From iatp@igc.apc.orgSat Mar 11 10:13:08 1995 Date: Fri, 10 Mar 1995 12:04:05 -0800 (PST) From: IATP To: Recipients of conference Subject: NAFTA & Inter-Am Monitor 3/10/95 The NAFTA and Inter-American Trade Monitor Produced by the Institute for Agriculture and Trade Policy March 10, 1995 Volume 2, Number 6 Summaries: - EXPLAINING MEXICO'S ECONOMIC CRISIS - EZLN REJECTS ZEDILLO PROPOSAL - MEXICAN GOVERNMENT TAKES OVER BANK - EXPORT MARKETS FOR US AGRICULTURE - DAIRY EXPORTS TO MEXICO - BANANA UPDATE EXPLAINING MEXICO'S ECONOMIC CRISIS After being touted as a model of neoliberal success, Mexico began an economic meltdown with December's peso devaluation. Signals of problems to come were present earlier, ranging from Mexico's 100 percent inflation between 1989 and December 1994 to the avalanche of foreign investment in the stock market and government bonds in 1993 and 1994. While money invested in new factories and equipment will stay in the country for the long term, investments in stocks and bonds tend to be easier to liquidate and generally more speculative. The Salinas government received repeated extensions of lines of credit -- $3.5 billion from the U.S. in October 1988 to facilitate an orderly transition from the De la Madrid government, $5.4 billion from the IMF in 1989, $825 million from the U.S. in August 1989, $325 million from the U.S. in August 1992, $6 billion from the U.S. in November 1993, and another $6 billion in March 1994, increased to $8.8 billion on April 26, 1994 to respond to capital flight and a massive sell-off in the stock market. Mexico's current account deficit, the combination of interest payments to foreign creditors and merchandise trade deficit, ballooned. The government maintained the peso's exchange rate at an artificially high level, and issued tesobonos, government securities ultimately payable in dollars, to shore up investor confidence. As foreign investment poured into the stock market, stock prices rose continuously. A rising trade deficit was justified in terms of imports that would build up the nation's industrial base. While Mexico had a good stock of dollars at the beginning of 1994, it began to sell off this stock to shore up the peso. President Salinas and Treasury chief Pedro Aspe concealed the drain on reserves throughout 1994, maintaining a facade of stability in order to safeguard their party's election prospects and to look good for Moody's and Standard & Poors' evaluations in late 1994. They hoped that the financial risk assessment firms would upgrade Mexico's risk classification to "investment grade," which would allow U.S. pension funds and institutional investors to buy Mexican financial assets. The $50 billion bailout package will further increase Mexico's foreign debt. According to foreign debt experts from the Autonomous National University of Mexico (UNAM), the U.S. portion of the bailout will cost Mexico around $5 billion in interest and commissions to be paid in advance. U.S. economist Carlos Marichal, a researcher at the College of Mexico, warned that many other countries face economic crises similar to that of Mexico. Marichal noted that after five years of debt renegotiation Mexico now owes $200 billion, twice the amount before renegotiation. The costs of the bailout will be paid by workers who will see further erosion of real wages and by loss of national control of Mexico's oil resources. From the Social Summit in Copenhagen, World Bank vice-president Armeane Choksi blamed Mexico's current economic crisis on President Carlos Salinas de Gortari's government, saying that the Salinas government suspended World Bank and International Monetary Fund-mandated structural adjustment during his last two years in office. Choksi did not specify which structural adjustment measures were abandoned, but said that as a country begins to move away from state control of the economy, speculative capital is attracted to its markets. He said that as the country proves its commitment to economic reforms, foreign direct investment will come -- not in three or four years, but perhaps after seven to fifteen years of structural adjustment. At a round table discussion on employment, poverty, and distribution at the Social Summit, Mexican participants blamed the neoliberal reorientation of the economy between 1989 and 1992 for increasing concentration of income and simultaneously decreasing the real income of workers and the standard of living of most Mexicans. Venezuelan minister Mercedes Pulido blamed Mexico's problems in large part on foreign debt, a circumstance that makes development difficult throughout Latin America, and said conditions imposed on Mexico only make matters worse for that country. Speaking in Mexico, former President Carlos Salinas de Gortari blamed the country's economic crisis on his successor, saying that President Ernesto Zedillo botched the peso devaluation. Salinas said that Zedillo's finance officials told bankers and business heads that the devaluation was coming, and that investors withdrew nearly $13 billion from the country within a single day. James M. Cypher, "NAFTA Shock: Mexico's Free market Meltdown," DOLLARS & SENSE, March-April/95; "Banco Mundial - Crisis Se Debe a Suspension de Reformas," LA JORNADA, 3/5/95; "Laura G"mez Flores, "Mesa - Empleo, Pobreza, y Distribucion," LA JORNADA, 3/7/95; Eduardo Molina y Vedia, "Crisis Reflects Worldwide Debt Problem," INTERPRESS SERVICE, 1/31/95; Eduardo Molina y Vedia, "Experts Call for New Controls on World Economy," INTERPRESS SERVICE, 2/1/95. EZLN REJECTS ZEDILLO PROPOSAL Representatives of the Legislative and Executive branches of Mexican government approved an Initiative of Law for Dialogue, Conciliation, and a Just Peace in Chiapas on March 1, with President Ernesto Zedillo and representatives of the Legislative Commission signing the proposed law and presenting it to Congress for debate. The proposal would suspend the arrest warrants for Zapatista Army of National Liberation (EZLN) leaders for 30 days, but would not give permanent amnesty nor re-establish "free zones" that existed prior to the current Mexican army campaign nor free presently- jailed political prisoners. The government proposal also fails to name CONAI as the mediator for negotiations, and makes no provisions for an army pullback that would enable refugees to return to their homes and villages. The EZLN characterized the initiative as "a genuine step backwards in the road to a dignified and just solution to the conflict," noting that the government does not even call them by name, referring instead to "the self-proclaimed EZLN" or a "group of malcontents." The EZLN notes that the government does not propose any free zones between the two armed forces, but only physical space for negotiation. Charging that Mexican military units have begun to destroy towns, the EZLN reports that troops in Ocosingo burned three homes, looted others, killed all the animals, and threw away food left in people's homes. They also destroyed the hydroelectric plant. While rejecting the government proposal, the EZLN continues to call for negotiations for peace with justice and dignity, and asks that CONAI communicate with President Zedillo to obtain a renewed dialogue. During congressional debate, some deputies said that they could make changes to meet the objections raised by the EZLN, while others complained that it was too late for revisions. Rosa Icela Rodr!guez, "Ley de Amnistia Aprobada," LA JORNADA, 3/1/95; EZLN COMMUNIQUES, 3/2,5/95; Luis Hernandez Navarro, "Chiapas: La Ley de la Selva," LA JORNADA, 3/4/95; Nstor Mart!nez and Ricardo Aleman, "Ley e Amnistia," LA JORNADA, 3/7/95. MEXICAN GOVERNMENT TAKES OVER BANK As the Mexican economic crisis continues to unfold, the government's Bank of Mexico put in place a massive rescue plan for the banking system and took over Banpais, the country's eighth-largest bank on March 3. The Grupo Financiero Asemex-Banpais, which owns both Banpais and the country's largest insurance company, Aseguradora Mexicana, was placed under central bank management. Banking regulators warned that as many as 10 of Mexico's 16 banks will need capital infusions from the government's Bank Savings Protection Fund, Fobaproa. Only Banamex and Bancomer, the country's two largest banks, have said they do not need Fobaproa help, although their reserves are also below desirable levels. Banks have felt the impact of the December 20 peso devaluation in the sharp appreciation of dollar- denominated assets, in steeply rising interest rates, and in climbing rates of defaults on loans. Leslie Crawford, "Harsh World for Mexican Banks," FINANCIAL TIMES, 3/6/95; Roberto Gonzalez Amador, "15 Bancos en Crisis," LA JORNADA, 3/5/95. EXPORT MARKETS FOR U.S. AGRICULTURE August Schumacher, chief of the USDA's Foreign Agriculture Service, forecasts $45 billion in exports in 1995, with an increase to $60 billion by 2000. Schumacher asks who would have thought that "the Japanese would be eating American rice, that the Mexicans would be importing our tomatoes, that the French would be drinking American wines, ... that our canned salmon would capture over half the Australian market?" California leads the nation with $10.4 billion in exports last year, followed by Iowa, with $3.5 billion. Some U.S. farm groups warn that focusing on low-cost export production has high costs in natural resources, and others insist that raising domestic farm prices is a priority. While corn exports are likely to rise again in 1995, U.S. farmers note that the export boom of the 1970s led to a crash in the 1980s that brought economic disaster to U.S. farmers. Mexico remains an important and growing market for U.S. agricultural products. In 1994, Mexico bought six percent of California's agricultural exports. Growers expected 1995 to bring even greater sales as the NAFTA-mandated decreases in Mexican tariffs on agricultural goods continued. Although the devaluation of the Mexican peso has made California's agricultural goods 30-60 percent more expensive in Mexico, California producers hope to continue expanding their food exports to Mexico. The USDA's Economic Research Service predicted that the peso's fall would hurt U.S meat exports, due to declining personal income in Mexico. Mexico accounts for 15 percent of all U.S. beef exports, 45 percent of pork exports, and 58 percent of turkey exports, according to the U.S. Meat Export Federation and the USA Poultry & Egg Export Council. Because U.S. corn is still cheaper than Mexican corn, grain exports are expected to continue to be strong. Turkey producers saw a 50 percent drop in turkey exports to Mexico by early January. The USDA's Agricultural Export Program manager, James Zion, noted at a January 27 meeting that land value in Mexico has dropped by 50 percent. Zion said "now is the time" for U.S. growers to buy land in Mexico and set up operations there. Brian Johns, "Huge Mexican Market Feeds Optimism of Calif. Growers," JOURNAL OF COMMERCE, 1/20/95; Rod Smith, "Exporters Expect Peso to Stabilize, Trade Resume," FEEDSTUFFS, 1/18/95; Charles House, "USDA Reports Pressure Soybeans; Peso's Fall May Hurt U.S. Exports," FEEDSTUFFS, 1/18/95; Robert H. Brown, "Turkey Exporters Especially Hard Hit by Peso's Sharp Drop," FEEDSTUFFS, 1/18/95; George Anthan, "Ag Officials See 'Golden Era' in Export Trade," DES MOINES REGISTER, 2/19/95; Chuck Harvey, "Market Has Profit Potential," THE PACKER, 2/6/95. DAIRY EXPORTS TO MEXICO Dairy exports remain a contentious issue for U.S. and Mexican producers and regulators. The Mexican government recently unveiled stringent food safety standards, including regulations requiring that the expiration date on fluid milk be no more than 48 hours after the time of pasteurization. The proposed rules also require vitamins to be labeled as "additives." An executive of Dean Foods in Chicago, a $2.5 billion-a-year food company that is the largest U.S. producer of fluid milk, says that technology available in both Mexico and the U.S. allows milk to have a shelf life longer than two days. He charges that the new regulations are desig Organization waiver, as a development policy instrument. A recent World Bank report, "Bananarama III," says that the EU rules cost European consumers $2.3 billion dollars yearly in artificially inflated prices, $700 million more than under the previous quota regime. According to the report, most of the increased cost goes to European banana marketers, and the banana-producing countries would be better served by the EU scrapping the quotas and giving them $300 million yearly in direct aid. Debra Percival, "EU Commission Defends Its Single Market Policy," INTERPRESS SERVICE, 1/31/95; "EU-U.S. Talks Produce No Change in Banana Dispute," INTERPRESS SERVICE, 1/31/95. RESOURCES/EVENTS Free or Fair Trade? Monthly newsletter published by the Latin American Institute for Alternative Legal Services (ILSA) and the Regional Coordinator of Economic and Social Investigation (CRIES), with the cooperation of CUSO. Available in English and Spanish, by post and electronic mail. 10 pp. ILSA, A.A. 077844, Bogot , Colombia. Email: Ilsabog@ax.apc.org. Fax (571) 2884854. Living with FTA/NAFTA: Six Years of Free Trade Fallout in Canada. Special four- page pullout of the CCPA Monitor, February 1995. Canadian Center for Policy Alternatives, 804-251 Laurel Avenue West, Ottawa, Ontario K1P 5J6. Part I, published in the February 1995 issue, includes "The State of the Economy: Prosperity for Whom?" and sections on social programs, environment, and agriculture. Part II will follow in March 1995. Chiapas, Mexico: Alternative Development Models for the Indigenous of Chiapas, June 21-28, 1995; Chiapas, Mexico: Challenge for a Changing Church, June 10-19, 1995; Mexico: Poor, Yet Making Many Rich, August 7-14, 1995 -- three travel seminars from the Global Education Center, Augsburg College, 2211 Riverside Avenue, Minneapolis, MN 55454. For further information, call 612/330-1159 Economic and Financial Cycles and NAFTA: Macro and Micro Issues and Analysis, international symposium in Mexico City, June 7-9, 1995, sponsored by the Graduate School of Political and Social Sciences of the Universidad Nacional Autonoma de Mexico. Focus on economic and financial cycles in NAFTA countries and their relationship to world cycles, and relationship between financial liberalization, deregulation and business cycles. Call for papers - send abstract or proposal to Edgar Ortiz, Apartado 20-712 Col Coyoacan Del Coyacan 04000 Mexico, D.F. by April 10. Tel/Fax: 525/659-1949. Email edgaro@servidor.unam.mx. Dollars and Sense, March-April 1995 issue includes "NAFTA Shock: Mexico's Free Market Meltdown" and "GATT: A View from the South." Dollars and Sense, Economic Affairs Bureau, Inc., One Summer Street, Somerville, MA 02143, telephone 617/628- 8411. Single issue $4.50; one year $22.95 individuals, $42 institutions. Produced by the Institute for Agriculture and Trade Policy, Mark Ritchie, President. Edited by Mary C. Turck. The NAFTA & Inter-American Trade Monitor is available free of charge to Econet and IATPNet subscribers. Fax/mail subscriptions are available for $45 for three months. For information about subscriptions or other IATP publications, contact: The Institute for Agriculture and Trade Policy, 1313 5th St SE, Suite 303, Minneapolis, MN 55414. Phone: 612-379-5980; fax: 612-379-5982; e-mail . For information about IATP's contract research services, contact Dale Wiehoff at 612-379-5980, ext. 233 or e-mail .