Why Congress Should Not Bail Out the Mexican Peso
Yes, innocent investors will be hurt if Mexico defaults. But billions in US loan guarantees only reward speculators.
HAVING deceived the Congress and the public about the strength of the Mexican economy when we were asked to support NAFTA, leaders in Mexico and the United States now are asking US taxpayers to guarantee Mexico up to $40 billion worth of loans because of the peso crisis. Congress should reject the bailout and renegotiate the NAFTA treaty.
The loan request puts Congress in a difficult position. We are told of cataclysmic consequences for Mexico and the US if the bailout is rejected. The truth is the bailout is nothing more than a reaction to Wall Street's poor judgment of economic and political history and it does not address the long-term arrangement between the two neighbors for freer trade.
Certainly innocent investors will be hurt if Mexico defaults on billions in short-term investments. But the bailout rewards speculators playing with middle class money. The only thing that can correct the crisis is the marketplace, not a bailout.
When Congress was asked to pass NAFTA in 1993, we were told the Mexican economy was strong, fear of a huge wage disparity between the two countries was exaggerated, and the Mexican political system was democratic and thriving. Leaders of the two nations created an image of Mexico as a top-flight international economic competitor, ready to receive more US goods made by US workers and to export goods at lower costs to US consumers.
Within less than two months of its passage, the Chiapas rebellion occurred, disproving former President Carlos Salinas de Gortari's theory that economics and politics could be separated. And within one year of NAFTA's passage, the peso collapsed. The secret was out: Mexico was a paper tiger, and Mexican and American leaders had concealed its weakness in the hope of passing NAFTA and seeing the Mexican ruling party reelected.
The devaluation of the peso removed any of the alleged benefits to US workers for NAFTA and unveiled the tenuousness of our economic relationship. US consumer goods in Mexico and along the border are now more expensive, Mexican labor is even cheaper than before, and Mexico will now pursue a fire sale on Mexican exports. Cheap exports from Mexico may help US consumers but they hurt US workers.
Until the benefits of Mexico's economy are spread out across the country, illegal immigration pressures on US border states, wage pressures on US workers, and the rebellion in Chiapas will continue.
It has been clear for some time that Mexico was overfeeding on short-term debt to prop up a consumer-binge economy for the wealthy class. The short-term debt also propped up the ruling Institutional Revolutionary Party as it headed into presidential elections.
The economic policies that brought down inflation in Mexico over the past decade were popular among foreign investors and Mexico's aristocracy, but apparently did little to develop sustainable economic growth in Mexico that would in fact lift all boats.
Congress should reject the bailout, and instead should insist on fundamental reforms of Mexico's economy that would increase the chance that NAFTA will someday benefit US workers, not just US investors. Economic benefits in Mexico must be widely distributed, not concentrated in the hands of the wealthy few, including the benefits of privatization, if that takes place.
Congress must require additional protections for labor rights in Mexico. As long as Mexican labor remains cheap and weak it will undermine the ability of US workers to benefit from increased trade. Congress should strengthen labor side agreements to guarantee worker rights, such as the right to organize and the right to see violations redressed. Mexico must restrain its tendency to use troops to settle labor disputes. Mexico also must allow wages to grow with productivity. Finally, Mexico should emphasize purchasing US goods when buying abroad. Mexico's trade deficit has shrunk with the US, but has risen with Europe and Asia.
What was going to be a win-win situation for the US worker is now a lose-lose scenario, with increased demand for cheap Mexican consumer goods and a decrease in demand for US labor. The $40 billion loan package is a bailout of investors, not Mexico. Workers in the United States should not be asked to assume Wall Street's risks, just as we do not ask Wall Street to assume theirs. The Opinion/Essay Page welcomes manuscripts. Authors of articles we accept will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHEL.CSPS.COM.