A Prescription for Dealing With Mexico's Economic Crisis
by Ricardo Valenzuela
Ricardo Valenzuela, a native of Mexico now residing in Tucson, Arizona, is the Chairman of INTERMEX, an investment banking firm. He is also the director of the Liberty Americas Foundation (formerly known as the Free Latin America Association). He believes that what the Mexican economy needs is deregulation and privatization. This article was translated from Spanish and edited. He has previously published the views expressed in this article in Mexico's "El Economista." As is true of all the "opinion" pieces published by B>Quest, the views expressed in his article are those of its author. Those with different views are welcome to submit manuscripts to B>Quest.
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Mexico is at the greatest and most dangerous crossroads of its history. Its political problems have disgorged an economic depression without precedent that is about to annihilate the spirit of the Mexicans, the soul of the nation. Beginning with the devaluation in December 1994, the countrys GNP has shrunk ridiculously beyond description. Per capita income has fallen to the level of the 50s, and the poverty level is indescribable.
The average Mexican played no role in the irresponsible actions that brought on this crisis. Nevertheless, unilaterally and autocratically, the average Mexican is being made to pay the price for these actions. Those in power who do not want to accept the resulting changes, propose to sabotage them without caring what are the consequences of their actions or who these costs will fall upon.
The global financial markets are currently adjusting and accommodating to a large number of new participants. The international monetary market is, basically, under great pressure due to the increase in commerce among the countries of the world in this digital universe, this new market without barriers. Mexico will not be able to successfully face the new challenges on the horizon of the almost-present Twenty-First Century if courageous and responsible decisions are not taken to solve its problems. Mexico requires aggressive, daring, bold, and responsible solutions. Mexico requires a Marshall Plan such as the one that lifted Europe from its deathbed after the Second World War. What our country does not need is the socialist, Keynsian, anti-market shock treatments prescribed by the IMF, much less the prescriptions of the political parties that would return to our nationalistic and revolutionary past.
The core structure of Mexico has been mortally injured, and only the intrepid actions of honest and visionary leaders can save it. Private enterprise and the structure of the country is slowly expiring and with it the faith, hope and the future of Mexicans. Mexican enterprise is agonizing because of the distorted and disfigured surroundings that have become a vicious and lethal cycle: there is no credit, the market depresses, unemployment increases, the markets disappear, the bankruptcies multiply, the financial system is in ruins, etc, etc, etc.
Mexico needs a general recovery plan, Mexico needs a "New Deal", but, based on the history of the United States, it must not be Keynesian, statist, or paternalistic, much less should it be nationalist or revolutionary, because we already know from the experience of both these countries with Keynesianism that this does not work; the best proof of this being the large number of unproductive people dependent on the state. In Mexico, the ejidatoarios (peasants "working" the government's land) don't produce, so the State has been supporting these people for generations. While before the revolution Mexico exported all kinds of agricultural products, now, after agrarian reform, Mexico doesn't produce enough to feed its people.
Mexico needs a New Deal but with market overtones, or the true promotion of development. This plan must be geared to save Mexican business and, as a consequence, the country. Rehabilitating businesses lowers unemployment, stimulates the internal market, increases sales, large and small businesses' profits, and the state collects taxes. If the government stops subsidizing crisis, the economy will grow; trust will be reestablished; international capital will return; the currency will be strengthened, etc. Businesses' problem is financial, and from this problem the greatest number of the countrys misfortunes are derived: unemployment, poverty, bankruptcies, lack of faith and mistrust among citizens, loss of security, an increase of criminal activities, massive emigration resulting from lack of opportunity, capital flight, and general despair.
The time has come for Mexicans to find and implement a solution to the problems of their country through the effort of the civil society, rather than continuing to depend on the decisions of a centralist government that I believe has totally lost contact with the desires, the needs, and the dreams of 100 million desperate Mexicans. It is time for civil society to fully exercise its power for the benefit of the country. Although what I and like-minded Mexicans propose is very specific with reference to Mexico's petroleum industry, privatization needs to be accompanied with a series of drastic and bold complimentary measures that I believe only brave leaders will dare to implement.
Mexico needs to start a serious process of deregulation of the economy, a true liberalization. It needs to continue its process of privatizing state enterprises that have not yet been put up for sale, such as Federal Commission of Electricity, Railroads, and, very specially, conclude the true privatizing of the ejido (community land owned by the government) in order to make it productive. A drastic and total reform of Federal Labor Law that will make development possible without affecting workers is also required.
Petroleos Mexicanos (PEMEX), Mexico's state-owned oil company, ranks tenth among the worlds business, but it is also one of the most inefficient, and above all, one of the greatest sources of corruption in the country. The government has resisted any type of reform of this monopoly for political reasons and, in a subliminal way, has employed it as a symbol of Mexican national sovereignty and touted it as being the most important achievement of the already monotonous Mexican revolution. Only through privatizing it can the problems of corruption, inefficiency and the enormous losses that it is experiencing be resolved. If, in the coming years, large investments in exploration and modernization are not made, this monopoly will not be able to satisfy the increased internal demand in just the next five years. This means that Mexico, among the leading countries in the world with proven oil reserves, will become an importer by the year 2005. Mexico is already importing close to three billion dollars of refined products, natural gas and gasoline.
Despite the fact that PEMEX has become, in the eyes of the Mexicans, a symbol of Mexican sovereignty, it is currently in the process of obtaining foreign capital on the order of 20 billion dollars. What irony! Mexico's national symbol of sovereignty requires foreign capital to survive! PEMEX is one of the sources of the countrys debt that has trapped and asphyxiated it during the past 20 years and converted Mexico into the greatest debtor country in the international capital markets of the world to the tune of 170 billion dollars.
As a Mexican concerned for my country, I propose the following plan to raise it from its convalescent bed:
1. The sale and privatizing of the assets of PEMEX, with an appraised value of 150 billion dollars, through a clear and transparent auction in full view of the world and in which nationals and foreigners can participate, should take place. It should be accomplished in the same way Argentina utilized: on Wall Street, with a public offering on the international markets.
2. The creation of the Mexican Reconstruction and Promotion Bank, contributing 150 billion dollars as capital for the institution, controlling the flow of that money using one of the foremost international accounting firms and an audit committee comprising prominent and representative members of the civil society, business, workers, community and religious leaders, etc.
3. Create a Board of Directors and a management team for the Bank composed of honest, professional and apolitical individuals with the responsibility to administer the institution with clear and measurable objectives designed to save the Mexican economy. This team must perform its tasks with a clear plan and in full view of the nation. This team must include the best individuals in the world, without reference to their nationality. They should be chosen based on their professional capacity and their honor. Included could be controversial individuals such as Mike Milliken, Domingo Cavallo, Pedro Aspe, Warren Buffet Luis Pazos, Alan Greespan, Art Laffer and the like.
4. All Mexican businesses would issue bonds for the full amount of their debt for terms up to 30 years. These would be purchased by the Reconstruction and Promotion Bank at the current prices, thus consolidating the business debt that is currently estimated at 70 billion dollars. Mexico's banks would thus be freed from this problem and, above all, be totally free begin promoting new projects.
5. The bonds issued for the all of Mexican businesses would yield an interest
of Libor +4 percentage points, that currently is 9%, and would have a five year grace period for capital payment and, in cases that justify it, the grace period could be extended.
6. . Part of the consolidation for businesses that, because of their precarious situation require it, could take place through an infusion of risk capital (equity) represented by convertible stock, redeemable in a reasonable period, providing the alternative for the owners to rebuy or convert to debt the original equity contributed.
7. Reduce the income tax to 20% and in this way energize the recovery of businesses and, in general, stimulate the economy, negotiating, in some cases,
not to include accumulated losses as a tax benefit against future earnings, and a declaration of an immediate tax amnesty by the Treasury Department.
8. Negotiate with Canada and the U.S. the immediate and total abolition of taxes and tariffs in trilateral commerce, formalizing not a Free Trade Agreement, but rather a Common Market among the three countries, similar to the European model in which free immigration is included and, in this way, relieve the potential problem so feared by the U.S. as a detonator of inflation, the pressures in the labor market because of full employment of its economy.
9. With a part of the 150 billion dollars derived from the privatization of PEMEX, acquire a percentage of the sovereign debt of the federal government with the respective discounts according to quotes of UMS paper in the international secondary markets in order to pay part of the foreign debt of the country which is the Number 1 in the world.
10. Use this paper to liquidate the business debt with the Mexican banks, providing the benefit of the discount in the acquisition as part of the total consolidation, given that the Mexican banks in turn, can liquidate their commitments to the federal government with that same UMS paper (FOBAPROA, etc.). This would be a SWAP operation.
11. Use the remainder of the 150 billion dollars to recapitalize the Mexican banking system with a commitment to sell this equity in a reasonable time period to Mexican and foreign investors, generating in this way the stabilization and modernization of the financial structure of the country, conditioning this support of the financial system on the banks assuming the responsibility of resolving the financial problem of individuals (mortgages, credit for purchase of automobiles, credit cards, etc.) under the same conditions that are given to businesses.
12. Upon the conclusion of the process, selling the Bank portfolio in the International Capital Markets, including the already recapitalized Mexican Banks, and having freed (purchased) its assets, it would have enough resources to compete and invest, with the ability to offer products similar to those offered by the international Banks, but above all, it would provide a situation of extreme liquidity to resolve the financial problem of individuals and support New productive activities that definitively would be generated with this New plan. With the capital out of the sale of the portfolio of the new Bank, proceed to liquidate the whole foreign debt of the country.
13. Promote with U.S. and Canada the establishment of a common monetary
system based on the dollar that, in turn, must be backed totally with a gold reserves and would definitively end the speculative market, inflation, devaluation, manipulation of interest rates, etc. As an alternative, establish a monetary management plan similar to Argentina's with the creation of a currency board and a strong tie to the dollar.
A similar plan could also work for the U.S.A. in regard to the land that the Federal government owns in the West (90% of the land).