Mexico Project Update
Jude Wanniski
August 23, 1989


Alan Reynolds and I have just returned from working visits to Mexico City and Monterrey. Dave Goldman and his wife Blanca, who have spent the last four months in Mexico gathering data for the project, will be back after Labor Day when we begin overview analysis and a first draft. Professors Bob Mundell and Alvin Rabushka will be engaged at this stage as we prepare the policy recommendations and alternatives.

Even our Mexican industrial sponsors are surprised at how well we have progressed, especially in winning over the enthusiastic support of the key policy makers in the government, at least for our efforts. We met last week with Miguel Mancerra, director of Banco de Mexico, the central bank, with Carlos Camacho, director of the office of foreign investment, and Francisco Gil Diaz, Treasury Undersecretary for tax revenues. A scheduled meeting with Finance Minister Pedro Aspe had to be scrapped as he accompanied President Salinas on a trip to Guatemala, but we're assured that Aspe sees us as a positive enterprise. I hope to see him in September. The meeting with Gil Diaz was an especially delightful one. We learned at the outset that he had studied under Mundell at Chicago and considers himself a Mundellian!

At every stop, we urged the officials to think seriously about pegging the peso at its current level of about 2500 to the dollar, halting the peso-per-day devaluation that was initiated last December. We pointed out that the Social Pact and wage-price freeze extended when Salinas took office, at that time, has held together because of a fortunate coincidence. The peso, after all, has been glacially devaluing against a dollar that has been appreciating against gold and commodities. This means the real value of wages and prices in pesos has been relatively constant in this period. But now that the Fed has eased its grip on dollar reserves, stabilizing gold and foreign exchange, the daily peso devaluation is a daily acid drop eroding the value of wages and profit margins. Unless it is halted, the pact will come under serious strains in the next few months, with spreading labor unrest, we argued. We found pockets of agreement and disagreement at these top levels, and came away believing it's only a matter of time before the peso devaluation is halted -- with immediate, positive effects on short-term interest rates.

We're putting special attention on structural barriers to corporate growth, trying to figure out why there is such difficulty in expanding from low levels of earnings through mid-size. Corporate Mexico seems top heavy and bottom heavy. Answers will help us understand why there are fewer than one hundred companies traded on the Mexico exchange, many of them conglomerate groups. We've been meeting with labor unions, members of opposition political parties, and tax and security professionals in grappling with these key growth questions. The government, we think, appreciates this "fresh eye" and different perspective. We are thoroughly persuaded that the Salinas economic team is generally pointed in the right direction, but critical questions of timing and risk regarding necessary reforms are still up in the air. A major overhaul of the federal/state tax structure is on the planning boards, but crucial details on rates and thresholds remain in the discussion stage.

We now have 18 of the 24 co-sponsors we need, but with more than 25 others giving us a definite "maybe," we can safely shift our attention to the study itself instead of its finances. Late December publication is still likely.