic hopes it generated, and the government's willingness to undertake new spending gave rise to two contenders with wider popular appeal: Luis Colosio, the secretary of social development, and Manuel Camacho, the mayor of Mexico City and one of the few leading political figures not closely identified with Salinas. Confident that economic development was well under way--and possibly hoping to achieve a political compromise between economic reformers (who presumably favored Aspe) and PRI traditionalists (aligned behind Camacho)--Salinas opted for Colosio.