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Despite Austerity, Rich Get Richer

The Two Faces of Mexico's Debt Crisis

IN a country that offers constant reminders of its painful debt crisis, Antonio Guti'errez Cortina can give you a temporary case of amnesia. Striding into his sumptuous office, the venture capitalist unsheathes his latest laptop computer, flicks on a revolving electronic blackboard, and reprimands an assistant over the telephone. ``No, I don't want the plane,'' he says tartly. ``Give me the helicopter.''

Forget about Mexico's seven-year-old economic crisis. Forget about the 40 million Mexicans - nearly half the population - that now live below the poverty line. And forget about the government's bare-bones economic austerity program that supposedly required everyone's sacrifice.

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For Mr. Guti'errez - and a relatively small cadre of other investors speculating on the economy - business has never been better.

Mexico's rambunctious young stock market is growing faster than any other in the world - except for the South Korean market. Real interest rates, jacked up to prevent the type of massive capital flight that drained Mexico in the early 1980s, are approaching an astounding 3 percent a month. And taxes on such ``paper'' investments remain minimal.

So even as poor and middle-class Mexicans watch their living standards erode almost daily, the rich keep getting richer.

``The outcome of the [economic] crisis is a general concentration of capital,'' observes Nora Lustig, a Mexican economist at the Brookings Institute in Washington. ``Instead of subsidizing the population, the government is subsidizing savers with a very high real interest rate. That affects only a very small proportion of people - those with money.''

The growing gap between rich and poor may undermine the political legitimacy of President Carlos Salinas de Gortari, who promised greater social justice and improved income distribution.

But the proliferating paper investments may have an even more dangerous effect. Not only do they fail to create the jobs and services Mexicans desperately needs. They are also piling up a huge internal debt that economists say may hinder future recovery.

Over the past year, Mexico's internal debt has ballooned by 109 percent, rising to more than $50 billion. According to official statistics, the government now spends nearly four times more money servicing its internal debt than its infamous foreign debt.

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``You've enriched people crazily without increasing production,'' says Juan Molinar, a political scientist at Mexico's National Autonomous University.

The Mexican government has inadvertently subsidized the rich ever since the debt crisis erupted in 1982, when plunging oil prices rocked an economy intoxicated by the oil boom of the late 1970s.

At that time, Mexico's newly nationalized banks desperately tried to use the country's foreign loans to shore up a severely overvalued peso and keep some state companies from going bankrupt.

Shaken Mexican investors and even ``patriotic'' political leaders gobbled up the dollars the government was selling and stashed the cash in foreign bank accounts.

According to debt expert James Henry, about 51 percent of the money Mexico borrowed from foreign creditors in the late 1970s and early 1980s flowed right out the back door in private flight capital.

So while most Mexicans have helplessly watched the peso devalue from 150 to the dollar in 1982 to around 2,500 today, wealthy investors have been protected by their untaxed flight assets in Switzerland, Britain, and the United States. Says one leading Mexican economist: ``People with access to dollars not only saved themselves, but some of them made a killing.''

In fact, the Mexican private sector (between 1 and 2 million investors) may have enough assets abroad to pay off the nation's $100 billion foreign debt - even at face value. Government officials say that Mexicans have between $20 and $25 billion deposited in US banks. But many economists estimate that total Mexican investments in the US alone are now over $65 billion. (See chart below).

Finance Secretary Pedro Aspe Armella has staked part of the current debt negotiations on the need to repatriate these foreign assets. But the capital, much of which is now tied up in real estate and business ventures, will not come back easily. Even Mr. Aspe acknowledges privately that the government expects only $1 billion a year to return, merely one fifth of what these foreign assets can earn in interest each year.

Over the past seven years, while that private capital has accumulated abroad, Mexico has dutifully paid over $90 billion to service its debt.

The burden has been shouldered mainly by poor Mexicans who cannot escape its natural side effects: inflation, slashed government services, dropping salaries, and a dwindling job market.

Today, in an effort to prevent further capital flight and finance its foreign-debt payments, the Mexican government is offering sky-high interest rates to private investors interested in buying up public debt. Coupled with an austerity program that has cut the annual inflation rate from 159.2 percent in 1987 to 20 percent today, the soaring rates have succeeded in stemming capital flight and increasing internal savings.

``They're keeping the money in Mexico,'' says Mr. Molinar, ``but at tremendously high costs.'' Indeed, the government has drained $10 to $12 billion in foreign reserves in the past year alone. Mexico's high interest rates are discouraging economic growth even as they heap profits on businessmen investing in short-term bonds and treasury bills. Wealthy Mexicans are snapping up luxury cars and other fashionable goods faster than ever before, but they are reducing their productive investments.

``High interest rates are a good way of preventing capital flight, but they create an enormous internal debt,'' says venture capitalist Guti'errez. ``But until there's a clear panorama [with the debt negotiations], the rates will remain high, stimulating paper but not real investment.'' Tomorrow: Mexico's poor.

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