Status Report: Mexico Project Jude Wanniski July 18, 1989

We commenced our study of Mexico's economy in early June and are now only slightly behind schedule. We anticipated problems in assembling a satisfactory data base and have put most of our effort into this area. Reliable statistics are difficult to obtain because of the cross-currents of inflation and growth of the informal economy since 1976. The material we need for analytical purposes is being made available through government cooperation and private sources, and we can already see the beginnings of a strategy recommending itself from the data.

In outline, most of the revenues sustaining the central government are collected from the 300 largest companies. Only 350,000 of the 1.5 million companies estimated to operate in Mexico are even registered on the Treasury's tax rolls. Roughly half of economic activity in Mexico is in the informal economy, off the books, this being the most vibrant sector, threatening the formal sector at the margin for resources and manpower. The Polyconomics study team will almost certainly focus on the concept of setting up tension in the opposite direction, i.e., making the formal economy more attractive than the informal. If it can be achieved, one success will lead to another, on internal and external debt, interest rates and inflation, the strengthening of the peso, and government finances and infrastructure expenditures.

We find a heartening determination of the youthful government to bring about a revolution in the way it conducts itself. Most of the key officials are, like President Salinas, young technocrats who are confident of Mexico's economic potential and understand the necessity of policy change. It struck me that Salinas benefited enormously by winning a plurality of only 51% in last year's elections. It gives him the leverage to force change on his political party, which has dominated Mexico as long as the Communist Party has dominated the U.S.S.R. There's a parallel with Gorbachev and Salinas. Mexico's revolution was also socialist in nature, and Salinas, clearly a visionary, has his eyes on the capitalist road. Like Gorbachev, he also has an Old Guard to contend with. Salinas and his young finance minister, Pedro Aspe, are close to policy shifts that would put Mexico on a path of rapid, non-inflationary growth. Once past the debt negotiations that have been consuming their energies in New York, they can turn to a domestic agenda in Mexico City. October 15 is a key date, when the new budget and legislative agenda is presented to Congress in Mexico City. We hope to be of assistance, generating ideas and options informally, although our report, encompassing a strategy for the 1990s, will not be published until year's end.

Financing is proceeding at an encouraging rate, especially now that potential industrial sponsors are satisfied that we have established our bona fides with the government. We have the complete cooperation of the finance ministry and the central bank. Of extraordinary assistance have been: Gustavo Petricioli, Mexico's Ambassador to the U.S.; Jose Manuel Suarez, the embassy's economics minister; Carlos Camacho, the director of the foreign-investment office; and Professor Manuel Sanchez of ITAM, a private economic study center in Mexico City. Of the 24 sponsors we'll need at $10,000 each to cover the project costs, 11 have now committed: American Farm Bureau; British Petroleum America; Servicios Condumex, S.A.; Conelec, a subsidiary of Phelps Dodge; Ford Motor Company de Mexico, S.A.; Hewlett-Packard de Mexico S.A. de C.V.; Grupo ICA; The Procter and Gamble Company (Cincinnati); Industrias Resistol S.A.; Repap Enterprises Inc. (Montreal); Banco Nacional de Mexico (Banamex). Prospects for completing the financing in August are good.