The Reconquest of Mexico

The "conquest of Mexico" happened in 1520. With his well-built ships and newly discovered navigational techniques, the Spanish General Cortes penetrated the "New World" and -- by an unrelenting process of deception, betrayal, warfare, and wanton violence -- subdued and destroyed the mighty Aztec empire, then under Montezuma, its last unsuspecting, hospitable chief. Thence, the willed ruination of great civilizations followed. "Massacres" were committed by the hundreds -- the word genocide had not come into usage then --, grand cities were destroyed, palaces and temples burned, and survivors forcibly converted to Christianity. The rehearsal had been carried out decades earlier upon the Moors of Spain. The holocausts suffered by the Aztecs, Mayas, and Incas went largely unrecorded in the self-righteous annals of the west.

It was a momentous event in history, the augury of a most violent and transforming world system of domination that humanity has ever experienced. We know it as the age of western, capitalist imperialism. Yet, not one of the future victims of this behemoth -- not the Indians and Chinese, nor Arabs or Africans -- took notice of it until, that is, it was too late. Their failure was comprehensible. In Asia and Africa, it was the age of the "gun powder" empires -- Ottoman, Safavid, Mughal, and Ming. Their elites contentedly usedmisused power, luxuriated in wealth and patronage of the arts. So they missed the marriage of science to technology, and missed also to notice the rise of the new world system which put new knowledge to the service of old greed. The price of this failure was conquest and colonization.

It is strange that contemporary Asian and African elites travel now on "information highways" but they appear even more unknowing than their ancestors were centuries ago. Despite the warnings of such sages as Rabindranath Tagore, they became hooked into the ideology of nationalism and the quest of nation states. That done, they embraced the shibboleths of the cold war, bit into derived notions of bipolarity and national security. Since the cold war"s end, we have witnessed a well-orchestrated, brightly packaged, and global sale of the "free market". Every country from Kenya to Indonesia and Morocco to Bangladesh is buying it feverishly, without looking closely for the poison in the package. Even now that Mexico"s economy has collapsed from excessive dose of "freedom" and a re-conquest of sorts has begun, few in the corridors of third world power are drawing the necessary conclusion.

Among Emperor Market"s "emerging" favorites none matched the lures of Mexico. As the US Treasury Secretary Robert Rubin emphasizes repeatedly: Mexico "has been the proto-type economy, an exemplar of the way to privatize big industries, open markets, and create a growing middle class eager to buy imports". For five years it offered American and European investors in bonds and certificates of deposits a bonanza of quick and high profits.

It all started in the late 1980s after Nicholas Brady, George Bush's Treasury Secretary crafted the "Brady Plan". Its goal was insure repayments on the huge commercial debts many third world countries had incurred. Built into the complex formula were the appearance of America"s generosity toward the third world and the assurance of full profit for American capital. Banks agreed to reduce the total amount of debts (which were likely to be being defaulted) in return for the debtor country"s commitment to resume regular repayments. Therein lay the catch: to repay, they needed to borrow and sell. Borrowing spawned trade in bonds -- "Brady bonds" they were called -- sold by banks and big investments houses like Goldman Sachs & Co. of which Robert Rubin, now the Secretary of Treasury, was then co-chairman. Selling involved the underseveloped country"s "family jewels" -- industries, lands and forests -- national assets sold cheaply to foreign and domestic investors. With this clever formula, foreign investments of $10 to $15 billion flowed into Mexico annually. Its politicians and business compradors had never been happier until, that is, the bubble burst at the dawn of 1995.

In just two months Mexico suffered a catastrophe from which it may not recover for many years, certainly not without sacrificing its sovereignty. Since the outbreak of the crisis in early January, the Mexican peso has plummeted 67%. The Bolsa, bellwether of Mexico"s stock market has fallen 62%. Bank rates have risen 67%. Unemployment has begun to soar. Most economists believe these to herald severe recession.

Rich countries, especially the United States, have huge investments in Mexico. So they have devised a "rescue plan" of which the largest component is the $20 billions in US loans and guarantees. Others have also chipped in: (i) Loan of $17.8 billion from the International Monetary Fund. (ii) Short term loan of $10 billion from the Bank for International Settlements, with the Swiss-based BIS serving as clearing house for contributions from European and other countries. (iii) $1 billion in Latin American swaps of dollars for pesos. (iv) $1 billion from Canada in short-term swaps. (v) $3 billion in new loans from Commercial Banks.

The total of new debts comes to $52.8 billion which Mexico must repay with interest. But the price tag is higher than that; it includes Mexico"s sovereignty. The US loan agreement imposes on Mexico what the New York Times editorial described as "harsh, though necessary restrictions on Mexico"s monetary and fiscal policies." The agreement requires Mexico to deposit all its revenues from oil and petro-chemical products into the Federal Reserve Bank of New York. This money shall be effectively under US control, and shall be automatically seized if Mexico defaults on any part of its repayment on various loans. In addition, Mexico has undertaken to submit every week a wide ranging report on its economic condition, and post it on the computer Internet for the benefit of its creditors.

Mexico"s strict "diet of austerity" is to be administered under watchful American supervision. This "diet" includes a regime of tight money and raised interest rates. The tight money requirement prevents the government of Mexico from spending state funds even to stimulate employment and the economy. The idea is to control inflation, and restore the confidence of foreign investors even though it squeezes Mexican people dry. With such severe cuts in spending, the onset of a deep recession is predictable. Similarly, interest rate has been driven up. By end February interest for Mexico"s benchmark treasury certificate (consumer and commercial rates are fixed above it) was raised to 59%. The idea is to stabilize the peso. But high interest rate are choking off what little native strengths the economy has been spared. The economy reflects reality, nevertheless, and public perception. The peso has continued to drop.

Robert Rubin, the American Secretary for Treasury spoke of the loan package as aimed at "preventing the underpinnings of the Mexican economy from crumbling". It makes sense that the US should want to halt Mexico"s economic break-down. After all, Mexico ran neck-to-neck with Japan as the US"s second largest trading partner. Through the third quarter of 1994 it bought more than $51 billion in imports from the U.S while Japan bought $51.7 billion. Moreover, recession in Mexico will undoubtedly put pressures of illegal immigration on USA. A healthy Mexican economy is important to a healthier American one.

Yet, a reading of the "bail-out-Mexico" package suggests that its immediate aim is to rescue the American and European financial institutions and individuals who had invested there in hopes of making a fast-buck. Thus, half of the $20 billion US loan is to enable Mexico to pay off those American investors who had invested mostly in the bonds (tesobonos) and certificates. The remaining $10 billion will be held for "contingencies". When a failing Mexican bank is "saved" and required to pay off its foreign depositors, a contingency will have been met. "The depositors", said Robert Rubin, until recently a bond Czar himself, "must be protected."

Two questions arise: what factors have caused Mexico to get so deep in economic trouble that it must sacrifice, for a time at least, both its people"s well-being and its national sovereignty? What lessons do the case of Mexico hold for the other countries which are seeking, so eagerly and so unquestioningly, to fall into the grasping embrace of "emperor market"? Next week I hope to answer these questions.

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<strong>The Message from Mexico
10 March 1995</strong>

My last essay in this space concluded with two questions: How did Mexico get so deep in crisis that it must compromise its sovereignty in an effort to overcome it? And what are Mexico's lessons for those third world countries which are longing to fall into the embrace of emperor market? This essay partially answers these questions. But first an update on developments since last week:

Mexico's economic crisis has deepened, and appears headed toward what a New York Times columnist described as "not merely a cleansing recession but a revolutionary depression". The fifty billion dollars in new loans which the US and IMF have arranged are going just where we had anticipated -- to pay off Mexico's American and European `investors'. This is how the Times columnist Thomas Friedman described the process on March 8: "The banks are getting the dollars to pay the foreigners from the Mexica n government, and the Mexican government is getting the dollars on loan from the US Treasury. That is not a pretty picture."

The picture had in fact been ugly and getting uglier for two years. No one in Washington, the Wall Street, or Times Square took notice, perhaps because people were being bled in a distant land while American banks and investment houses were taking handso me returns home. Until eight weeks ago, one read and heard nothing but praise from officials, bond czars, and media pundits of Mexico's ivy league whiz kids and its visionary "Harvard educated" president Carlos Salinas de Gortari, now retired and under cr iminal suspicion. But the chickens of greed do occasionally come home to roost. The fifty billion dollar loan has not stabilized the Mexican peso. It has continued to fall reaching record low levels this week. So the American investors who repatriate the ir money from Mexico are also hurting as they drain the remaining life out of Mexico's fallen economy. The American dollar has responded by falling to a new post-world war 11 low against the Japanese yen and German mark. Not a big deal, but an embarrassme nevertheless.

Therein lies Mexico's first lesson: do not keep your currency overvalued. At 3.45 to a dollar, the peso was grossly overvalued. It pleased American investment banks which were pouring money in bonds, stocks, and high yield certificates of deposit becaus e they converted profits into dollars at favorable rates. For many Mexican businesses the cheap dollar meant excellent opportunity for imports and an unfavorable export environment. So they exported less and imported liberally matching Mexico with Japan as the second largest importers of American goods. In 1994, Mexico ran an exorbitant trade deficit of $30 billion which, of course, the government financed in order to keep the peso's value to its investors' liking.

The new government of Ernesto Zedillo inherited a structural crisis. It attempted a mild adjustment by devaluing the peso by 15%. It ran counter to past practice. The Times reported, as though amazed, that American financiers were not consulted. After al l, Pedro Aspe, President Salinas' finance minister always made sure that "important New York bankers and money-fund managers ...were consulted before any important shift in economic policy."

The second lesson is an extension of the first: do not view your currency exchange rate as an indicator of economic strength. Some times it reflects the state of an economy; often it does not. In some countries like Pakistan, the exchange rate is seen as a decisive symbol of sovereignty and healthy economy. In the last election campaign, it played an important role. Its an old habit with us. In the early fifties, India devalued. Pakistan did not. Mr. Liaquat Ali Khan and other Muslim League leaders made much of it, speech after speech. Even the humorist poet Mohammed Jaafri wrote a poem on our presumed achievement and India's failure:

   Woh but-i-seemeen badan ke dollar naam hai jis ka
   Apnay sacchay aashiqon se ho gai bilkul khafa ....

In reality, India's economy was much stronger than Pakistan's at the time. Exchange rates are just that -- a medium of regulating exchange. A country must regulate it in accordance with how it needs to balance the relationship of export and import. To for get this fundamental principle and to regulate rates of exchange to suit the proclivities of maney managers is to quote disaster as Mexico did.

The third lesson is as follows: economic planners and informed public must distinguish constantly and clearly between money and capital, mere profit seekers and investors, the consumer and the producer, between bonds and factories. Third world countrie s have sunk deeply in recent years into the morass of equating the two types of investment. The foreign money that seeks profit through buying equities, bonds, and certificates is a nomadic phenomenon. It roams in search of high yields in the so-called de regulated economies, buoys them artificially, and creates illusions of dynamism and prosperity in `hot emerging markets'. Large sums of money in small markets push up the value of existing assets, raise stock prices astronomically, create false optimism, and stimulate greedy and irresponsible leaders to pursue risky monetary and trade policies.

Simple common sense tells you that one can not run away with a factory. Very little of such money is invested in plants, and factories. Thus, from 1989 onwards $10-15 billion of foreign money flowed into Mexico annually. It is estimated that only 5% of i t went into augmenting the domestic capital holdings. At the first sign of reduced profits, or a modicum of regulation such `investors' take the money and run, creating panic, and severely fracturing the structure of economy as they did when Mexico announ ced a 15% devaluation.

Mexico is not an exception. Turkey's economy was starting to grow steadily when it rushed to become a `hot market'. Its stocks climbed up by 200 per cent in 1993. When the Islamic Welfare Party won municipal elections in Istanbul, the Turkish market p lunged 60%. That signalled Turkey's down turn. Inflation has now reached 150% annually. Gross domestic product fell more than 6% in 1994. The external debt has climbed to $62 billion. Now, goaded by IMF, it is pursuing a privatization program in order, so the government says, to pay off some debts. The architect of the policies that has brought Turkey to grief is actually the former prime minister, then president Turgut Ozal. He spent liberally and borrowed heavily disguising the debt with high yield trea sury bonds sold to foreign investors. Prime Minister Tansu Ciller has inherited a mess she is hard put to cleaning. Her rating slides down a slippery slope. "She is a national disaster", the New York Times quotes Mesut Yilmaz, Turkey's leader of oppositio n. An IMF austerity program hits, as every where, the vulnerable and poor people.

The fourth and final lesson is for those third world leaders who take pride on being popular and liked in western capitals especially in Washington D.C. If memory serves, they should recall such luminaries as Ngo Dinh Diem of Vietnam, the Shah of Iran, and Ferdinand and Imelda Marcos of the Philippines. They waltzed with the high and mighty in the west, and were described there widely and variously as nation-builders, islands in a sea of instability, men of vision and wisdom. Eventually, they were cast like used tissues -- murdered in one case, abondoned in the other instances, they buffeted about looking for a home to live, a hospital to die in.

Since power erodes memory, they might look nearer in time. It was late last year, December 7 to be exact, that the Capital's glitterati joined New York's money managers at the Washington Hilton for $400 a plate dinner to honor Carlos Salinas de Gortari . As speech after gratuitous speech extolled his "contributions to improved public policy and social welfare", Don Carlos cut a figure of complacency. After all, he was the great reformer, a `Harvard educated' visionary who had brought Mexico into the mo dern world, and crowned it with a membership in the North Atlantic Free Trade Alliance. Barely three weeks later the `thing', as Americans folks say, `hit the fan'. Soon thereafter, the entire de Gortari family was exposed to charges of theft and murder. In desperation, the former president staged a hunger strikes to save his "honor". He looked abandoned and alone without those friends he had made. His troubles are in the news almost daily but the American media does not refer to him any more as a ref ormer and visionary. Not even as "Harvard educated" -- which he is.