Originally published in The Akron Beacon Journal
Sunday, October 22, 1995
ALL BUT VERY RICH HURT BY PESO DEVALUATION; U.S. STAKE IS ENORMOUS
By DAVID KNOX
ALL BUT VERY RICH HURT BY PESO DEVALUATION; U.S. STAKE IS ENORMOUS
By DAVID KNOX
On Dec. 21, 1994, the day after the bottom dropped out of the Mexican economy, the snow-capped volcano silhouetted on Mexico City's southeast horizon blew its top, spewing a plume of white ash into the sky.
With a sound likened to the howl of jet engines, Popocatepetl ended a half-century of silence.
Fear that the eruption was prelude to something worse prompted the evacuation of 30,000 people from surrounding villages. With 30 million people -- a third of Mexico's population -- living in sight of "Popo," a truly big blow could be catastrophic.
However, for many Mexicans, Popo's awakening was also a metaphor for the nation: Just as geothermal pressure had built for decades under the volcano's placid face, economic and political discontent among the Mexican people has smoldered beneath an authoritarian government shrouded in a smog of corruption, secrecy, censorship and double-speak.
Just as a volcano could explode after so many years corked up, so could a nation. But as with some volcanoes, Mexico might need only to let off some steam.
So far, anger about the staggering economy hasn't brought political change in a country that has been ruled for 65 years by the aptly named Institutional Revolutionary Party -- better known by its Spanish acronym "PRI" (pronounced "pree").
But many observers say this crisis is different because for the first time all classes -- except the very rich -- have been hit.
"You have doctors, lawyers and accountants who from 9 until 2 have their own practices and from 4 to 9 are taxi drivers," said Miguel Angel Pinzon, 43, a professor of business administration at the Monterrey Technical Institute's campus in Cuernavaca, about 70 miles southwest of Mexico City. "At the university, we have professors who in the nighttime are selling bicycles.
"Why? Because the economy has cut our salary in half in the past six months."
Which way Mexico goes means a lot to the United States. Billions of dollars are directly invested there, and more than 770,000 jobs depend on exports to Mexico.
Also jeopardized are the hundreds of thousands of new jobs that were expected after U.S. goods were freed of high tariffs by NAFTA, the North American Free Trade Agreement, which went into effect last year.
Beyond the jobs is the fear that a complete collapse of the Mexican economy could start a domino effect throughout the other financially shaky nations of Latin America.
The crisis began Dec. 20, when the Mexican government devalued the peso after nearly exhausting the country's cash reserves to secretly prop up the currency during a presidential election year.
Within days of the announcement, the peso lost more than a third of its value as the exchange rate soared from about 3.4 to more than 5 pesos to the dollar. After hitting a March high of 7.45 to the dollar, the peso settled this summer at about 6 to the dollar.
For Mexicans earning the minimum wage of 18 pesos a day (at least 15 percent of the work force) the devaluation was the equivalent in U.S. currency of a pay cut from 65 cents to 38 cents an hour.
The devaluation struck every Mexican's wallet. Faced with making good on nearly $30 billion in bonds that paid off in the now high-priced dollars, the Mexican government slashed domestic spending, jacked the national sales tax in April from 10 to 15 percent and pressured employers to hold the line on wages.
As the tax hike and spending cuts sucked money from the economy, the cost of borrowing went through the roof -- peaking at more than 120 percent this spring -- gutting the market for homes and other big-ticket items.
Those with mortgages, auto loans or credit-card debts were even worse off because variable rates have always been the norm in Mexico. Their monthly payments suddenly doubled, tripled or shot up even more.
By July, the economic score card was grim. The gross national product for the half-year was down more than 6 percent, and annual inflation was projected at 50 percent.
Prices through the roof
The numbers that bring home the inflation story could be found in stores, restaurants and other businesses in Cuernavaca this summer. In a supermarket, a can of ground coffee that had cost 7 pesos last year was up to 13.60 in July. Overnight, the price of a movie ticket went from 12 pesos to 15. Outside a restaurant, a scrap of paper pasted on a chalkboard menu advertised lunch for 14 pesos. A gust of wind revealed the old price: 10 pesos.
At a Nissan car dealership, an economy-model sedan that sold for 40,000 ($11,500) last year cost 70,000 ($20,000) this year. A Volkswagen dealership stopped posting prices on its outdoor sign rather than keep up with the changes.
In three farm fields outside nearby Juitepec, where Nissans are made, thousands of unsold cars were parked amid waist-high weeds. The passenger lines at the plant were shut down in May after sales of new cars dropped 81 percent from the year before.
There were other signs. Street vendors -- some not yet teen-agers, others old men and women -- sold everything from tacos to half-minute windshield washes at stoplights. A few sported homemade clown outfits and makeup to advertise their wares.
Unemployment doubled by summer. The official jobless figure in May and June was 6.6 percent -- the highest ever recorded. That number is deceiving. Any person over age 12 who works at least one hour a week is counted by the government as employed.
Most observers place the jobless figure using a more realistic method at 25 percent at least.
Figures are deceiving
Bill Coleman, one of the founders of VAMOS, a nonprofit foundation in Vermont that operates social-service programs in Mexico, said that of the 36 million work force, "10 million have no work at all -- nada," and 15 million are scraping along in the "informal economy" as unlicensed street vendors. That leaves only about 10 million with "real jobs" that pay enough to support a family, he said, "and half of those work for the government."
Coleman, 63, moved to Mexico six years ago after retiring and giving up a small publishing business. He directs more than a dozen schools, day-care centers and other programs for the poor in the Cuernavaca area. He and his wife, Patty, also are correspondents for the National Catholic Reporter.
At a VAMOS summer school in a church in Temixco, a town of about 100,000 south of Cuernavaca, the children have scrubbed faces and clean -- albeit worn -- clothes. They are far from the poorest of the poor, he said. "They are a cut above the children we would have in the (day-care) centers where there are the children of the street sellers."
Many of the several dozen students at the school are the children of laborers, bricklayers and electricians in the construction industry, which has been severely crippled by the high interest rates.
Since Mexico has no unemployment insurance, most workers have nothing to fall back on except their families if they lose their jobs. None of the families in the neighborhood around the school own their homes -- they are squatters who took possession of vacant land on the outskirts of the town and avoided eviction because of their sheer numbers.
"They all started with tar paper shacks," Coleman said. "Gradually, the government gave in."
Wall Street and the White House have lauded "big-picture" statistics -- Mexico's ability to pay off dollar-denominated government bonds and an $8.9 billion trade surplus with the United States for the first seven months of the year -- as indicators that the worst of the crisis is over. But these numbers are meaningless for the working-class and poor Mexicans, Coleman said.
"For the majority of Mexicans," he said, "the quality of life has gone down every year since 1958."
But it's the middle class that has been hit hardest psychologically by the most recent crisis.
Oil boom days are gone
The Mexican middle class -- now about 20 percent of the population -- tasted real prosperity in the late 1970s, when the discovery of vast oil deposits pumped millions into the economy.
"Those were very good years," said a Cuernavaca travel agent who asked not to be identified. "The kids in their 20s were drinking cognac and champagne in the discos."
The bubble burst in 1982, when the government, which had managed to outspend the increased oil revenues, defaulted on billions in loans as world oil prices dropped.
While the resulting recession hurt, many in the middle class were still able to take advantage of sky-high interest rates on their bank savings.
"In one month, our money doubled; in the next month it doubled again; in the next month, it doubled again," the travel agent said. "It would have taken many years to make what we made in three months."
This year's crisis is different. Most in the middle class aren't earning interest; they're paying it -- on credit cards, loans and mortgages that became readily available after President Carlos Salinas de Gortari took office in 1988.
Salinas, a Harvard-educated economist and ardent believer in free markets, sold off most government-owned businesses and encouraged spending by lowering tariffs even before NAFTA.
The result was an explosion of borrowing.
"A few years back, there was no such thing as credit cards in Mexico. Now there is a credit card for everyone," said Pinzon, who imported dental supplies and equipment before joining the business staff at the Monterrey Institute last year. "So, the devaluation is hitting everyone."
An estimated 16 million Mexicans have fallen behind on debt payments since the peso's crash.
Adding to the middle-class woes is the growing problem of crime blamed on the poor economy.
First came concern about property crimes.
The travel agent's van was stolen from outside his home two years ago. After that, his neighborhood installed gates, operated by round-the-clock guards -- on the only two street entrances.
Gated neighborhoods are a trend, said May Brooks, an American teacher and writer who has lived 40 years in Mexico and helped establish Cemanahuac, a center for Spanish language and Latin American studies in Cuernavaca.
"I know many streets that are doing that -- ordinary streets," she said. "Crime is on the rise because of economic desperation. It's not that there are more criminals."
Violence on the rise
The deepening economic crisis this year has been blamed also for a sharp rise in crimes of violence.
In March, the U.S. State Department advised embassy employees in Mexico City to use taxis only from authorized taxi stands after several workers were "abducted, assaulted and robbed after hailing taxicabs in the streets."
But foreigners aren't the only victims. Brooks tells a "ghastly story" she heard from her housekeeper.
"I friend of hers was in the supermarket," she said. "When she's finished, she goes looking for her child, who was about 5, and she can't find her.
"A man comes up to her and he says, 'I have your child. She's sitting outside in a car with my wife. I have no job. I have a family. I have children at home. I am out of money.
" 'If you'll buy my groceries for this week, I will give you your child.'"
The woman agreed.
"It came to about 300 pesos" (about $50), Brooks said. "They go out on the street and his wife is sitting there and hands her the child."
Such a story illustrates a vulnerability of crime victims in Mexico: If you get in trouble, there's no help from the authorities.
Asked whether the woman reported the kidnapping and extortion to police, Brooks looked surprised.
"No, you don't call the police," she said. "In Mexico, that would get you into more trouble. Nobody calls the police. The police are just going to make it worse."
Distrust of the police is universal in Mexico. A staple of Mexico City newspapers are periodic surveys showing most residents -- 80 percent in one survey this summer -- believe police take bribes, make false arrests and torture suspects.
"If your house is broken into, the last thing you'd do is call the police," said an American businessman who has lived in Mexico City for 1 1/2 years. "Then they'd come in your house. All you'd do is lose more stuff."
Rich largely immune
Some corruption in government and business traditionally has been winked at by Mexicans. A recent survey, published on the Internet, measuring the difficulty encountered in doing business without kickbacks, extortion and fraud ranked Mexico ninth from the worst among 41 nations -- worse than drug-infested Colombia. In the wake of the December crash, however, Mexicans are wondering whether greed got out of hand and contributed to overheating the economy.
Frequently cited is a 1994 Forbes magazine story reporting that the number of billionaires in Mexico nearly doubled -- from 13 to 24 -- from a year earlier. That ranked Mexico, with the 13th-largest economy in the world, fourth in the number of richest individuals, behind only the United States (120), Germany (42) and Japan (36).
Only one Mexican was on Forbes' list in 1987, a year before Salinas took office. Despite the economic problems, 10 remain on this year's list.
Public suspicion that so much new wealth could come only from insider deals with the government pressured officials in mid-July to join opposition parties in demanding that Salinas be extradited to answer questions about his administration. Salinas, who left office just weeks before the December devaluation, reportedly is living in Canada.
The extradition demand was seen by many as an attempt to quell widespread public demonstrations that for the first time include many middle-class groups.
In Mexico City, those demonstrations became so large and numerous this summer that on July 31, traffic congestion from eight protests and marches prompted a citywide air-pollution alert.
While the protests in the cities have been peaceful, they can be deadly in the poverty-stricken countryside, where more than a quarter of Mexicans live.
On June 28 in Guerrero, one of the poorest of Mexico's 31 states, 17 peasants traveling to a demonstration were gunned down by police. A week later, 11 more peasants were shot by men who the lone survivor said identified themselves as members of the state police. A few days later, gunmen armed with AK-47s ambushed and killed five policemen, possibly in retaliation.
The occasional murder of a troublesome peasant by the government is nothing new in Mexico. But the wholesale massacres in Guerrero are viewed by many as a sign the PRI might be losing its grip.
Revolution spurs doubts
Doubts about the party have grown since the Zapatista guerrilla uprising on Jan. 1, 1994, in Chiapas, on the Guatemalan border. The rebels demanded greater democracy and improved social and economic conditions for Indian peasants.
The government's failure to put down the rebellion is central to one of the many theories to explain the March 23, 1994, assassination of Luis Donaldo Colosio, the PRI's presidential candidate.
Faced with popular opposition to using the Army to end the rebellion, Colosio had backed negotiations with the rebels -- supposedly angering hard-liners in his party who ordered him killed.
Less than six months after Colosio's murder, the party's second-in-command, Jose Francisco Ruiz Massieu, was assassinated.
But predictions of PRI's demise proved premature. The party's replacement presidential candidate, Ernesto Zedillo Ponce de Leon, handily won the election in August, taking just over 50 percent of the vote in a three-way race.
Some observers speculate that the turmoil within PRI actually benefited the party by generating votes from people who feared factions within the ruling party would resort to violence if it lost.
Those fears may have been well-founded. After taking office, Zedillo bowed to growing demands and launched investigations into the assassinations that have linked both murders to PRI officials.
But while several people have been arrested, including the brother of former President Salinas on charges of ordering Ruiz's killing, no party officials have been convicted.
The question of whether PRI can reform itself remains in doubt. As does the future of Mexico.
"Nobody knows," said Brooks, the Cuernavaca teacher. "I ask that of everyone -- people whose judgment I really look to -- and nobody can say.
"There are days when you feel very optimistic because so much is happening from below. And there are days when you feel how strong the powers can be to hang on."
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