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Mexico's finance minister describes his year of turmoil

STANFORD -- Mexico's Guillermo Ortiz was quick to admit the statistics didn't look great on his resume. Output fell 7.2 percent, domestic consumption dropped 12 percent, investment fell 25 percent, and inflation reached 52 percent in Mexico last year.

"It is not a pretty record for the first year of a finance minister," the 47-year-old secretary of finance and public credit told a Stanford audience on Friday, Jan. 19. In fact, he added, 1995 was the "worst year for the Mexican economy in six decades."

Ortiz, who earned a doctorate in economics from Stanford 19 years ago, inherited a major crisis when he took over as finance minister in the final week of 1994. A year later, he is able to list two major accomplishments:

  • While Washington, D.C. remains deadlocked over how to erase the federal government's deficit in seven years, Mexico has eliminated its current account deficit in one. The turnaround was achieved by a sharp increase in exports rather than through a decline in imports, Ortiz said. In Mexico's debt crisis of the early 1980s, he said, imports fell by two-thirds in two years. In the first year of this crisis, they have fallen just 8.5 percent.
  • Mexico has regained access to private credit markets. After using $12.5 billion of a $20 billion loan guarantee from the United States to refinance short-term loan obligations, "we managed to re-access capital markets seven months after the crisis," Ortiz said. "In the previous financial crisis in the '80s, it took eight years to go back to capital markets."

These accomplishments, he added, have been the result of harsh but economically orthodox policies that have not been popular with Mexican citizens. Mistrust of the government has been high, he said, partly because so many Mexicans had expected 1995 to be a good year. Government budgets have been cut, the price of energy sold by the state monopoly was raised, and a 50 percent increase in the value-added tax was passed.

President Ernesto Zedillo, who is committed to political as well as economic reform, Ortiz said, probably only was able to get the tax passed because his party, the PRI, still holds the majority of national legislative seats. Some PRI candidates blame the tax for their defeat in elections last year, he said. "They are probably right, but it was the only way we could do it."

Ortiz spoke in English at a Faculty Club dinner hosted by the Center for Economic Policy Research as part of the annual meeting of its advisory board, which includes members of the local business community. Fighting the flu, he spoke earlier in the day to students, asking permission to speak in Spanish because of his health.

A deputy finance minister under President Carlos Salinas de Gortari, Ortiz became secretary of telecommunications and transportation in late 1994 under the newly elected Zedillo. Jaime Serra Puche, Mexico's NAFTA negotiator and a Yale-trained economist like Zedillo, was named finance minister. Serra, however, was forced to resign after 29 days in office because of criticism of how he handled the peso devaluation, which allegedly prompted investors to pull billions of dollars out of Mexican investments.

When Ortiz was named to the finance post in late December 1994, the New York Times described him as "a bulldog administrator - short on style but tough enough to take on anyone who crosses him. He is already respected by Mexican and foreign business executives for his grasp of practical economics, which he proved in his work in privatizing Mexican banks." Stanford economics Professor Ronald McKinnon, Ortiz's thesis adviser, told reporters at the time that Ortiz had a good combination of skills for the job.

In introducing Ortiz to fellow economists and business people at the Faculty Club dinner, McKinnon recalled that during his student years Ortiz was an excellent cook and party giver, as well as a good student. At the time, he said, Ortiz owned a collection of leather coats and a
two-seater sportscar that were the envy of other students. His doctoral dissertation, McKinnon said, determined that the way that Mexico had financed its economy during the "golden period" from the late 1950s into the '70s was unsustainable. Later, when Ortiz was a professor at El Colegio de Mexico, McKinnon said, the young economist wrote two books and a seminal article on the parallel circulation of dollars and Latin American currencies in Latin America that McKinnon used in his classes on international economics.

Ortiz responded by saying that among his circle of friends McKinnon had been the only thesis adviser who actually provided typed critiques of thesis drafts.

His challenge for 1996, Ortiz said, involves consolidating the Mexican banking system, as part of a longer term goal of raising Mexico's domestic savings rate, so that the economy can grow fast enough to absorb the nation's rapidly growing labor force.

While Mexico's rate of population growth is now 2 percent, the lowest this century, he said, the real growth of the labor force is 3.4 percent, because of past birth rates and the entry of women into the labor force. The economy, he said, "should grow at 5 to 6 percent in order to absorb the new entrants into the labor force and chop away some of the unemployment." For next year, however, he predicted a growth rate in the range of 3 percent, and a modest increase in employment and in domestic consumer demand, which, he said, "fell like a rock last year."

"The bad thing is that this [growth] will be export driven. I think it is very healthy for us to begin a period of export-driven growth, but the problem also is that this is likely to produce smaller gains in employment for the next few months" than would growth in the domestic sector.

In response to a question from Stanford economist Paul Krugman, Ortiz said a sharp increase in consumer credit - credit cards and mortgages - in the five years preceding the 1994 crisis created a problem in that Mexicans spent more and saved less to invest in the economy.

"We have to raise the rate of domestic savings, which is what caused the problem in the first place," Ortiz said. As Mexico took steps to liberalize its economy, he said, there was considerable talk that the country was poised to "join the club of more developed nations." This raised consumers' expectations of improvements in their future incomes, he said, which caused them to spend and borrow more. Another factor in the consumer boom, he said, was the fact that Mexico's banks were in the process of "privatizing and internationalizing."

"All these elements combined to produce a huge expansion of credit from 1989 to 1994, so that by the end of 1994, total bank credits to the private sector rose from 11 percent of [gross domestic product] to 40 percent," he said. "When the crisis erupted, the situation was really bad because with interest rates rising and economic activity decreasing, consumers had a very tough time paying their bills." To avoid a run on the banks, he said, the government had to assist them with short-term obligations.

Events that led up to the crisis, he said, included the Chiapas uprising on Jan. 1, 1994, the day that the North American Free Trade Agreement took effect; the assassination of the leading presidential candidate later in the year; and a steep rise in interest rates in the United States, which reduce