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Backgrounder #611 on Latin America

October 22, 1987

"Privatization in Mexico: Robust Rhetoric, Anemic Reality"


(Archived document, may contain errors)

611 October 22, 1987 PRIVATIZATION IN MEXICO ROBUST RHETORIC, ANEMIC REALITY Few nations are as heavily indebted or in greater need of economic reform than Mexico. The nation's total foreign debt well exceeds $100 billion, and inflation is now running at 130 ercent. In exchange for promises of reform, Mexico! this past year has received P 14 billion in new loans from the International Monetary Fund (IMF), the World Bank, international commercial banks, and creditor governments. The conditions of the IM F and World Bank include: a small decrease in the Mexican federal budget deficit, tax reform, liberalization of trade and increased investment in state-owned enterprises. Missing from the list of promised reforms is the measure that Mexico needs most--priv atization of its bloated state sector.

Few reforms are expected from Mexican President Miguel de la Madrid, who leaves office next year. The ruling Institutional Revolutionary Party (PRI) recently announced that its candidate to succeed de la Madrid is Car los Salinas de Gortari the Harvard-educated Secretary of Budget and Planning credited with: Mexico?sa recent trade reforms. Nomination by the PRI is tantamount to election to the presidency; the PRI has not lost an election in its 58 years. Salinas is exp ected to take office in December 19

88. Though hailed as a pragmatist, his record is k I This paper, prepared in cooperation with the Arthur Spitzer Institute for Hemispheric Development, is the seventh in a series of Heritage studies on Mexico. It was pre ceded by Backgrounder No. 595 Keys to Understandm Mexico: The PAN'S Growth as a Real Opposition (July 29, 1987 Budpunder No. 588 Deju Vu o f Policy Failure: The New $14 Billion .Mexican Debt Bailout" (June 25, 1987 4, 1987 Backpunder No.

The Key Players April 4 Challenges to the Ruling policy and development Ailing Economy, Time Runs Short June 19, 1987 Backgrounder' No. 575 Mexico No. 573, "Key to Understanding Mexico papers wdl examine other aspects of Mexican 2 that of a statist. How h e will address the need .for-divesting Mexico of its failing government enterprises may be the key test of his commitment to economic reform.

Mexico has no shortage of privatization targets, from small manufacturing and service industries, to newspapers, b anks, transport services, and the vast oil and steel industries. Mexico's capital markets are sufficiently well developed to permit stock offerings of these concerns to the Mexican public. A central am of U.S. policy therefore should be to encourage the M exican government to pursue such a program of "popular capitalism."

This means that 'the U:S. should Tell Mexico that further World Bank and other loans will be conditional on real 'and demonstrable progress toward privatization Reduce direct support to th e Mexican public sector Help Mexican educational efforts designed to spread the private sector message in Mexico Provide high quality advice and technical expertise to Mexico on how to construct a large and popular privatization program PUBUC AND PRIVATE IN MEXICO The Mexican economy has become heavily socialized since the PRI assumed power in 19

29. Expropriation of foreign-owned firms, nationalization of domestically owned companies, state takeovers of companies that would otherwise go bankrupt and new p ublic sector ventures undertaken by government all have servedn'to build up a vast state sector of the economy.

State industries claim around 45 percent of the federal budget and contribute significant1 to Mexico's debt burden. As of March 1986 Mexico's F oreign Ministry reported dat state industries owed international banks $29.2 billion, a foreign debt larger than that of most governments, and twice as big as the total debt contracted by the Mexican private sector Public Sector Dominates Public sector wo r kers form an important part of the ruling PRI's political base. There are some 2.3 million unionized public sector workers formally affiliated with the PRI. Economists calculate that about 70 percent of the economy is owned or controlled by the state or b y PRI-affiliated labor unions Capital flight is also a major problem. Between 1975 and 1985 Mexican citizens took an estimated $60 billion out of Mexico and into the United States.

Billions more dollars found their way into Swiss bank accounts. Privatizati on could help counteract the lack of worthwhile investments inside Mexico that has caused this capital flight. -3 Constitutionally Set. State ownership is enshrined in. the Mexican constitution.

Articles 25 to 28 lay out the role of the public sector and spec

the areas to be managed exclusively by the state. Article 25 sets forward the general principles and philosophy behind this state ownership, and article 28 outlines the economic areas that were originally the exclusive domain of the state (minting m oney, the central bank, telegraph and radiotelegraph services plus those that have been nationalized at various times, such as electricity in 1960, and banking and credit in 19

82. The nationalization of the petroleum industry in 1938 is covered separately by Article 27.

Aside from these important areas of economic activity, the state also has acquired many small companies involved in all sorts of economic enterprises, including restaurants, mowe theaters, a nightclub, a soft-drinks manufacturer, and a bicycle factory.

Since the accession to the Mexican presidency of Miguel de la Madrid in 1982 there seemingly have been signs that the nationalization trend may be reversing.

Privatization and state sector. reform supposedly have been a requirement in negotiations for new international loans, such as the $7.7 billion agreement signed on March 20, 19

87. In the last four years, much attention has been given to the large numbers of public sector enterprises that the Mexican government claims to have sold or to intend to sell. There have been many stories in the press usually prompted by an announcement from the Mexican government, of the numbers of enterprises sold or intended for disposal. Closer examination, however, reveals that these accomplishments and p lans are less significant than they initially seem THE MEXICAN PRIVATIZATION PROGRAM Most of Mexico's state-owned enterprises--also known as parastatals-were obtained by expropriation. Between the government's nationalization of oil in 1938 and the nation a lization of the banks in 1982, Mexican presidents have nationalized electric power, mining, railroads, shipping, sugar, and most of steel and telecommunications, besides collectiwzing much of agriculture. Mexican parastatals also include the national fert ilizer monopoly and the state agricultural marketing b0ard.l Reducing Parastatals. The Mexican government has announced that it intends to reduce the number of its parastatals from 1,155 in December 1982 to, 200..by the end of 19

88. So far the number apparently has been reduced by about half to between 600 and 7

00. Not all have been privatized. The methods of reduction have included selling them, closing them, merging them, and transferring them to state and local governments.

The Mexican government s tates that one of its main economic goals is to rationalize the direct participation of the public sector in the economy. It describes this program as "restructuring of the state decentralized sector to make it smaller and more efficient by means of "sale , liquidation, merger, or transfer. of as many agencies as possible An increase in efficiency of the sector, according to the government, also would Ymprove its financial condition, which would lead to a 1. See Daniel James How Long Can Mexico's Authoritar i an System Last The Wdd I, March 1987, pp. 601-617. -4 recovery of public sector savin This, in turn, would contribute to the financing of lbo Phases. These reductions in the parastatal sector were carried out in two phases. In the first phase, starting in 1983, nationalized banks, which had interests often minority interests, in 339 enterprises, sold their shares in about 200 enterprises to the private sector for about 100 billion pesos or about $300 million to $350 million at current exchange rates In the second phase, in early February 1985, the government decided to reduce the number of parastatal enterprises by 257, by selling 111, transferring 11 to local governments, merging 31, and liquidating the rest. Planning Minister Carlos Salinas de Gortari cla i med that the companies offered would be more "attractive than those previously put up for sale. He said that the Mexican government hoped to save up to $1 billion in subsidies by the additional sales. From February 1985 to April 1986, some 33 companies se e m to have been sold for 24 billion pesos, (about $50 million Most of the sales were achieved with special government credit facilities As a result of these different measures, the number of parastatal entities decreased from 1,155 at the end of 1982 to 82 0 at the end of 1985, and around 700 at the end of 1986 future economic development. J According to the Mexican government's Secretaria de Hacienda .Y Credito Publico (Ministry of Treasury and Public Loans)? the status of the parastatal restructuring proce s s as of May 1986 was Qpe of Operation AUthOliZed Inprocess Concluded Sale Dissolution Merger Transfer TOTAL 101 269 58 30 458 67 193 28 30 3 18 34 76 30 0 140 Of the 101 state enterprises approved for sale, 84 were in the industrial sector twelve in the t ourism sector, two in the agricultural sector, and three were of other types. In 80 of the 101 firms the state had majority ownership, in 21 only minority ownership.

Thus, according to the above table, only 34 enterprises had actually been sold by May 19

86. There is some question, however, that even these figures exa erate and state industry, said that only 26 companies had been sold and 45 remained on the degree of privatization. In June 1986, Mario Barreiro, deputy minister o T energy 2. Mexico: Main E c onomic Issues, Secretariade Hacienda Y Credito Publico, September 1986 3. aid. -5 I the auction block. More recently the Center for Economic Study of the Private Sector (CEESP an organ of the Business Coordination Council (the umbrella organization for mo s t of the major Mexican business organizations released figures showing that 96 enterprises had been approved for sale, of which 72 had actually been sold No List. In a recent report on Mexican government efforts to reduce 'the size of the public sector, C E ESP states that "a major difficulty in assessing these efforts is the lack of a definitive list of the parastatals Although the Mexican government has reduced the number of parastatals, the CEESP report notes that the number of those controlled by one dep artment, Gobernacion (the Ministry of the Interior actually increased from 26 in 1977 to 64 in 19

85. The CEESP report does not name any parastatals that have been privatized, but only lists numbers of firms As CEESP noted, the most suspicious aspect of th e Mexican privatization program is the absence of a list of public sector enterprises and a list of those companies actually sold. The few privatized companies that can be identified include the Nacional Hotelera chain of five-star hotels, Vehiculos Autom o tores Mexicanos (VAM) and Renault of Mexico (both sold to Renault of France an apparently profitable soft drinks manufacturing company, Garci-Crespo, and the bicycle factory. The Mexican government paid Renault some $200 million to take over VAM and assum e its debts. Renault then closed VAM down. This is not really privatization.

Still Part of State. Some enterprises, including the. bicycle .factory have. been sold to the so-called "social sector namely unions, which in Mexico are very much part of the rul ing machine. Meanwhile, state-owned enterprises have sold minority shareholdings. For example, Diesel Navastar, a large Mexican state concern which makes trucks, has sold 5 percent of its stock to the U.S. company Navastar. A majority remains state-owned.

It is difficult to assess Mexico's privatization program without knowing the names of the companies privatized, let alone their size and asset value. The Mexican Embassy in Washington cannot provide such a list, nor can the World Bank, the U.S. Treasuy, t he International Monetary Fund, or any other of the institutions arranging billion dollar loans to Mexico supposedly conditional on the fulfillment of such policy reforms as privatization companies that it would not privatize, all others being up for sale or subject to merger or dissolution. This list has yet to appear. It is thought that many public sector enterprises are lobbying hard for inclusion on the list. The government's economic policy statement for 1987 promises that "the state will withdraw fro m the branches of chemicals, textiles, pharmaceuticals, and secondary petrochemicals, whose promotion no longer requires the presence of the state.'15 In summer 1986, the Mexican government said it was going to produce a list of 4. Avances en la Racionaliz a cion de la Patticipacion del Gobierno en la Economia Mm'cana, CEESP, March 1987 5. Larry Rohter, "Divestment Efforts in Mexico Debated The New Yo& Times, April 13, 1987. -6 Most recently, the government announced the sale of Mexicana de Aviacion one of tw o state-owned airlines. However, the announcement of Mexicana's sale has been made twice before by ministers Indeed in February 1986, Planning Minister Salinas stated that the privatization of Mexicana was a fact Recently, a formal deadline of June 30, 198 7 , was set for bids on the government's 60 percent ,stake in the airline. The ailing airline, which has now been on the auction block for two years, is still in government hands. Unlike Aeromexico, the traditional flag carrier Mexicana was privately owned u ntil 1982 when it was acquired by the government as part of a financial bailout. It has foreign debts of $400 million and currently runs at a loss. It remains to be seen whether it will actually be sold SELLING MINORITY SHAREHOLDINGS IN BANKS This Februar y 6th, the Mexican government sold minori shareholdings in two nationalized banks, Bancomer and Banamex, Mexico's largest 'r; anks. Mexico's private banks were expropriated by presidential decree on September 1, 1982, in a dramatic final act of the outgoin g President Jose Lopez Portillo. When Miguel da la Madrid assumed office three months later he resisted pressure for reversing the expropriation, but promised to sell minority shareholdings in the banks back, to the private sector. No private investor was t o be allowed to buy more than 1 percent of any bank's stock. Instead of privatizing a minority stake in each bank, business leaders had unsuccessfully urged that a thud of Mexlco's banks should be privatized in full Political Patronage. Some 23 percent of Bancomer's shares were sold for 38 billion pesos (about $38 million) and 34 percent of Banamex shares were sold for 40 billion pesos. Both sets of shares were sold at far below market prices to a restricted and politically favored group of customers and e m ployees. Twelve percent of Banamex stock was reserved for employees, and 17 percent was sold to a select list of Banamex clients. This po1iticaU.y chosen list was reportedly weighted toward businessmen in the provinces. The pnce of the shares shot up as s o on as they began trading, giving gains of between 200 and 300 percent to those who were able to bu shares. Some criticized the sales as politically motivated giveaways This is a hig K -tech version of traditional PRI patronage said one stockbroker the Ser fin placing was in the f orm of a new ca ita1 issue of share certificates Banamex and Bancomer sales, the Se A shares were priced hig i! er. But *investors On March 17, a minority stake of 34 per cent in a third state-owned bank,.

Bank Serfin, was sold. As with the Banamex and Bancomer issues, the stock was distributed almost solely amon employees and clients. As with the previous sales known as Certificados de Aportacion Patrimonaf(CAPs These totalled some 27 billion pesos 25.4 million Reflectin criticism of the giveawa nature of the were still able to realize an appreciable profit.

These partial privatizations reveal the government's strong resistance to selling more than a minority of its shareholding. It seems clear that the state will not give up its c ontrolling interest, despite the strong demands of the Mexican private sector for full privatization 7 THE ROLE OF DEB'I-EQWTY SWAPS Although most of. the enterprises that were 'vatized were sold to the Mexican private sector, one or two were apparen r y s old to foreign firms, partly Public Debt, would-be P oreign investors buy Mexican corporate debt at 62 to 64 through debt-equity swa s. According to the data of the Secretariat of Finance and percent of face value, and .the government accepts these at 85 t o 88 percent of face value when converting into equity included: The debt-equity swaps authorized in 1986 and the first quarter of 1987 hth~lkd MeXiarn Debt-Equity by Sector millions of U.S. dollars 1986 1987 1st Qtr Motor industry Tourism Capital goods M aquiladoras"

Chemical/pharmaceu tical Electronics Agribusiness Textiles/shoes Others 449.6 189.2 98.2 47.1 59.9 9.1 26.4 0.8 156.7 20.3 145.0 102.2 54.8 16.8 19.7 1.4 20.0 96.9 Total 1,037.0 477.1 The "maquiladora" program involves the assembly of goods in Mexico from imported components and their duty free re-export 100 million monthly, with a ceiling of $1.5 billion to $1.8 billion for the year.

This is much lower than some U.S. bankers had hoped. Many had thought !hat some $20 billion of Mexican debt co uld be retired in this manner Thus the Mexican program is much more.limited than that of Chile, which expects swaps to reduce its public commercial debt from $13 billion today to $8 billion in four years.

Citicorp, which recently announced its intention to convert billions of dollars of debt into equity, is expected to take on a major role in Mexican debt-equity swaps.

According to Cit~corp sources, it currently is preparing proposals to convert loans to equity shares in twelve M exican companies, including two state enterprises. Of course, the Mexican swaps' potential is also restricted by strict limitations on foreign ownership in many sectors of the economy The Mexican government has announced that it intends to limit swap deal s to 6. National Foreign Investments Commission Quoted in David Gardner Bankers Rush for Mexican Equity Financial nmw, June 2, 1987. -8 PRlVATEATION FALLEN SHORT To focus solely on the reduction in the total number of Mexican parastatals is misleading. Man y of the privatized parastatals are very small. Some were just bankrupt shells of compames which existed only on paper. A substantial portion of them became state-owned by default, being in the portfolios of the banks that were nationalized In fact, the sa l es in the first two phases of parastatal reduction account for far less than 1 percent of the total parastatal sector Huge Companies Remain. The biggest parastatals remain untouched. Among them are CONOSUPO, the agricultural marketing board, CFE, the fede r al electric company, and Fertimex, the fertilizer company. These companies are. huge CONOSUPO includes 18,000 retail stores, 32 manufacturing and food-processing plants, and 70 percent of the country's food storage space. These three, together with three o ther large state companies, the state sugar, steel, and railway corporations, account for more than 20 percent of the total public sector deficit products at low, unsubsidized prices, adding to the operating losses resulting from companies It is impossibl e for a state company to be profitable if it is asked to supply at a subsidy, cannot raise its prices and must generate jobs and expand services The fertilizer, food, electricity, and steel companies were required to sell their and misallocation of resourc e s. According to Jorge Tamayo, coordinator general lnefficien? o audits at the Mexican Comptroller General's office, which oversees state Many of the enterprises that have been removed from the federal government's books, moreover have not been genuinely p r ivatized. They have been merged with other parastatals, transferred to local governments, or closed. Closure of a loss making enterprise is a positive move, but most of the companies existed on paper only. The only significant enterprise to be closed down was the Funditora Monterrey steel rmll, with the loss of 9,000 jobs In 1985 its operating expenses were $414 million and sales were $185 million Varying Assessments. Commentators are divided as to the sincerity and extent of the de la Madrid government co m mitment to privatization. On the one hand Planning Minister Salinas sees a fundamental change in policy. "The government in Mexico will continue servicing the strategic areas through sole ownership and control he said In others, we will stimulate stron 17 the participation of society that we are witnessing at the closing of the 20th Century." This is echoed by business leader Claudio Gonzalez. He sees "indications that we are moving in the right direction away from as much state intervention as we've had i n the past.

However, obviously we would like to see it move as fast as possible, because we really don't have any time to lose right now in the process of development. This is a strong an d important historical change On the other hand, Jeno Malatinsky, a World Bank economist, doubts that the government intends to go far with privatization. He cautions The government does not want a sizeable reduction of the parastatal sector What it probably wants -9 is to streamline the parastatal ~ector Other observers are even less impressed.

Luis Pazos, professor of economics in the Faculty of Law of the National Autonomous Mexican University says that the announced sale of some state-owned enterprises "does not imply a fundamental change in the government's socialist tendencies. They represent a small proportion of the public sector and many of them will be sold to the so-called 'social sector,' that is businesses run by trade union leaders."8 Mexican Ropaganda Daniel James, who heads the United States-Mexico Institut e in Washington, D.C., stresses that no basic industries have been privatized.

He also warns that caution should be used regarding the Mexican government's statistics on privatization. He criticizes the U.S. government and international institutions for le nding credibility to the Mexican government's statements The Reagan] administration has been acting as handmaidens to Mexican propaganda helping convince people that Mexico is going ahead with an economic reform program when in fact it is not."9 One possi b ility is that the U.S. and international financial institutions are aware that nothing much is happening in Mexico, but have mutually agreed to suspend disbelief. They apparently feel that the change in Mexican rhetoric. toward reduction of state power is such a positive change that it warrants the encouragement provided by new foreign loans insecusof private pro erty and danger of expropriation President Lopez should have sought the approval of Mexico's Congress first, even if it is a rubber stamp for PRI decisions. But the former bank owners were unable to find a judge willing to grant an in'unction restraining the seizure, and Congress ratified the expropriate a comp+ny does not encourage foreign investor confidence transparency. The public does not know when privatization has happened or what has happened. Negotiations are carried out in secret. Successful purchasers are announced after the sale. Such lack of openness may be partially due to desire to avoid prompting leftist opposition, but is more likel y part of keeping the .privatized companies in the family" by sale to PRI supporters at low prices. on Danger. An important obstacle to privatization in Mexico is the Portillo's 1982 expropriation o f the banks was unconstitutional and illepl. He expropria t ion ex-post 1 acto. The ability of the Mexican President suddenly to An important feature of the Mexican privatization program is its lack of It seems that the only significant rivatization to date has been that of the National Hotelera hotel chain, a fai r ly P arge company that had always been owned 7 Information Received from Mexican Government Officials on Issues of Parastatal Industry and Increased Role of Domestic and Foreign Capital IFC office memo of April 30, 1986 by Jeno Malatinsky 8. Luis Pazos, " T he False Austerity Policies of the Mexican Government Journal of Economic Growth, Vol. 1, No. 1, 1986 9. Telephone interview With Daniel James 10 by the government. If the Mexicana airline is actually sold, it will be the second significant privatization.

Despite these meager results, the Mexican privatization is succeeding extraordinarily in public relations tefms. The Mexican government has convinced many fore

observers that it is making progress in privatization. That this is not true is indicated by the continuing increase in the size of the public sector payroll in Mexico in both absolute and relative terms, in the public sector as a whole, and in government-owned industry FUTURE DIRECIIONS FOR MEXICAN PRIVATIZATION Privatization could become a very important factor in Mexico. Reducing the role of the inefficient state bureaucracy and encouraging entrepreneurship are measures vital to Mexico's economic regeneration Perhaps most important rivatization provides a means whereby the wealth of Mexico can b e transferred Fk om the hands of the few into those of the many. Capital could be spread among ordinary Mexicans, who could for the first time be given an opportunity to own a stake in their country's future Popular Capitalism In countries where privatiza t ion has worked best and proved most popular--Britain, France, and Malaysia-great efforts have been made to increase the number of individual shareholders and create a capital-owning democracy. In Britain, the percentage of the population. owning stock; ha s . increased from 5 to 20 percent. This approach, known as popular capitalism is ideally suited to Memco, where there is great national pride and a fear of foreign ownership A first step, which would signal genuine willingness to privatize on the part of t he Mexican government, would be the sale of majority stockholdings in the commercial banks. The full privatization of these banks is the top priority of the Mexican private sector.

The Mexican privatization program could then be widened by sellin: profitab le smaller state-owned companies to the Mexican public through stock offerings. Next could come stock market flotation of such large basic industries as, the. governnient fertilizer monopoly, the state steel holdings, and the oil industry. Limitations on f oreigmownership could be imposed, as they have been in many other countries privatization programs. Employee buyouts of smaller enterprises should also be encouraged OONCLUSION MExI(xyS PRIVATIZATION AND THE US The role of the U.S. and international fmanc i al institutions in encouraging privatization in Mexico so far has been minimal. Despite their rhetorical commitment to privatization in Mexico, neither the U.S. Treasury, the World Bank the IMF, nor the State Department seem to be monitoring what the Mexi can government is doing. None of these institutions could produce a list of enterprises 11 privatized in Mexico. These institutions seem to rely almost solely on the Mexican government for their information.

The essence of the Baker Plan, devised by U.S. T reasury Secretary James Baker, is to ensure that policy reforms are carried out in return for further lending In the case of Mexico, reforms so far have been primarily empty rhetoric. If the U.S. remains serious about its commitment to the Baker Plan, the n Washington must take a number of actions. Among them government commits itself to openness and honesty in revealing what it is doing, in terms of providing full information as to what measures it is taking and then ensuring that those measures are taken i n a fair and open manner. Example:. state enterprises should not be sold to political cronies secretly The U.S. should demand more substantive Mexican policy reforms if further U.S. loans are to be extended. Full privatization of the banks is obviously es s ential. Privatization must extend beyond a handful of minor enterprises e Fewer loans should be extended to the Mexican public sector. These only make it easier for public sector inefficiencies to continue As part of the recent 14 billion bailout of Mexic o , the World Bank extended almost $1 billion in loans for the investment programs of Mexico's state-owned enterprises, including the state steel companies and the state fertilizer monopoly. Ironically, the World Bank's conditionality is that government sub s idies to these enterprises bel phased. out. The Bank thereby strengthened the position of these ailing public enterprises at the very time when it should have used its leverage to insist on their privatization.1 W No further U.S. loans should be made to M e xico until the Mexican The U.S. must make greater efforts to convince the Mexican public politicians, and other opinion makers that only the free market can ensure Mexico a prosperous, stable, and free future. Mexican politicians are still overly influenc e d by the large leftist "intelligencia" in Mexico, when in most of the rest of the world collectivist ideas are very much out of fashion and on the decline. This means that government and private institutions in the U.S. should do more to help the spread o f the private sector message in Mexico. This does not imply direct U.S propaganda, but rather support of and cooperation with those individuals and insbtutions in Mexico who favor market approaches. Seminars, reports on. Mexican policy issues, provision of more free market material in Spanish, articles in Mexican newspapers and magazines on market issues41 the usual means of influencing public policy--should be deployed The U.S. should improve the quality of advice on privatization given to the Mexican gove rnment.

Mexico. But practical advice on how to construct a politically popular privatization program does not seem to have been extended to Mexico. There are many experts with experience in this field. They could provide invaluable assistance to the Mexica n government Privatization is a political process above all, especially in 10. Melanie Tammen Deja Vu of Policy Failure: The New $14 Billion M&can Debt Bailout,"

Heritage Foundation Backpunder No. 588, June 25, 1987, p. 9 12 The U.S. government, the World Bank, and other.internationa1 fiiancial institutions so far have failed to persuade the Mexican government to undertake significant market economic reforms. Such privatization that has occurred is negligible. The continuing huge loans to Mexico serve onl y to avert a short-term crisis A more statesmanlike approach would acknowledge that only substantive reforms of Mexicos corrupt, statist economic system wdl avert a debt crisis in the long run. Large-scale privatization is the primary means by which the he a lth of the economy can be restored and economic power transferred from corrupt officials to the mass of Mexican citizens. Liberated from a suffocating and backward collectivist system, a stable and prosperous Mexico could join the rest of the North Americ an continent in providing opportunity, wealth, and good social conditions; for all. itk citizens Prepared for The Heritage Foundation by Peter Young Executive Director Adam Smith Institute (USA Washington, D.C.

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