Mexico’s IMF Credit May Only Make Things Harder Still

MEXICO CITY — The agreement between the Mexican government and the International Monetary Fund, announced Wednesday, is another indication of the growing cleavage that Mexico’s society and government is undergoing today.

Made public two days after the arrest in Guadalajara of drug lord Miguel Angel Felix Gallardo, the $3.6-billion, three-year IMF credit, as well as the drug bust, can be viewed in two different ways, depending on one’s vantage point.

On the one hand, there is the growing list of intrinsically positive and praiseworthy spectacular arrests that President Carlos Salinas de Gortari has been able to carry out since taking office: oil union leader Joaquin Hernandez Galicia, stockbroker and businessman Eduardo Legorreta, comic-book magnate Guillermo de la Parra and now Felix Gallardo. The fact that most of these arrests should have been made a long time ago shows how passive--at best--the previous administration was. But it does not detract from Salinas’ merit.

Indeed, thanks to the “tough guy” spin that most of Mexico’s controlled media have been persuaded to put on these strikes, Salinas’ popularity among important sectors of the Mexican middle classes has undoubtedly risen. It is questionable whether this improvement is significant or broadly based: The fact that the government has not carried out any poll worth publishing raises serious doubts in this respect. Nonetheless, since the middle classes are precisely the “swing” voters among which Salinas fared most poorly in last July’s elections, it makes a great deal of sense for the president to concentrate his efforts on winning them back.

But on the other hand, there is the view that the lives of the vast majority of the country’s people are singularly insulated from these events. Moreover, their living standard continues to drop, though perhaps less dramatically than before. The economy continues to stagnate, government spending on basic services like health and education has not picked up and official figures on inflation are deceiving with regard to the real impact that price increases have on broad sectors of society. Growth in the money supply since last June has systematically and sharply outpaced inflation. There is either a significant amount of repressed inflation or official statistics are not reflecting real prices.

All of this explains a surprising phenomenon. Despite Salinas’ skillful steps and his greater control over the Mexican media, and notwithstanding opposition leader Cuauhtemoc Cardenas’ undeniable difficulties in putting together an effective political party, it is Cardenas who continues to turn out huge, enthusiastic crowds in the Mexican provinces and countryside. On a recent trip to Tapachula, on the border with Guatemala, and the La Laguna area in northern Mexico where his presidential campaign took off a year ago, Cardenas was once again met by large crowds of followers. Incensed by electoral fraud in municipal elections in Tapachula, or by growing agricultural difficulties in the cotton industry of La Laguna, their support for Cardenas does not seem to have been affected by Salinas’ achievements. According to some observers in the region, the president was forced to cancel a visit to La Laguna scheduled for last week because the advance team sent ahead considered the situation too tense politically.

The agreement with the IMF will probably not, for several reasons, make things better. In spite of its being a necessary step in the broader process of Mexico’s $100-billion debt renegotiation, it is not a deal that will bring much to the average Mexican. While many commercial banks may not like it because it gives the Mexican government a relatively blank check, it will probably also make life harder for the Mexican people. The letter of intent mentions economic growth as an objective and a necessity, yet it is worth recalling that the 1986 agreement the country signed with the IMF was also, theoretically, “growth-oriented.” Still, the economy continued to stagnate.

The problem, of course, is that while the aims spelled out in the text might be laudable, the means to achieve them are not even mentioned. If anything, they run contrary to the very spirit of the agreement. While no yearly or half-year targets are established for the duration of the three-year deal, the fact that the 1989 stringent austerity budget is the basis forthe 1989 disbursement shows that the hopes for real growth in the next two or three years are not very high.

The letter of intent does mention the need for Mexico to substantially reduce its net transfer of resources abroad and calls for debt reduction. But there is every reason to believe that Mexico will probably not obtain the $7 billion a year in net resources that it needs in order to grow, even at moderate rates. As an example, while the IMF package provides $3.6 billion in new lending to Mexico over the next three years, during that same period Mexico will have to pay back to the IMF approximately $3 billion as service on previous debts. The net lending to Mexico is thus virtually meaningless--below $200 million a year. A similar situation exists with the World Bank. New loans will be provided, but they will barely keep up with payments on old ones.

Without massive debt reduction and significant new lending, the Mexican economy will not grow at rates that will significantly alter the majority of the Mexican people’s standard of living. There is no reason to believe that the unavoidable IMF agreement has brought this central objective any closer. It may have made it more remote, since rhetoric aside, it forces Mexico to go down the traditional, orthodox road of debt renegotiation.