The Perils of the Peso

By Kevin Fedarko

In the space of 12 hours last Thursday, Mexican Finance Minister Guillermo Ortiz Martinez undertook the unenviable task of charming, consoling and begging the forgiveness of three American credit-rating agencies, the heads of a dozen U.S. commercial banks and 400 investors and analysts who lost nearly $10 billion last month when Mexico's newly minted President, Ernesto Zedillo Ponce de Leon, abruptly allowed the peso to float against the dollar. To the investors, whose stampede to pull their money out of Mexican stocks and bonds stripped the peso of 41% of its value, Ortiz's message was, Come back, the government has an economic plan to deal with the crisis and knows how to make it work.

Ortiz's blend of confidence, competence and contrition reassured some listeners. "Well, that's what we've been waiting for!" exclaimed an analyst ) after the Finance Minister's two-hour, standing- room-only speech at Manhattan's Pierre Hotel, one of more than a dozen meetings he held before traveling to Washington to put his case before the World Bank.

But most Mexicans and many other Americans were not yet convinced that Zedillo had made bold enough choices or could carry out the pledges he did make. The spectacle of the President promising to speak Monday night, then hastily calling it off until he could persuade business and labor unions to go along, dismayed those looking for strong leadership. The rescue package Zedillo finally unveiled Tuesday called for cutting budgets, keeping prices in check and holding wage increases to 7% for 1995, backed by an $18 billion emergency fund substantially financed by the U.S. Those sacrifices, however, make it clear that Mexico now faces an anguished period of economic stagnation, even if the government can make the plan stick.

That prospect has infuriated ordinary Mexicans, who have seen the purchasing power of their paychecks erode more than 40% since 1982, and who voted for Zedillo because he promised to replace austerity with prosperity. Several thousand workers and political activists marched in Mexico City to demand better working conditions. Nor were investors and financial markets placated: although they welcomed the news that Mexico will sell off many of the state's power plants, they had also hoped Zedillo would privatize parts of the country's lucrative oil monopoly.

While the political stakes of the devaluation are enormous for Zedillo, they loom large as well for Bill Clinton. Little more than a year ago, the Administration sold NAFTA to Congress by arguing, among other things, that locking in low tariffs would boost the American trade surplus by making U.S. products cheaper in Mexico. Thanks to the peso's plummet, American-made goods could now be as much as 50% more expensive for Mexican consumers. Products from herbal shampoos to frozen desserts sold south of the border will be hard hit. "The peso has been devalued," says Texas A&M trade specialist James Giermanski, "to the point where it really wipes out your expected tariff advantage."

To make matters worse, American job losses could rise if the cost of Mexico's labor remains significantly cheaper. Not every U.S. company that sets up shop in Mexico, however, may cost American jobs; Nike, which last week announced it was opening a factory in Mexico, produces all its name-brand shoes overseas.

As Nike illustrates, the impact may not be as great as it seems on the surface. But the fears that the devaluation has raised add ammunition to the arsenal of free-trade critics who warned that Americans would be hurt more than helped by NAFTA's close entwining of the U.S. and Mexican economies. In a blistering op-ed article in the Los Angeles Times, Ross Perot, NAFTA's most vocal adversary, declared the devaluation would cost the U.S. thousands more jobs and as much as $20 billion in lost investment capital.

The Administration's political headache is made worse by the specter of increased illegal immigration. Although soft-pedaling the issue, Clinton officials are deeply worried that the drop in income for Mexican workers could seduce thousands to cross the border. Even if an influx does not materialize, the possibility is raising hackles in California and Texas, regions increasingly intolerant of illegal immigration, but crucial to Clinton's re- election hopes.

Perhaps the biggest benefit of the devaluation is the opportunity for large- scale U.S. investors to establish a cheap foothold in the Mexican economy. That, however, has little effect on ordinary Americans. For the moment, the issue is being ignored by Washington as the city adjusts to new political realities there. But once the Republicans settle in, they could realize the political gold mine offered by Mexico's potential drain on the U.S. That could force Clinton to take his cue from the Mexican Finance Minister and plead forgiveness, on bended knee, before American voters next year.

With reporting by Paul Kreuger/San Diego, Laura Lopez/Mexico City, John Moody/New York and Suneel Ratan/Washington