Juan Manuel Hernandez Escamilla weighs tortillas for a customer at the Mexico City tortilla shop his family has run for two generations. (John Ward Anderson — The Washington Post)

By John Ward Anderson
Washington Post Foreign Service
Tuesday, January 12, 1999; Page A11

MEXICO CITY –– When the Mexican government ended its long-standing subsidy of tortillas on Jan. 1, the result was a five-day crash course in free-market economics and tortilla politics that left a bad taste in everyone's mouth.

For 25 years, the government has subsidized tortilla production and regulated the price of the popular corn-flour pancakes, which are to Mexicans what baguettes are to Parisians or rice is to the Chinese. But falling oil prices and pressure from international lenders have forced the government to cut spending. When the ax fell on tortilla subsidies, prices responded like a basketball released from the bottom of a swimming pool, more than doubling in some places.

The result has been an angry backlash, particularly among impoverished Mexicans who rely on the soft, chewy disks for half their daily diet.

"Tortillas are the most politically sensitive product in the Mexican economy, and that was why they were the last to be liberalized," said political commentator Sergio Sarmiento. "You cannot maintain price controls for decades on a staple food item and then just lift them without a lot of turbulence."

Now, price controls, which are anathema to the Ivy League-educated free-market advocates in the government of President Ernesto Zedillo, are looking pretty attractive once again. Last Wednesday, after the price of tortillas had bounced from about 14 cents per pound to as much as 32 cents in some places in five days, and 23 cents in Mexico City, Commerce Ministry officials and tortilla producers reached an agreement to discourage price gouging by setting a voluntary ceiling of 16 cents per pound for the next three months.

Officials said that about 80 percent of the country's roughly 40,000 tortilla producers have agreed to the voluntary price cap. Whether they will abide by it and what happens when it expires in April remain to be seen.

The tortilla tempest has become all the more explosive because of recent sharp price increases in other commodities here. According to supermarket surveys conducted by Mexico City newspapers, in the first week of January prices in the capital shot up 39 percent for chocolate, 33 percent for cheese, 25 to 30 percent for beer, 28 percent for orange juice, 19 percent for beans and 12 percent for milk. In one of the city's main vegetable markets, according to one newspaper, the price of onions was up 100 percent in the last month, tomatoes were up 66 percent and carrots, 40 percent.

Many blame the sudden rise in food prices on higher transportation costs. In November, the government raised gasoline prices 15 percent, and soon after it authorized 33 percent increases in taxi and bus fares. Such increases will make it difficult for the government to hold inflation to its target of 12.8 percent this year, analysts said. Many predict an inflation rate of around 18 percent.

On Thursday, the government said inflation in 1998 was 18.6 percent, about 6 points more than it had projected.

At the same time, the government has approved an increase in the minimum wage this year of just 14 percent, saying it was concerned about the effect rising wages could have on inflation.

One key question is whether the ruling Institutional Revolutionary Party (PRI) will pay a political price for the economic squeeze, beginning with seven state governors' races this year.

For the first time since the 1994 peso devaluation and later deep recession, Mexicans last year finally got some relief in their pocket books, with real personal income rising about 3 percent after three years of stagnation or decline, political analyst Sarmiento said. He credited the improvement for the relatively strong showing by the PRI in state elections last year. But with inflation and taxes rising, "there will be a political price at the polls this year for the government and the PRI, and the only way that price will get watered down is if incomes go up," he said.

The government has been phasing out tortilla price controls and subsidies for several years, arguing that a general subsidy favored the wealthy as well as the poor, and that the money would be better spent on programs exclusively for the impoverished. But critics contend that abolition of the controls hurt the poor disproportionately since they eat up to four times as many tortillas as rich Mexicans, who prefer more expensive bread.

With plummeting oil prices so far creating about a $1.5 billion budget shortfall this year, the $1-billion-a-year subsidy for tortilla producers became an attractive target for the Zedillo administration. The decision was politically hazardous, however, because Mexicans on average annually eat about 220 pounds of tortillas per person, according to industry statistics. Because they often cannot afford meat, poor Mexicans eat more than a pound of tortillas a day -- wrapped around cheese, flavored with salt or chilies or eaten plain -- accounting for half their daily calorie consumption.

"I have no choice but to buy more tortillas and less meat, chicken and vegetables," said Maria Teresa Munoz, 44, while buying her daily tortillas at a local market. "I think very poor people are going to be hurt the most, not only with high prices in tortillas, but in almost every other item we use to cook. I'm lucky I can give my kids a meal every day. Others can't do even that."

But tortilla makers said that the competition will encourage them to modernize equipment that has not been replaced in decades, while improving the quality and nutritional value of the tortillas they sell. And while there may be some wild price fluctuations initially, the free-floating tortilla will eventually level off at a reasonable, affordable price, producers and sellers said.

"The move [to end controls] will be good for customers because they will be able to choose where to buy better tortillas," said Juan Manuel Hernandez Escamilla, 25, who works at a tortilla shop in Mexico City that has been in his family for two generations. "In a free market, people will go for the best quality, and prices will not go crazy."

In December 1995, one pound of tortillas cost 6.6 cents in Mexico City.

In August 1997, the price had risen to 9.9 cents per pound.

By September, the price jumped to 11.2 cents.

Last February it inched up to 11.9 cents.

From May '98 through the rest of the year, the price remained stable at 14 cents.

On Dec. 31, price controls were lifted, and the price jumped to 23 cents in Mexico City.

On Jan. 6, Commerce Ministry officials and tortilla producers agreed to a voluntary ceiling price of 16 cents.

SOURCE: Staff reports