Mexico

on the World Today

MEXICO’s peso trouble makes an instructive example of post-war economic trends and fiscal developments in Latin America. The peso’s downfall from a pegged value of 4.85 to the dollar had been anticipated for some time. It produced no serious complications in international finance, except in a few rather specialized lines of trade with Mexico. The peso itself, after devaluation, behaved rather handsomely for a contemporary currency unit whose artificial props had been pulled out from under it. It fluctuated for several weeks between six and slightly above seven to the dollar, but showed a steadying tendency to find its own level at about 15 cents, or approximately 6.50 to the dollar.

The peso ran into difficulties to a considerable extent because Mexico has been indulging enthusiastically and somewhat successfully in a number of economic programs commended to her as virtuous. Since 1940, under the administrations of Presidents Avila Camacho and Miguel Alemán, Mexican capitalists have developed more business initiative, United States style, than there has been below the Rio Grande since the Cortez conquest. The government has pulled in the strong semi-socialist controls it exercised over private business during the Calles and Cárdenas administrations in the 1920’s and 1930’s, and has given the new and growing entrepreneur groups a relatively free hand.

The entrepreneurs have spotted the land with new industries — the stock prescription in our times for balancing, variegating, and enlivening an economy. In a great many cases they have made money out of these modernizing services. The patriotic Mexican customer can buy anything from Mexican-made fabricated steel to Mexican-made shoes or a Mexican-made automobile battery nowadays, with assurances that the profits on it should improve his country’s capital structure.

And Mexico has been anything but niggardly with the money wealth and financial prosperity which she was supposed to be acquiring. Both in domestic and in world markets, where spending is supposed to keep trade moving, she has thrown her money around lavishly. But all the government’s decrees, all the pegging operations of Mexican banks and fiscal authorities, and even some millions of dollars’ worth of pegging help from the United States could not keep the peso at 4.85.

The flaws in Mexico’s boom

More than a century ago, the United States began industrializing in an underpopulated halfcontinent where food supply could be indefinitely expanded and agricultural and factory production were relatively balanced; and where, consequently, every new population increase meant more customers for both farm and factory. Mexican industrialization in the 1940’s was quite different.

Mexico simply superimposed a hodgepodge of new industries, some useful, some economically undesirable, on an overpopulated nation whose agricultural resources were running down and whose purchasing power was insufficient to sustain a great many of its people.

Some handicaps of this situation could have been overcome by letting the less desirable new industries die on the vine and making sure that the profits of the more useful ones were plowed back into the national economy through income taxes and surplus profit taxes, through better industrial wage standards, and through controlled domestic investment policies.

Instead, doubtful industries have been kept alive, a drain on the Mexican consumer’s purse, by high protective tariffs. Inferior automobile batteries, for instance, cost from $80 up in Mexico today, whereas good small car batteries sell for under $15 in the United States. The high prices of dozens of items reduce the purchasing power of relatively well-to-do Mexican families so that they cannot buy native Mexican products, including farm produce and groceries.

In both the protected and the more “legitimate” industries, Mexican income and profit taxes are low, according to United States standards, and can be easily evaded. The various wage increases negotiated by Mexican labor unions during the war and the post-war inflation have not succeeded in making the industrial and white-collar workers more profitable customers of Mexican agriculture. There have been no government policies or controls leading to reinvestment of profits in Mexican enterprises, either industrial or agricultural.

The flight of capital

Mexico’s post-war boom has profited, then, largely at the expense of the country’s over-all economy and has resulted in distressing imbalances. It may look well on the books of various manufacturing corporations, but actually it has been draining the economy. The greater the profits, the greater the amount of capital leaving Mexico.

On the surface the figures may not appear too alarming. Ostensibly, Mexicans have banked 70 million dollars in the United States in the past two years. But this figure represents only the openly registered deposits. There are plenty of ways to get money into American banks from Mexico which disguise the identity of the actual depositors.

Unquestionably, there has been heavy investment of Mexican capital and profits in American business securities without the formality of open and obvious bank deposits. The capital drain, then, at the most conservative estimates, must measure several times 70 million dollars.

There have been even fancier fiscal manipulations by Mexican money experts. For some time before the peso’s fall, for instance, it was possible to buy a Cadillac car for 14,000 Mexican pesos, ship it to Buenos Aires, and sell it for 40,000 Argentine pesos, or better. The Mexican who accompanied his car on such a “selling trip” played a sure thing in Latin American foreign exchange. He was in the expenses of his trip and a pleasant summer or winter vacation in deep South America. If he moved on to Chile — say, the Lake region for summer or winter sports — he gained still more by trading his Argentine profits for hopelessly inflated Chilean currency.

Whatever has been drained out of Mexico by these and similar shenanigans has been more than negligible. Capital-wise, Mexico has been getting poorer in the post-war period, precisely because her new industrialists were getting richer. To this extent, the capilal props have been pulled out from under the new industrial structure, as well as from under the peso,

Dwindling exports

Meanwhile, various factors have been playing against the peso and the Mexican economy. The new industrialization has required investments running into the hundreds of millions for machinery, power developments, and so forth. This has stepped up Mexico’s imports prodigiously. It correspondingly has weakened Mexico’s trade balance and tin1 peso’s credit standing, and has played a part in the rapid decline of Mexico’s slender dollar resources.

The republic came out of the war with 350 million dollars to its credit in dollar balances. At the end of July this total was down to 114 million or less. How much of the outflow was for new machinery and how much for new cars and luxury gewgaws for the newly rich industrialists is anybody’s guess. In view of the demands of the foreign trade balance on Mexico’s dollar reserves, 114 million dollars is a trifling sum in any case.

And everything in the situation has tended, and is still tending, to make the import-export balances worse. Because industrial profits have not been plowed back into the domestic economy, the Mexican government has been without resources to expand its nationally owned oil fields, or even to get maximum production out of already developed fields. As a result, Mexican oil exports, which in 1923 amounted to 180 million barrels, are now down to approximately 8 million barrels — a mere trickle.

At the same time, many of the new industries are kept from operating at full efficiency, both productively and in production costs, because of power shortages. Again, because capital is fleeing the country and profits are not plowed back into the home economy, Mexico’s ability to pay for, or to borrow for, expensive new power developments is shrinking.

Finally, the huge 1947 hoof-and-mouth disease epidemic led to the loss of practically all Mexico’s livestock exports. It was one more ruinous blow to an already desperately sick agricultural economy. Recovery from it, if it comes at all, will take a considerable part of a decade. It would come somewhat faster, though, if Mexico’s industrial and overall economy were geared more effectively to the support of her agricultural interests.

Devaluation had to come

The peso’s devaluation, authorized by Mexican Treasury Secretary Ramón Beteta on July 22, was simply an honest recognition that the economy was badly askew. The 4.85 peso already was in hopelessly bad repute. For some time black-market exchanges have existed throughout Mexico, selling the peso short at various points below the official price, with reasonable expectations of eventual gain, as well as profits from quick turnover.

Against such competition and the normal state of Mexican morale in such matters, no government decrees could have maintained the 4.85 value longer. Mexico’s credit and cash resources could not have done so, even if all other demands upon them had been ignored and they had been put to work solely at upholding the peso.

The peso was allowed officially to find its own level, because the situation had come to a point where it was bound to do that anyway. The immediate effect, of course, was to cut down the purchasing power of the inflationstarved Mexican masses still further, and to check imports, whether luxuries or essentials.

Politically, devaluation produced a new crop of rumors of revolution against the Alemán regime. These would be more credible if the Mexican Army were not fairly well provided for by the government, and if it were not in the Mexican tradition that the revolutions that really happen are not usually those one hears advance rumors about.

Dollars for Mexico?

Economically, Secretary Beteta issued rational-sounding statements to the effect that devaluation would help out in the worsening importexport situation, and that flocks of tourists drawn from the United States by the more advantageous exchange rales would improve the dollar balances. Wisps of wishfulness may have been involved with the sound sense of these pronouncements. But with or without revolution, Mexico could hardly expect to cure its peso troubles without drastically reforming many of its internal and external economic practices.

Loans from the United States or from the World Bank certainly cannot overcome the difficulties. If they lead merely to more industrialization and more profiteering by industrialists at the expense of the economy, they might even aggravate it. Mexico’s current requests for 50 million dollars from the Export-Import Bank and 208 million from the World Bank may well be reviewed in the light of these possibilities.