by Economic Analysis Technical Group
MEXICAN NETWORK ON FREE TRADE (RMALC) LOG Number 1 - April 10, 1995 _________________________________________________________________ 3. FORUM: "CRISIS, FREE TRADE AGREEMENT AND ALTERNATIVES" Mexico City March 23-24, 1995 This forum, organized by RMALC, evaluated the balance of the North American Free Trade Agreement's first year. The balance insisted on the negative effects that NAFTA has had in Mexico: unemployment, breaking businesses, lack of a solid fiscal policy, etc. In light of this balance, the Plan for Sustainable Development, developed by RMALC, was mentioned as an alternative. The plan diagnoses the crisis and proposes alternatives, different from those of the government, which design a long-run economic policy that truly solves the problems of Mexico's economic policy. * DOCUMENTS * YES, THERE ARE OPTIONS Plan for Economic Recovery and Sustainable Development (The Plan) Economic Analysis Technical Group Mexican Network On Free Trade (RMALC) The grave crisis the Mexican economy is going through is rooted in the economic model imposed during the last 12 years. The government emergency program is limited to confronting problems of insolvency and short-term debt, in exchange accepting external conditions regarding economic policy and the loss of sovereignty over our petroleum resources. The program will worsen the effects of the crisis, increasing unemployment, sending thousands of productive units to the sidelines in bankruptcy, and leading to the collapse of the domestic market. All this implies foreclosing all means of getting the country on track to real, sustainable development. There are realistic, technically well-founded alternatives, that would allow us to face the economic and financial crisis head-on, attacking the problems it generated at their roots. The crisis The model in effect for the last 12 years is based on two premises: a) that indiscriminate openness would lead the country to sustained growth; and b) that reducing the role of the State in regulating the pace and orientation of economic activity would allow market forces to allocate resources efficiently and identify niches of competitiveness for the Mexican economy. The reduced inflation rate, presented as one of the most outstanding achievements of the past administration, was in reality a wholly fragile outcome of external vulnerability. The lack of equilibrium in the trade balance was paid off with financial resources attracted not by the possibility of productive investment in a healthy economy, but by high interest rates. Speculative capital was a key piece in the scheme. When it was withdrawn, inflation recovered its virulence and dangerousness. The present crisis demonstrates that the macroeconomic achievements of the last few years rest on very weak supports. Indiscriminate aperture didn't result in an open, robust and healthy economy, but rather in a vulnerable, weak and disjointed economy. The crisis reveals the necessity of redefining the role of the State in the Mexican economy: we can't go back to a large, inefficient State, but we should seek a democratic State capable of preventing the Mexican economy from falling into the vulnerable conditions in which it now finds itself. The government's diagnosis of the crisis located its causes not in the model, but rather in financial factors. Its response has accentuated the negative traits of the model and deepened the effects of the crisis. A restrictive monetary and credit policy, on top of drastic fiscal adjustment, doesn't represent a solution to the Mexican economy's current problems. The package of contraction measures is already intensifying the negative effects of the crisis. It is therefore urgent to put the brakes on and change direction. The gravity of the crisis requires a redefinition of Mexico's economic strategy such that the process of growth is sustained by a balance between the necessities of the domestic market and a true export capacity. Objectives The Plan would be part of a general strategy to achieve economic improvement and development, and to better the quality of life and environmental conservation. Its immediate objectives are preserving the industrial base and generating productive and stable employment. The Plan attempts to articulate the short, medium and long terms, integrating the domestic market into a strategy for economic growth and development and restoring the consumption necessities of the Mexican people. The Plan proposes to democratize the decision-making process for economic policy. Macroeconomic Policy and the External Sector We must stabilize the chief macroeconomic variables, but not at the cost of drowning the economy and dismantling industry. Instruments of monetary, fiscal and credit policy must be made more flexible to alleviate the pressure that exists on the external sector. Two steps in this direction would be to: a) renegotiate foreign debt, both public and private, starting with a suspension of payments; and b) apply emergency measures to reduce imports, maintaining only those that are indispensable for productive activity. The North American Free Trade Agreement (NAFTA) imposes severe limitations on economic policy, representing an obstacle to the adoption of measures aimed at alleviating pressure on the external sector. It is therefore necessary to submit the agreement to revisions that would allow Mexico to implement measures that would reduce the vulnerability of its economy. ADJUSTMENT FOR GROWTH, EMPLOYMENT AND PRESERVATION OF THE INDUSTRIAL BASE OF PRODUCTION Incentives for Productive Investment Easing pressure on the external sector would allow reduction of interest rates in that would be unnecessary to attract masses of speculative capital to finance the external deficit. But this process must be accompanied by a redefinition of the central bank's role in financing productive activity. This would imply a more flexible credit policy, which would in turn help commercial banks to ease up on credit. With respect to fiscal policy, the Plan proposes to: 1. Substitute a tax on speculative profits, including those derived from stock market operations, for the 2% tax on business assets. 2. Stimulate productive investment incentives and job creation. 3. Increase the pool of taxpayers via administrative simplification, not harassment of taxpayers. 4. Revise the Rent Tax Law to make the tax structure fairer. 5. Revise the special regimen for mercantile corporations, particularly for the maquiladora [foreign-owned factories] industry. Internal Debt In terms of the Plan, Congress should expedite a Reconstruction of Domestic Debt Act, under which short-term debits would be exchanged for long-term debt at a low, fixed real interest rate (similar to that of the Ajustabonos [government bonds]). The conditions and terms of this operation would be defined by different types of credit securities and operations. Commercial creditor banks could charge this interest rate plus a reasonable percentage. Wage Policy and Employment Wage policy should no longer be a piece in the anti- inflation fight, nor constitute an attraction for foreign investment. It should instead become a lever for growth. The minimum wage should tend to adjust itself to the criterion established by the Constitution: sufficient to provide for the all-around necessities of a family. It would thus power development, since workers would become strategic consumers whose welfare would benefit the whole of the economy. The Plan contemplates: a general emergency salary raise; freeing up salary negotiations between business and labor, thus ending wage ceilings; abolishing the 1% payroll tax; creating emergency jobs to rebuild and wide infrastructure, with funds from the Secretariat of Social Development. Anti-inflation Policy The Plan doesn't leave the fight against inflation unattended, but assumes that it is one variable to be considered as part of an overall economic policy. Therefore, the Plan proposes to: 1. Diminish interest rates, reducing inflationary pressures. 2. Stimulate growth and productivity, both factors that play a part in lowering costs. 3. Diminish imported content in national production. 4. Create a strong peso, strengthening the internal market. 5. Reduce inflation's social effects on the majority of the population. Sectorial Policy and the Role of the State The Plan must be complemented by sectorial policies that strengthen the industrial base and make it competitive, not only in the domestic market, but also internationally. This requires measures that consistently promote formation of human resources, scientific development, and investment in infrastructure and communications. The foregoing presupposes a redefined role for the State in promoting and regulating economic activity. _____________________________