MEXICO CITY -- In his last year in office, President Miguel de la Madrid is being forced to take drastic and unpopular economic measures that appear to contradict basic tenets of his proclaimed philosophy.
After weeks of intense negotiations and incessant rumors, De la Madrid last week outlined an "economic solidarity pact" -- a tough 10-week austerity plan that many observers believe could be a prelude to a more sweeping stabilization program next spring.
If such a second-stage plan is implemented -- a possibility deemed more likely if Mexico remains mired in stagflation and oil prices stay low -- it could include an attempt to limit foreign debt payments, economists and diplomats said.
The fact that such sweeping measures were needed at all was a disturbing setback for an administration whose reforms had seemed finally to be delivering on their promise of export-based economic growth. And to the extent that the plan was styled after similar "shock" plans elsewhere, it also represented a policy reversal for a president who had professed aversion to such "precipitous, spectacular" strategies.
De la Madrid somewhat wistfully noted a few days ago that as recently as September, Mexico's prospects appeared unusually buoyant. Manufactured exports were booming, the stock market was the world's fastest growing, private capital was coming home and oil prices had steadied. Authorities were taming inflation, they said, by lowering import barriers and slowing the daily devaluation of the peso.
Independent economists also voiced confidence that by 1988 -- a presidential election year -- Mexico would return to real sustained per capita income growth for the first time since the 1982 debt crisis.
That scenario was shattered in October, when the stock exchange collapsed in a crash that preceded New York's by two weeks and far exceeded it in depth. Dollars again began leaving, first to pay private debts and then simply to seek safe haven. To stanch the flow the peso was devalued from 1,600 to the dollar in mid-November to 2,200 today, a move that sent consumer prices skyward.
De la Madrid, who entered office five years ago vowing to clean up his predecessor's economic mess, now could find himself bequeathing the largest deficit, deepest recession and highest inflation in Mexico's history -- unless his new plan succeeds.
"The next three months are undoubtedly going to be difficult times for everyone," said Jorge Chapa Salazar, president of Mexico's Chambers of Commerce Confederation, as he signed a document pledging merchants' support for De la Madrid's pact. "There are businesses that are going to be bankrupted. It is going to have terrible effects in some industries."
In the first move of one of the most economically tumultuous weeks of his administration, De la Madrid on Monday devalued by 18 percent the official peso rate used for trade and debt. By making exports more competitive and dollars more costly, the devaluation will help Mexico retain its large trade surplus and record $15 billion in foreign reserves, economists said.
To cushion the inflationary impact on foreign products, De la Madrid simultaneously halved Mexico's import duties to a maximum 20 percent. "This is very unusual -- it is the first time that trade liberalization has an integral part of one of these hybrid shock plans," said one government economic analyst.
The next day De la Madrid announced that Mexico's biggest labor and business federations had agreed on an immediate 15 percent salary increase for all organized workers and a 20 percent minimum wage boost two weeks from now. The wage hike's impact was undercut immediately, though, by the president's announcement of what he termed "painful, bitter" measures to cut the government's financial deficit, which is expected this year to surpass 1982's record 17.2 percent of gross domestic product (GDP).
First, responding to business community demand, the government chopped $2.4 billion off its $35 billion 1988 spending program -- cuts equaling a substantial 1.5 percent of GDP and signifying fewer jobs and subsidies for the poor.
Secondly -- and most controversially -- De la Madrid decreed immediate 85 percent price hikes in most government goods and services, which range from air fares, cane sugar and gasoline to electricity and telephone service.
He elicited promises from business leaders to restrain inflation, but stopped short of tightening price controls. Indeed, the government may soon remove existing controls from staple goods "in order to let prices find their real level," according to one economist close to the government. Such a move could be a radical turn toward free markets or, equally conceivably, the penultimate phase of a wage-price freeze, he said.
De la Madrid's stated intent is to brake inflation, now running at a record 144 percent, and spur economic growth, which remains stubbornly flat after five years of Mexico's worst recession. Yet in the short term, as its defenders concede, the plan's tangible effects will be a sharp cost-of-living rise and an economic slowdown induced by budget and credit cuts.
"The idea is to take a big hit in inflation now and then start bringing it down once the deficit is under control," said a U.S. government expert who praised the plan.
But the government's political opposition, noting that to most Mexicans the plan's biggest shock was the barrage of unexpected price increases, condemned it almost gleefully as proof of official indifference to wage earners.
As a gesture to disgruntled labor bosses, who had threatened a national strike unless granted a 46 percent wage increase, De la Madrid proposed a monthly indexing of wages to "anticipated" inflation beginning in March -- an option he had long rejected. Even though the system could theoretically restrain wages, its use of indexation represents "a confusing turnaround" for a regime that often said such policies only perpetuate inflation, one foreign diplomat said.
Arturo Romo, a ruling party senator and prominent union official, said De la Madrid's pact "will fail to bear fruit" unless it is followed by a cut in Mexico's "onerous" foreign debt payments. Three state governors, also ruling party members, joined the call for debt relief following a private meeting Thursday with the president.
With oil prices plummeting and dollar interest rates threatening to climb, it could be much harder for Mexico to meet payments on its $104 billion debt next year, economists warn. Several influential officials, speaking privately, said Mexico's present payment commitments rest on the premise -- now increasingly questionable -- of sustained real growth next year.
Several bankers and diplomats said the odds are increasing that Mexico will demand further concessions when its current IMF-backed $12 billion loan agreement expires three months from now. An interest payment was a key component of Bolivia's inflation-stopping shock program, often cited by Mexican officials as a model for such plans, a U.S. debt specialist noted.
"Many people have felt for a long while now that if the Mexicans were going to do anything dramatic with the economy, they would do it with the foreign debt," said a diplomat from another major creditor country. "It would be politically popular, and less risky technically than anything major they could attempt domestically."
A payments halt "would be out of character" for a government that has scrupulously honored its debt commitments, the diplomat added, "but the Mexicans are sending subtle signals to their creditors that they do not want to be taken for granted."
Mexican debt negotiators, pointing to their "five-year track record" of compliance with banks and the IMF, deny that they are contemplating a moratorium. But they advocate some change in servicing costs to reflect a debtors' "ability to pay" -- and the steep discounts at which Latin debts are realistically traded -- and say if such concessions are accorded others, Mexico will demand the same. Significantly, in unusually specific language, the ruling party's 1988 campaign platform calls for debtors to "get the full benefit" from loan market discounts.
For several years De la Madrid inveighed against "confrontation" with creditors and said debt relief should be sought through negotiations. Two weeks ago, however, he joined seven other Latin American presidents -- including Brazil's Jose Sarney and Peru's Alan Garcia, who have already slashed interest payments -- in endorsing "unilateral limitations" on debt payments if banks fail to lower interest rates.
Mexico drafted the statement, participating diplomats said.