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This Is Recovery?

Mexicans' Struggles Suggest Asian Comeback Won't Be Easy

January 30, 1998|JAMES F. SMITH | TIMES STAFF WRITER

MEXICO CITY — The Mexican economic recovery is being held out as a model for the crisis-ridden countries of Asia, and no wonder: Exports are booming, foreign investors have returned, employment is up and retail sales are finally reviving. Mexico even repaid its 1995 bailout loans three years early.

But if this is what recovery looks like, perhaps the people of Indonesia, South Korea and Thailand shouldn't be allowed to watch.

"What they say about our recovery from the crisis, it's a myth," Susana Figueroa, 26, said as she emerged from a discount supermarket. "The prices keep going up--milk, diapers, beans, rice, tortillas--faster than salaries. Really, the middle class has fallen further back. Now you can either go on vacation or you buy clothes, but you can't afford both."

Impressive though Mexico's macro-level turnaround from its 1994-95 currency crisis is, average citizens remain far behind where they stood just three years ago. The message is daunting for Asians: Even if they diligently carry out the tough reforms demanded by foreign governments in return for economic bailouts, hard times will continue for years.

"There is a lesson in this for Asia," said Lawrence Krohn, chief Latin American economic analyst for UBS Securities in New York. "Unfortunately, if the lesson is too well-learned, then the message from the [Asian] public may be, 'We don't want to suffer like the Mexicans did, so we won't let you impose such strict austerity measures.' The political will might not exist in Asia. But there is no quick fix when excesses have accumulated over time."

Only during the just-completed holiday shopping season, three austere years after the peso crisis hit, did Mexico finally show signs of a consumer recovery. But even with holiday sales up about 5% in real terms over the previous year, no one was going on any spending binges.

The painful fact is that if Mexico can achieve economic growth levels in 1998 similar to the 7%-plus growth of the last year, then its 93 million people might--just might--be within sight of regaining the modest living standard they enjoyed before the peso crisis engulfed them in December 1994.

"The standard of living for the typical Mexican is still very low," Krohn said. "There's no way the standard of living has recovered to pre-crisis levels, and no chance of that happening very soon."

Guillermo Ortiz, who became governor of the central bank in January after overseeing the economic recovery program as finance minister, said Mexico could not expect to overcome the crisis--let alone address its deep-rooted problems of poverty and unequal wealth distribution--in just three years of austerity. But he said the past decade of structural reforms had set Mexico on the proper course toward longer-term development.

"We now must begin another cycle like the one we entered in the 1940s," he said, "and have another 30 years of growth above 6%."

The huge cost of the peso crisis included a 50% devaluation, inflation that soared to 52% in 1995, skyrocketing interest rates that drove countless small businesses into bankruptcy and a near-doubling of Mexico's primary unemployment rate, from 3.4% in 1993 to 6.2% in 1995.

(Mexico uses an extremely broad definition of "employment," and no one considers the unemployment rate to be as low as the figures suggest, but the numbers are useful for indicating longer-term trends. More than 800,000 "official" jobs--those registered with the nation's social security system--were lost in 1995.)

Although employment began to edge back up in September 1995, real wages continued to decline for Mexican workers as inflation outpaced wage increases. Only in April 1997 did real wages start to rise again, setting the stage for consumers to spend. The unemployment rate finally fell back to pre-crisis levels in September. About 800,000 jobs were created in 1997--not even enough to keep pace with population growth.

Getting employment and real wages to rise simultaneously required some of the purest doses of free-market reforms and austerity measures applied anywhere. The value-added tax, for example, was raised from 10% to 15% in one jump, and government spending was slashed. The result was reduced living standards, as well as rising crime and a decline in government services. "So the quality of life deteriorated on virtually every front," Krohn said.

Since then, productivity in manufacturing has soared, he noted--but workers haven't benefited.

"Labor conditions were such that employers didn't have to pay workers for the productivity improvements," he said. "Now there is some tautness in the labor market, so workers can command higher real wages, and they have earned it."

Juan Ronquillon, a 38-year-old building craftsman, put it more directly as he bought supplies in a hardware depot: "For me personally, each year gets worse. For working people, this recovery isn't reaching us."

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