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MEXICO : Progress and Promise : A WORLD REPORT SPECIAL SECTION : National Agenda : Mexico is radically shifting its economy and ideology. The nationalist, state-run model is out. The free market is in. But there are costs.


MEXICO CITY — A decade ago, when the Perisur shopping center opened its glitzy doors in southern Mexico City, consumers marveled at the state-of-the-art mall with multilevel parking, three department stores and dozens of pricey specialty shops. Here was the best that Mexico had to offer in clothing, furniture and appliances.

That was the problem.

Under the bright lights and modern displays were made-in-Mexico clothes, many copied from international designs, second-rate Mexican toasters and televisions and Mabe-brand kitchen appliances--maybe they worked and maybe they didn't, consumers quipped. Mexico's best was mediocre.

Today the upscale, stucco-and-glass Polanco Pavilion that opened across town in December offers an altogether different fare: Benetton for clothes, Nintendo for games and McDonald's for lunch.

An import grocer in the pavilion sells everything from American breakfast cereals to microwave dinners. Electronics stores are stocked floor-to-ceiling with Japanese stereos, Korean televisions and U.S. kitchen appliances. They even sell Mabe refrigerators, which now compare favorably with their foreign competitors.

Polanco Pavilion is a monument to the radical transformation of Mexico's economy and official ideology. The government has abandoned the nationalist model that came with the 1910 Mexican Revolution--a protected, state-run economy where imports and foreign investment were blocked--to embrace a competitive, free-market system.

Casting aside its historic fear of foreign domination, Mexico is trying to forge a free-trade agreement with the United States and Canada. The rest of Latin America is watching closely, hoping Mexico will pave the way to open borders throughout the Western Hemisphere.

These momentous shifts, begun in 1985 by President Miguel de la Madrid, have gained force under his Harvard-trained successor. Taking office three years ago, President Carlos Salinas de Gortari promised to modernize not just Mexico's ailing economy but also its stifling system of one-party rule.

Midway through Salinas' term, Mexico is awash in the cross-currents of change--with hopeful progress, painful dislocation and unfulfilled promise. Aspiring to greatness, it is weighed down by a volatile past.

Half of Mexico's 82 million people live in poverty. The country lost half its territory in a war with United States and millions of lives in the revolution. Presidents come in promising and go out plundering. An oil boom went bust in the early 1980s, leaving an unpayable foreign debt and an unhappy irony--a nation that exports some of its hardest workers as well as petroleum.

Today, for the first time in a decade, Mexicans have a clear sense of where their president is leading them. But his mission is fraught with controversy and uncertainty.

Salinas has shrunk the state dramatically, shedding its huge deficit and restoring economic growth after a "lost decade" of stagnation. But the massive sale of state-owned factories, withdrawal of subsidies for small farmers and depressed salaries have left millions of Mexicans behind, widening the gap between rich and poor.

The president is counting on the free-trade agreement to attract investment and sustain growth. But his critics argue that the proposed treaty could backfire--making Mexico too dependent on the United States without creating enough jobs, spurring more migration over the border and drawing more industries that pollute the environment.

While economic change has come quickly, political reform has lagged. The Institutional Revolutionary Party's 62-year dominance of Mexico is unshaken. Instead of encouraging debate on his economic program, Salinas has mustered his near-monarchical powers to push it through. Heavy-handed management of the press has fed expectations of prosperity. But if those hopes are dashed, he risks a political backlash.

"The political system is proving inadequate to accommodate such a thorough economic liberalization," said economist Rogelio Ramirez de la O. "Either there is steady progress on all fronts, or a society is disrupted as we saw in the Soviet Union."

Fear that the political system would topple prompted the government to change its economic model in the first place. Since its founding in 1929, the PRI had been a social welfare machine that distributed the benefits of continuous growth to its constituencies--mainly peasants, workers and bureaucrats--in exchange for political support.

When international oil prices fell and Mexico's debt-ridden economy collapsed in 1982, the resources of this patronage system dried up. Confronted by the demands of a youthful population for 800,000 new jobs a year, Mexican leaders realized there was an urgent need to grow.

De la Madrid tried to revive the economy with government spending but failed. In 1985, he decided to join the General Agreement on Tariffs and Trade, initiating the switch to a free-market model. He picked Salinas, his budget and planning secretary, to succeed him as president.

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