May 28, 1992

May 28, 1992 | Lecture on Latin America

Mexico: The Unknown Revolution

(Archived document, may contain errors)

Mexico: The Unknown Revolution

Zy-Wesley R.-.Smith With th e collapse of Communism in Eastern Europe and the disintegration of the Soviet Union, few people have been paying attention to a more quiet but no less profound revolution south of our border. The debt crisis in the early 1980s precipitated the "lost deca d e" for Latin America and prompted an intellectual crisis among its elites. Latin leaders, even those on the left, started to doubt socialist economics, and looked to the Western democracies' model of eco- nomic-growth-based"i-fm-ftftmal-markets and-fi. -e e intemational-trader-In most Latin American countries that free market model is now taking root. The Latin American leader that most represents this new era of pragmatism is Mexico's Presi- dent Carlos Salinas de Gortari. He is leading-his-country through the most dramatic-economic revolution that will position it for decades of strong growth. This fundamental economic change in Mexico affords numerous opportunities for U.S. investors and businesses-into the 21st century. To a large extent, this transforma t ion has gone largely unnoticed outside Mexico, especially in the United States, where the image of a corrupt and crisis-ridden country hostile to business con- tinues. President Salinas has reversed over seven decades of socialist policies and central pla nning and replaced them with an unambiguous commitment to the free market. This is a com- mitment not only to a wholesale change of government policy, but to a thorough restructuring and modernization of the entire economy.

Mexican Reforms Negotiations now underway for a North American Free Trade Area (NAFTA) are a culmina- tion of efforts by the administration of President Salinas to bring economic stability and growth to Mexico. A key element of Salinas's agenda has been t h e opening of the Mexican economy to the world. In 1986, tariffs on U.S. exports to Mexico were as high as 100 percent. Under Salinas, Mexican import duties have fallen to a weighted average of only I I percent. Mexico's openness, combined with its proximi t y to the U.S. has helped Mexico become America's third largest trad- ing partner, after Canada and Japan. Total U.S.-Mexico trade in 1990 reached $59 billion. Over two-thirds of Mexican trade-both imports and exports-is with the United States. Foreign inv e stment in Mexico now is strongly encouraged. Mexican firms and industries, long shielded by protectionist policies are being forced to adapt to world -standards and international competition. Most important, Salinas has ended Mexico's traditional hostilit y toward the United States, which has always limited Mexico's ability to grow. Salinas is seeking permanent eco- nomic integration with the United States through the NAFTA now being negotiated. Mexico has waged a dramatic comeback from the credit crisis in 1982, and shown its ability to recover from near economic ruin to become one of the most dynamic economies in the world today. Since Salinas came to power state enterprises have been sold off, including Mexico's eighteen commercial banks, Telefonos de Mex ico, Mexicana Airlines-i.n all, over 900 of the 1,200 state- owned industries. Centralized planning and regulation of the economy have been reduced

Wesley R. Smith is a policy analyst for Latin American affairs at The Heritage Foundation. He spoke befbre the National Conference of Public Employee Retirement Systems in Baltimore, Maryland on Apil 7,1992. ISSN 0272-1155. 01992 by TU Heritage Foundation.

radically. The quasi-socialist agricultural system of communal fanning is being dismantled and replaced with a new emphasis on private credit and private ownership of agricultural production. The result of these- changes has been strongly positive. Mexico has drastically reduced infla- tion, from 159 percent in 1987 to 20 percent last year. In 1991 Mexico' s federal budget was balanced for the first time in fifty years. Salinas is only halfway through his reform agenda. FEs first priority is negotiation and passage of ft NAFTA that likely will be approved-by the U.S." Congress in- the spring of -1-993. Follo w - ing that will'be continued liberalization of Mexico's foreign investment laws, a further reduction in corporateandincome-taxes.-lab =form-, kLpeai@qr_WpqLng,tq -iji the financial ser- . ot. _ftgjgnms vices sector, and the promotion of small and medium-s i zed businesses. Nacional Financiera, Mexico's development bank, is dedicating massive resources to creating a more stable business environment for U.S. businesses and investors. This announced plans to spend over $6 billion to develop a more sophi s ticated financial system for the country's medium to small businesses that comprise close to 80 percent of Mexico's market, and to pro- mote development of the small and medium sized business sector. These efforts will bring stability to the market, diver sify Mexico's economy, and give Mexico one of the most modem economic systems in the world.

Opportunities for U.S. Companies and Investors Given Mexico's firm commitment to free-market reforms, and the strong influence of the U.S. economy on the Mexican ec onomy, opportunities in Mexico for U.S. investors in both the short term and long term look good. Mexican reforms are guaranteed to succeed because of its proxim- ity to the U.S., providing Mexico with the largest market in the world and virtually unlimit e d sources of investment. In the 1990s Mexico will experience an enormous diversification of its economy. Among the key trends: of Growth In medium-sized companies. Of the 200 companies listed on Mexico's stock exchange, only thirty are actively traded. Th e re will be greater growth in this area as investors look for new opportunities. Extended pubildprivate financing. Mexico's development bank, along with the Inter-American Development Bank and the World Bank, will play a key role in promoting small to medi u m-sized business growth through creative financing with both soft and hard funds. Relocation from Asia. U.S. companies will begin moving operations from Asia to Mexico in anticipation of the NAFTA, increased U.S. barriers to products made outside North Am e rica, and a better Mexican business climate. Maquileddra growth. The U.S.-Mexico border region will continue to grow as U.S. firms seek lower labor costs in Mexico. The short-term benefits of this growth will go to the in-bond assembly or maquiladora indu s tries located along the border. Expansion of the financial services sector. Mexico will not be able to continue its growth without allowing greater competition in the financial services sector. U.S. participation will increase dramatically, providing more sophisticated and lower-cost financing to Mexican businesses and consumers that historically have lacked access Mexico's financial community.


U.S. Export Industries Mexico neglected investments in plant and equipment, transportation, communications, a nd other infrastructure from -198 1 -to -1988. Now-it has-reversed that trend and has-begun pouring enormous resources into infrastructure. The cost of upgrading and expanding Mexico's telephone service alone is estimated at $14 billion, providing million s of dollars in exports for U.S. tele- communications companies. Tens of billions more will be needed to revamp an antiquated industrial base and expand new industries. This will.provide numerous.opportunities to U.S. ckLpi- tal equipment producers since o v er two thirds of all U.S. imports, and over 80 percent of all capital equipment Mexico buys comes from America. U.S. and Mexican companies will see a strong marker xTC01W uuwlrrgmms:..-. X Oil and gas exploration and production X Energy production X , Com puter systems and software X Environmental products X Agriculture X Construction X Maquiladores X Infrastructure (especially ports, roads, and telecommunications)

Mexico's Stock Merket The Mexican stock market has grown dramatically in the last three years , fueled mostly by for- eign and repatriated capital. The index of Mexican stocks grew by 90 percent from 1990 to 1991, and market capitalization doubled to $90 billion dur- ing the same period. The Foreign Investment in Mexican Stocks value of stocks of t he 22 top as of December 1991 Mexican companies with a capitalization of $500 mil- In 1991, Foreign Investment In the Mexican Stock Market lion increased by 144 American Depository Receipts Increased 336% percent last year. Mexican $14.26 billion corporat e American Deposi- X.: X ...... tory Receipts (ADRs), in 74% Ii@: 4 @: companies like Telmex and NO g Mexico Fund $0.41 billion Cemex, grew by 565 percent 61b in 1991. Less dramatic, and Neutral Fund $1.45 billion consequently more stable, .. ...... 0. gro w th in Mexico's stock Free Subscription Stocks market-between 30 to 0 $3.14 billion Wei ADRs are dollar-denomInated credits that are owned by percent on an inflation ad U.S. Investors and hold In escrow by U.S. banks. ADRs are justed basis-is expected trad ed like other American stocks. for 1992. This will accom- Soure : El FlnenCero InternationaL Heritage DatsChart pany an estimated 4 percent GNP growth. U.S. investors interested in projects in Mexico should look in the following areas:


Country funds X Mutual funds X U.S.-Mexico joint-venture financing X Refinancing of large Mexican companies -,X . Medium-sized business financing Ultimately, integration into North American markets wiH bring long-term stabffity to Mexico. .James Jones@--ChW=az@of-the-Ame r ican-Stock.Exchange belit-yesa.NAETAwill-produce growth in Mexico com- parable to that of Korea Mexico's Stock Market: One of the during the 1970s, pro- vide U.S. companies Developing Vorld's Top -Perf romers with cheap labor and Market Capitalizdtion (in Millions of Dollars) raw materials for expan- sion, and encourage $140- . .............................. ........................................................................... . ..... U.S. industries to relo- $120- . ....................... ... . ... ........................................................................................... cate to Mexico from .. ........ Asia. Perhaps no other . ....... $100

0 $80-, ...................................................................... country in Lati n Amer- X ica, save Chile, has a $so . . . . .. ............................ ..................... ..... . ..... .. ............................ government whose lead- $40- ers am so dedicated to adopting a free market $20- system. While countries with si m ilarly large defi- Argentina Chile Brazil Malaysia South Mexico The Taiwan cits, such as Argentina Korea Philippines and Brazil, have wres- source- El Financero Interneflonah Heritage DateChart ded with inflation, runaway government spending, and at times disoriented leadership, Mexico has marched a straight and determined course since Salinas and his team came to office in 1988. The existence of this "new generation" in Mexico is probably Mexico's best hope for prosperity and stability -into the 21st cent ury. //17 . ........ ......... . ...... .. ........ . ..4 . ..... . .. .... . ........ ...

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