SALINAS, TRADE AND MEXICO'S CURRENCY DEVALUATION
George Baker
While rumors of an overvalued peso had been circulating in Mexico
and abroad for over a year, the devaluation of the Mexican peso three weeks
after the installation of a new president on December 1 is surprising.
With a closer look at trade statistics, it is also understandable.
The first surprising element is found in the retrospective view:
Looking back, despite the lack of an investment-grade rating by Moody's and
Standard and Poor's, American investors put some $35 billion dollars in
equities and bonds during the six-year Salinas period from 1989-94. A
second surprise is that the devaluation broke one of the fundamental terms
of the working agreement between the government and Mexican private
industry that had been in force since December 1987. The agreement was
that the government would maintain a predictable exchange rate policy as
well as low prices for labor and fair prices for state-produced products
and services (notably, energy), and, in return, industry would increase
its investments in plants, equipment and real jobs Mexico.
A third, if less visible, surprise is that former President Carlos
Salinas broke one of the unwritten conventions of devaluation politics in
Mexico: unlike other Mexican presidents who faced adverse economic
conditions that made devaluation the lesser of alternative evils and who
decided to take on investor anger and disappointment during their terms of
office, President Salinas decided to pass the responsibility for
devaluation to his successor. Other Mexican presidents, notably Luis
Echeverr=EDa and Jos=E9 L=F3pez Portillo, decided that it was better that th=
eir
successors start off their terms in office with a stable currency, even if
it meant a peso that was lower in value.
While it is certain that Salinas's successor knew, at least by late August,
that a devaluation of the peso was inevitable, it is not clear whether or
not his originally intended successor, the assassinated Luis Donaldo
Colosio, also knew that a devaluation would soon be necessary. In neither
case is there a solid basis for speculating on the reaction of either
presidential candidate to the news that the government's exchange rate and
inflation and trade statistics papered over profound weaknesses in the
Mexican economy. It is likely that the timing of the devaluation was the
subject of intense negotiations between the Government and the sequential
PRI candidates.
While a complete autopsy on the inflation statistics of the Salinas
period is not yet possible, owing to the lack of data on pent-up demand in
distinct markets, a sketch of a road map can be drawn. The year Salinas
came into office inflation was some 150%, the year he left office inflation
was under 10%. While these two statistics doubtless point to a general
trend, the figures do not take into account the existence of the
wage-price-parity agreement, known in Mexico as the "Pacto," that had been
renewed annually since December 1988. The government's measurement of
inflation is primarily keyed to a basket of prices for goods whose prices
are government-controlled, such as eggs, tortillas, beans, corn, public
housing, gasoline and electricity. What price behavior would have been
seen in the absence of government controls is for the moment anyone's
guess.
The emphasis on government prices had a corollary during the
Salinas period, which was that in non-controlled sectors of the economy
there was a tendency toward price parity with the United States. The
economy came to have two price determinants: one was low income prices
controlled by the government, the other was high-society prices equivalent
to those of Fifth Avenue or Rodeo Drive. For the business traveler to
Mexico City, Monterrey or Guadalajara, high-society prices were everywhere,
from hotel rooms to restaurant tabs and attorney fees. A U.S. Embassy
official estimates that to open an office in Mexico City an international
company should have a half-million dollar budget.
Unfortunately, such high-society prices (made higher for the foreign
visitor by a progressively overvalued peso) spilled over into the tourism
sector, which, counter-intuitively, made Mexico vacations out of reach for
tens, or hundreds, of thousands of American and European tourists. The
cost of foregone tourism exports during the Salinas years has not yet been
estimated.
Regarding investments, Salinas in his outgoing State of the Union Address
on November 1, 1994, bragged that during his six-year rule there had been
some $50 billion in private investments in Mexico. Unfortunately, such
amounts were primarily invested in the stock market, and very little in new
plants, equipment and jobs.
Official Mexican trade statistics for the period 1989-93 tell an
ambiguous story about the controversial role of the oil industry in Mexico.
While the president of Mexico does not set world oil prices, he does set
forth the framework in which investment in the oil sector takes place. At
the insistence of Salinas, there were no private investments in any area of
the petroleum sector, despite the badly needed infrastructure upgrading in
production, refining and natural gas transmission and distribution. Pemex,
meanwhile, was given a shoe-string investment budget and was forced to pay
exorbitant taxes. Oil production stayed flat, and revenues from oil
exports fell 11% during the period.
To judge from official statistics, oil exports, as a percent of
total merchandise exports, fell some 36%, to 14% in 1993, from 22% in 1989.
These figures will be revised momentarily.
Statistical appearances of the Salinas period are the most
deceptive in the area of manufacturing exports, which, seemingly, increased
67%, to $42 billion in 1993, from $25 billion in 1989 (Table 1)*. To
understand the needed correction, a clear idea of a "merchandise export"
must be held in mind. What counts as an manufactured export is a product
for which the manufacturers are responsible for its design, engineering,
market strategy and whole pricing. If one of these elements is missing,
the plant is performing an international assembly service, not engaging in
the manufacturing of exports.
Before Salinas, this distinction used to operate in Mexican trade
statistics. Mexico's "in-bond industry," which in official statistics,
accounted for some $22 billion of merchandise exports in 1993, is made up
of plants that operate in a legal and tax framework like that of a Free
Trade Zone (FTZ). The exports of these FTZ plants used to be treated as
export services, comparable to those of the tourism industry. It was never
considered that a product with $95 of imported components and $5 of Mexican
labor, supervision and packaging should be treated as a $100 Mexican
export. In early 1991 this distinction was dropped in favor of treating
the FTZ export as if it had $100 of Mexican content.
A second category of questionable exports is intra-firm trading.
When a Ford or a Volkswagen plant in Mexico manufacturers and exports an
engine or builds and exports a car to their respective parent companies, no
Mexican engineering or marketing executive is centrally involved in the
design, planning or market-evaluation processes. Foreign-owned, non-FTZ
plants in Mexico (such as IBM's) do pay taxes on profits from operations,
but 'profits' are cooked by intra-firm accounting practices, and are not
the result of market successes and failures.
Restated in this way, and estimating intra-firm trading as 25% of
general exports (exclusive of FTZ exports, which are disallowed in their
entirety), Mexican exports in 1993 were $15 billion, not $41 billion (Table
2)*. Oil exports were 40% of total merchandise exports in 1989, not 22%, a
ratio that indeed fell in the succeeding years--to 30% in 1993, but not to
14% as official trade statistics suggest.
By this reading, the Salinas government understated its dependence
on oil exports by nearly 50% and overstated the size of Mexico's true
merchandise exports by a factor of 1.8. (Tables 3 and 4).
In such a make-believe world it was easy to see lose sight of the
underlying reality that Mexico's growing trade deficit was pointing to,
namely, that the other economic indicators were not accurately measuring
the weakness of an economy based on high-liquidity investments and a trade
account based non-market prices for a large share of imports and exports.
One immediate outcome of the unexpected devaluation of the peso is
that it all but eliminates Carlos Salinas as a viable candidate for the
directorship of the World Trade Organization. This successor to GATT, the
success of which will depend on the fairness of its policies and the
transparency and honesty of its statistical reporting, will not be best
served by having, as its first chief executive, an authoritarian political
leader for whom trade statistics are instruments of politics. While the
Salinas approach to trade statistics may be good enough for the executive
branch of the U.S. Government and certain editors of the U.S. press, which
support the Salinas candidacy, it should not be accepted by the
international community, including Mexico.
A second immediate outcome is that it increases the urgency with
which economic planners in Mexico need to rethink the assumptions
shibboleths of Salinonomics.
George Baker directs Mexico
Energy Intelligence, a
subscription service based in Oakland, California.
Note: A pre-devaluation version of the analysis of Salinas trade statistics
was published in translation in Reforma (Mexico City) on Dec. 19, 1994.
g.baker@energia.com
Tel: 713-627-9390 Fax: 713-627-9391
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George Baker