“Cecily, you will read your Political Economy in my absence. The chapter on the Fall of the Rupee you may omit. It is somewhat too sensational.”

—Miss Prism in The Importance of Being Earnest by Oscar Wilde

Poor Cecily, condemned by her governess to study a tedious textbook, is at least spared the driest chapter, on the collapse of an obscure foreign currency. Miss Prism’s notion that such an event could contain any excitement for a healthy ingénue sounds pedantic and absurd. But could she have a point? Certain economic crises, precisely because they occur at an abstract remove, have some of the sickening allure of a horror story, or of a myth in which a merciless god threatens to wipe out a city at some unspecified date in the future. Unlike, for example, hyperinflation—when prices jump so fast that the cost of bread rises by the time you get home from the store, a situation so viscerally unpleasant that even an economic illiterate can grasp its dimensions—this kind of crisis lies sleeping, out of sight. For the time being it may remain safely shut up in the attic; in the end, with luck, it may even prove to have been imaginary. But once awakened it is capable of slipping the lock unnoticed, padding silently down the stairs, and taking a country hostage.

Last December, such a specter began to haunt Mexico. Around the world, from Mexico City, Wall Street, Tokyo, Berlin, and (to pick an example) a retirement home in Florida, where a trusting pensioner was informed that the emerging-market portion of her mutual fund had failed to perform as expected, all sorts of hypotheses have been advanced to explain how this sad situation came to pass. To begin an inquiry at the most concrete—the human—level, let us assume that at a critical moment the people who run Mexico’s economy simply made a mistake. The time of the bogeyman’s appearance on the scene was Monday, December 19. The hapless messenger—the man who had to reassure the public while announcing the government’s suspicion that someone may have jiggled the lock on the attic door—was Mexico’s minister of finance, Jaime Serra Puche.

Serra was new to the job—he had been sworn in on the first of December, the same day that Mexico’s new president, Ernesto Zedillo, took office—but having served as the minister of commerce under the previous president, Carlos Salinas de Gortari, he was not entirely new to power. Signs so far indicated that he and Zedillo would continue, in spirit, the work of a team of bureaucrats who formed an elite reform wing of the political party that has ruled Mexico for sixty-six years, the Partido Revolucionario Institucional (PRI). Now, about these men (yes, they are all men) there has, until recently, been a myth of prowess and accomplishment, as there would be about a team of ace Olympic athletes, and a grasp of this myth is necessary to understanding how steep was the fall about to occur. The technocrats, as these bright apostles have been called, are in their late thirties or early to mid-forties. They tend to come from rich and well-connected families. (That the new president, Zedillo, was born to a humble electrician in a poor neighborhood in downtown Mexico City was a good selling point during the presidential elections last August, enabling the PRI to counter criticism that it had abandoned the Mexican worker with an American-dream-style parable of economic opportunity. But this does not after the essential technocratic profile.) They attended one or another elite Mexican college, went on to get Ph.D.s in government or economics at an Ivy League school or at MIT or Stanford, and imbibed, in the United States of the late 1970s, a new way of thinking about how to manage affairs back home.

The new doctrine, which came to be known as neoliberalismo, would pare back the state and commit Mexico to more bracing competition with other countries. Mexico would lead a new species of Latin American “jaguar” counterparts to the Asian “tigers,” South Korea, Taiwan, and especially Singapore, which in a short time had lifted themselves up from relative paupers to exporting giants. (The tigers had done so under dictatorship or near dictatorship, with high tariffs and an iron grip on domestic industry. But this disquieting fact, clouding as it did the equation of free trade, economic growth, and democracy that underlay the new international fashion for “emerging markets,” and making investing in Mexico appear to be not a speculative venture but a moral one, was rarely mentioned.) The big prize of Salinastroika was NAFTA, the freetrade agreement with the United States.

As commerce secretary, Jaime Serra was Mexico’s chief NAFTA negotiator; later, his critics would suggest that trade talks, which require stubbornness and bravado, had not been good training for the job of finance minister, which likes a lighter touch. But that is to get ahead of the story. NAFTA had just passed in the US Congress and the future appeared to be rosy, when political conflicts arrived like indiscreet guests to interrupt the party. On New Year’s Day, 1994, a ski-masked guerrilla called Subcomandante Marcos led an army of Indians in taking over a destitute corner of southwestern Mexico; three months later, the PRI candidate to succeed Salinas as president, Luis Donaldo Colosio, was murdered. And here, well before Zedillo took over, begins the chain of error. Even at this disturbing time, Mexico continued to run up a huge deficit in its current account (the part of the balance of payments made up of merchandise exports and imports, and other non-capital transactions), and it proceeded to finance this deficit with foreign exchange reserves set aside in its Central Bank.


The technocrats’ program utterly depended on attracting foreign money, but early in 1994 a disconcerting trend began to announce itself. Quite simply, new money was no longer coming in. Foreign investment had peaked in 1991 and 1992, well before the arrival of the guerrillas. It had been trickling back out for over a year. With Colosio’s murder, the leak was widening to become a geyser.

In February 1994, the Federal Reserve raised interest rates in the United States, which meant that sufficiently lucrative, safe returns were to be had elsewhere—and this made the Mexicans’ need to hold onto investors more acute. Here the government, particularly its finance minister, Pedro Aspe, behaved about as logically as an owner of a greasy spoon who, having failed to attract customers for his knockwurst and coleslaw, puts foie gras with truffles on the menu. It began relying for cash more and more on a glamorous twenty-eight day instrument called the Tesobono. What made the Tesobono different from the more standard Cete, or Treasury bill, was that upon maturity the government had to pay back principal plus interest not in pesos but in dollars. Now, a key attraction of Mexico’s economic policy to investors—its best claim to “credibility” in the market—was a government policy of keeping the peso stable against the dollar. This was like a promise; it made investors feel safe, because the government couldn’t decide to devalue and wipe out their money. So, in a way, the fact that the government was scraping by on short-term debt—essentially, taking in pesos and handing out dollars—looked like an act not of panic but of valor, as if every avenue would be exhausted before a devaluation was considered.

Still, everyone assumed that the government must be propping up its currency in order to save face for the PRI through the elections in August. Surely, once Zedillo, the PRI candidate, won, the government would announce a minor correction downward. Zedillo won and no devaluation followed, but, as it happened, time was running out for the government to take control. The house had been erected on a weak foundation; hellish catastrophes now took over and sent it hurtling downhill. In September, Carlos Cabal Peniche, owner of the fourth-largest bank in Mexico, was discovered to have embezzled $700 million from investors and became a fugitive. Also in September, Jose Francisco Ruiz Massieu, who was to have led the PRI in the new Congress, was murdered on a busy work-day morning in downtown Mexico City. The Federal Reserve raised interest rates again in November. By December Mexico’s foreign reserves, which had stood at $26 billion back in March, were down to $6 billion.

On Monday night, December 19, Serra Puche told a closed meeting of Mexican business leaders that he was going to “widen the band,” or lower by 53 centavos the amount against which the peso could trade relative to the dollar. Widening the band was supposed to have been a one-time adjustment, but the peso continued to tumble. On Wednesday, December 22, Serra Puche decided that Mexico could no longer defend its currency. The peso would have to float. (The news of this decision was officially released by fax the following day, but the first wind of it came Wednesday night, on an 11 o’clock newscast, thus awakening a fear among investors that Mexico was improvising its policy in a fit of insomnlac anxiety.) A free fall was underway.

Here we arrive at a strange soap opera of blame. By December 30, the peso was down by 40 percent. To help cover its embarrassment, the Zedillo team argued that it had inherited a leaking boat from Salinas. To which Salinas defenders replied: the man who preceded Serra as finance minister, Pedro Aspe, a silver-haired aristocrat and, after Salinas, neoliberalismo’s most charismatic international messenger, would have reached out to the right deep-pocketed investors and cajoled, flattered, and persuaded them to wait out the storm. The new Zedillo team, lacking the rudder of Aspe’s smooth style and Salinas’s resilient ego, gave into weakness—akin to leprosy in financial circles—and publicly revealed its befuddlement. “These guys, they tell people anything,” Alphonse D’Amato was later to complain. “They told people they were going to devalue, then they went ahead and did it.”


Wall Street felt especially betrayed that Serra had warned Mexicans but failed to tip it off. On December 22, Serra met with brokers at the New York Fed, begged for understanding, and promised, as proof of the government’s new sobriety, to sell off more ports, airports, and power generators. But there appeared to be few takers. “Under the Salinas administration we felt that investors were a priority,” one of those present complained. “Now we believe there is a political agenda that does not include us.”

Sound economic policy, regettably marred by isolated human error. This is how Robert Rubin, the US treasury secretary, and Michel Camdessus, the director of the International Monetary Fund, and even to some extent the Mexican government itself have explained what happened in Mexico in December. (Camdessus and Rubin have made a point of the word “regrettable”; the Mexicans have stressed “isolated.”) Jaime Serra Puche (Yale) finally resigned after twenty-seven days in office, to be replaced by Guillermo Ortiz (Stanford), who had been the number-two man in finance in the previous administration.

President Clinton and the IMF, bowing to a theory called “systemic risk”—sort of a domino theory for international money—have advanced Mexico $20 billion and $17.8 billion, respectively, in credit; another $10 billion has been promised from the Bank of International Settlements. But in this confidence game, avoiding an appearance of neediness is essential. Foreign investors, like a volatile high-school clique, have asked Mexico, star of the last decade, to sit at another table. Into the empty seat investors have welcomed a new protégé, Chile, which, with more tiger-like foresight than Mexico, insists that its foreign investors keep money in the country for a minimum of a year, no matter what apocalypse occurs to decimate it.

It came on fast, as shocks do. But most of what followed—speeches with watchwords like “discipline” and “sacrifice,” the metaphor of belt-tightening, and all the gray, portentous trappings of crisis—was oppressively familiar to Mexicans. Pull the camera back, so to speak, from the dazed face of Jaime Serra, shift to Washington, DC, and you will see that Mexico has more or less been in crisis mode for thirteen years. A flashback: it is late summer 1982. A grim-faced Mexican delegation is arriving in town. A reckless borrow-and-spend cycle—a cycle in which American banks, flush with extra money deposited in the 1970s by newly rich OPEC oil merchants, are thoroughly implicated—has brought Mexico to the brink of insolvency. Jose Lopez Portillo, Mexican president at the time (remembered for promising to fight like a dog to defend the peso, a phrase that Mexican political cartoonists have resurrected this year, with various officials cast in the role of fire hydrant), has threatened to default on his country’s loans. At the last minute, Paul Volcker at the Federal Reserve helps to arrange a bridge loan from thirteen commercial banks.

So begins an era in which the accumulation, postponement, and refinancing of debt turn into a regular routine in Mexico. The people who run the government today are at this time just beginning to serve in its ministries, where debt has become something both to ignore and to tolerate, like television for one’s latchkey child. There, in the early 1980s, is future president Zedillo, working in Mexico’s Central Bank, where his principal innovation is a program called Ficorca, devised to save companies indebted in foreign currency. There, in 1989, is the future secretary of state, Jose Angel Gurria, Mexican nickname “the Angel of Dependency,” meeting with John Reed of Citibank. They are working out new terms for the debt incurred in 1982. The fruit of their efforts, the Brady Plan, forgives a small portion of the Mexican debt and converts the rest into thirty-year bonds—a happy solution which is hailed as the renegotiation to end all renegotiations. Yet there is Gurria again, in January of this year, sitting in Robert Rubin’s office at the Treasury for yet another telephone marathon, post-devaluation disaster, to round up new money.

As for Mexico’s creditors, having acted like enablers during the 1970s, they suddenly turned into temperance crusaders. To assuage them, Mexico agreed to submit to a new diet prescribed by the IMF. Since World War II, the Mexican economy had operated on an “import-substitution” model: the government poured money into domestic industries and protected them with high tariffs. Now, gradually, through what the IMF called “structural adjustment,” the government would transfer financing burdens to the private sector. The plan stressed rigor and discipline. State-owned telecommunication companies and iron and steel operations, most of them corrupt and inefficient, would be sold off. Manufacturing, followed by banking and services, and then—gradually—agriculture would be opened up. Because inflation must be exorcised as vigorously as any demon, wages and prices would be held low. At the same time, though, an important element of structural adjustment was relaxing the rules for foreigners to invest, which had the consequence—unintended, but a consequence nevertheless—of encouraging Mexico to live off capital inflows from someplace else.

Here is what the investment bankers, stockbrokers, and international-aid and financial-policy bureaucrats who were lured to Mexico—some by the promise of quick profit, some by a missionary commitment to markets, some by a new career track in which to rise—saw when they flew south to do business. In 1988, when Salinas took office, the Bolsa Mexicana de Valores, or Mexican Stock Exchange, occupied a dilapidated old building in the historic downtown of Mexico City. In 1990, in accordance with Salinas’s intention to “modernize” Mexico (he used this word at thirty different points in his inaugural speech), a new headquarters opened. The new Bolsa is on the Reforma, a European-style, wide boulevard that cuts south from downtown. (The Reforma Avenue is, in fact, a leftover from another tragicomic fantasy of Mexican progress. It was built in the 1860s; Napoleon III, after his army won a ludicrous skirmish at Veracruz, had installed a Habsburg, Archduke Maximilian, as Emperor of Mexico. Maximilian and his mad wife, Carlota, unaware that they were France’s pawns, set out with a touching, earnest, misguided paternalism to mold their new home into a liberal monarchy. Rebel Mexicans disagreed and stood Maximilian before a firing squad.)

The new Bolsa consists of a squat dome with dark-glass reflecting panels abutting a tall, dark-glass tower. The tower is divided into three sections, which look like three books that have been lined up side by side and then sliced across the top in crazy diagonals. It is a bold structure, but not a very solid or sober-looking one. In any event, for a mile on either side of the Bolsa, and across Reforma, in a quaint, heavily touristed district called the Zona Rosa, are dozens of brokerage houses and banks. Under Salinas, new offices representing the business interests of Arizona and Illinois and other American states opened, and sleek international-franchise clothing stores and restaurants appeared and began to multiply. It is this well-tended district that the Americans who dealt in money got to know. They found, too, that for the first time they had a parallel Mexican cohort, a counterpart class that drove Hondas, used cellular phones, and worked out on StairMasters at the gym.

When I went to Mexico in late March I found myself frequenting this neighborhood, trying to take its temperature. The streets were quieter than they had been in August, the last time I had been there; just recently, for what were given as “security reasons,” the Bolsa had been closed to the general public and its press room removed to a side street around the corner. Except for a receptionist and a woman who was whispering on the phone to a friend, the press room, done in international-office gray, was empty.

Later that afternoon, I went to see a Mexican writer, a nonaligned critic of the government, whose observations have a rare independence and sharpness. I wanted to ask his opinion. Was it the current account deficit, the Tesobono, or clumsy public relations; had Mexico adhered too strictly to the doctrine of neoliberalismo, had it deviated from a key tenet? I wanted his help in identifying the fatal error. Instead, he bounded into the room, energetically shook my hand, and lifted my questions to a different plane. “Well, it’s amazing, the lie, isn’t it?” he said. “How they came up with it, how they kept it up. How everyone went along. It’s quite an interesting psychological problem.”

“Lie” might not be quite right. A good con man, after all, will pocket the credulous widow’s savings, but that didn’t happen in Mexico. No, some new word or even epistemological category might be needed to describe how, regarding Mexico, an optimistic scenario has been floated for years, like an option, to become indistinguishable from the truth as long as enough people invested in it. Consider this statement, with its hopeful, strident, and insecure-sounding logic, by Michel Camdessus, the director of the IMF, explaining on February 2 why it was necessary for the IMF to spend $20 billion—more than it has ever given to any country—to bail Mexico out:

Another systemic aspect of the Mexican crisis is that Mexico has been an exemplar of the approach to sustainable growth recommended by the international community. Of course, this is what accounts for its great progress in the past decade. An unwarranted perception of failure of the Mexican approach might have had wide-ranging repercussions, because a view might have spread that the market-based approach to development had failed…The I.M.F. had a responsibility to step in to help prevent an unnecessary and partially self-fulfilling threat to the continued economic success of a country which had so resolutely pursued economic reform.

That the market-based approach works best of all is a given. Therefore the market-based approach deserves our confidence. And only if we trust in the market-based approach, as it deserves, will it show you doubters that it works best of all. A roundabout piece of reasoning, requiring an almost religious faith. Actually, though, Mexico’s “great progress in the last decade” has been mixed. The highest growth registered under Salinas was 3.6 percent in 1991; but this number had receded to less than 1 percent in 1993.

What a world view in which truth is subject to market verification appears to cherish above all is “credibility.” This sounds like a good neutral quality, and most of the time it is, but trying too single-mindedly to secure, hang onto, or recover credibility can also have ugly side effects. Since December, Mexico has pledged to keep inflation down, improve its balance of trade, beef up foreign reserves, and retire the ill-considered Tesobonos. (Meeting the Tesobono obligations, in fact, will eat up the lion’s share of the US and IMF package.) For the sake of credibility, Mexico has in effect forced its economy to contract—a million jobs are gone, and the projected shrinkage is between 4 and 5 percent—on the gamble that a year from now investors will admire its trim new figure. Meanwhile, as it awaits rediscovery by the world, the government must guard against blurry vision, malnutrition, and a weak, wobbly feeling in its legs.

Nor, just as investors are not voters, does credibility bear any necessary relation to accountability, democracy, or responsible government. The apotheosis of this non-relation was exposed in February, when the following advice from an American analyst, Riordon Roett, writing in Chase Manhattan’s investor newsletter, was reprinted in Counterpunch, a left-wing Washington newsletter, and further explored in The Nation and Harper’s: “While Chiapas, in our opinion, does not pose a fundamental threat to Mexican political stability, it is perceived to be so by many in the investment community,” Roett wrote. “The government will need to eliminate the Zapatistas to demonstrate their effective control of the national territory and of security policy.” Needless to say, Roett’s suggestion that Mexico go in and “eliminate” the guerrilla leaders and who knows how many hundreds of Mayan Indian followers, issued casually, as if he were advising someone to wear a nice navy wool suit to a job interview, was perfectly useful in the technical sense. But sent naked into the world, where other concerns besides investors’ perceptions come into play, it became a liability, and Roett was fired.

So while credibility is reassuring it can also be callous. Which is why I am repeatedly surprised to find its adherents, in conversation, to be unusually well-intentioned, sincere, and almost unnaturally upbeat. I had dinner in March with an American friend, a stock analyst who works at a Mexican brokerage firm. At the beginning of the meal he was all gloom. Mexico had taken such strides toward creating a middle class, and now so much ground had been lost; already there was so much pain, and layoffs and defaults would mount over the summer. But by the time we ordered coffee he was already envisioning the turn-around. “NAFTA will save us,” he said. Zedillo, Ortiz, Rubin, Camdessus, et al., agree. The Mexican government asserts, and the US government and the multilaterals confirm, that Mexico’s macroeconomic conditions are stabilizing. Inflation, though high (it is projected at 42 percent for the year), is not runaway. Easy access to the American market and a cheap peso have driven exports way up. The budget is showing a surplus. The economy is on track to register growth again starting in the first quarter of 1996.

There is another version of reality, of course, but it is less easily rendered in statistics and can only be gleaned from personal experience, gossip, anecdote, glimpses of haunted-looking restaurants and stores, and the erosion, tangible to anyone who has been in Mexico lately, of politeness in daily life. In this reality, anyone who hasn’t lost a job himself knows several people who have. Interest rates on loans and mortgages are running at the usurious rate of about 80 percent. A middle-class debtors movement called El Barzon has sprung up and staged symbolic credit-card bonfires around the country. Granted, Mexican beer exports shot up by 50 percent in January. On the downside, the number of Mexicans who suddenly find themselves in the underground economy, trying to interest passersby in a carnation, a pirated videotape, or an Indian handicraft, has also jumped. So, too, have bankruptcies, muggings, violent crime, juvenile delinquency, and suicide; by the middle of June, twenty-three people had killed or attempted to kill themselves by jumping onto the Mexico City sub-way tracks.

Still, compared to the psychology of belief, that of dissent is just beginning to evolve. Ever since December, the situation in Mexico has served the disgruntled, there and in the United States, as something like a Rorschach test—a smudged, ominous political symbol in which to confirm suspicions that the governments of both countries are bending the truth to serve a secret partnership with the rich. Except for that calculated to make Bill Clinton look foolish, the political opposition to the bailout remains unspecific, reactive, disorganized, and rhetorical—mostly a focal point for rage. The different explanations of what went wrong, and the different political stances on the American aid package, fall into place along a subtle, precisely delineated ideological rainbow. There are people on the left, like Ralph Nader, who perpetually complain that the Treasury and the Fed run both Mexico and the US as if it were their own colonial hacienda. There are freshman Republican congressmen hungry to expose the US bailout package as another example of government wastefulness. (“We need to focus our energies on passing the Contract with America,” ten congressmen wrote in a perfunctory letter explaining their opposition.) Richard Gephardt and David Bonior, both populist, protectionist liberals, have focused on NAFTA, which they say favors corporations and sacrifices American and Mexican workers and the environment. Alphonse D’Amato—to protect Robert Dole against accusations of collusion around election time, it is suspected, rather than out of conviction—has held Senate Banking Committee hearings attacking the bailout; the week that this article went to press Dole and D’Amato, citing an “in the event of an emergency” clause in the Mexican aid package, and claiming that the state of emergency has passed, sent a joint letter to Robert Rubin requesting that the second $10 billion in American aid be delayed.

But the opposition awaits its Calvin or its Luther with a concrete plan; money and the current economic wisdom argue the other side—the only side that has a thorough blueprint—with a momentum that so far has made it quixotic to attempt to dissent. Clinton came into office opposing NAFTA and then changed his mind—and so, it is surprising to recall, did Salinas, on the grounds that Mexico was too weak. A myth has gathered around the precise moment when he saw the light. It was February 1990. Salinas was high over the Atlantic, returning from a meeting in Davos, Switzerland, of executives from Europe, Japan, and the United States, at which he had given a keynote address on Mexico’s great reforms. But the executives had saved their enthrallment for the new promise, two months after the fall of the Berlin Wall, of Hungary, Poland, and East Germany. “May these splendid signs of change not cloud Europe’s global vision,” Salinas had pleaded, “not turn its attention away from our continent—particularly Mexico—and from other regions of the world.” His audience had looked bored, cool. On the way home, so the myth goes, Salinas, shaken by the executives’ indifference, realized that Mexico had to play this game better and harder than anyplace else, or Eastern Europe would pass it by.

If this is so, it begins to look like a gamble based on a faulty projection—Eastern Europe is doing all right, but not without its own pains, and is hardly rolling in money. Still the free-trade, market-based model lurches forward and grows. It will be interesting to watch how such a system intends to police itself. Signs so far indicate that when the money dries up, as it did in Mexico in December, the market will play with the fates of those who have attempted to master it like that merciless god of myth, which in some ways it resembles. Witness the number of Mexicans on the Forbes list of billionaires. Two years ago there were four; last year the number rose to a glorious, scandalous twenty-four, placing Mexico fourth in the world for this statistic. The new list is just out, and the number has shrunk to ten.

Witness former president Salinas, whom the private plane of a tortilla magnate whisked out of Mexico in March. For a while, dogged by blame for the collapse, sniping from Zedillo, and rumors of his administration’s corruption, he seemed to disappear. But in early July, he was reported as having secured a six-month Canadian visa. When the six months are up, presumably, he will move on—a sad human parody, almost, of the perpetual flow of capital that he helped to accelerate.

Still, it remains a good bet that a decade or so from now Salinas will appear in history books as a great reformer of the last half-century. Two recent signs already indicate that Jaime Serra himself is already under-going a minor rehabilitation. A story on July 6 in The Wall Street Journal* shifted much of the responsibility for the bungled devaluation from Serra to the formerly revered Pedro Aspe. Out of arrogance and pride, the article said (to preserve credibility, it might be argued in his defense), Aspe put off devaluing at a time when the results wouldn’t have been so catastrophic. One can only hope that this latest chapter in the ongoing melodrama of blame encourages people to place more faith in the managerial skills of President Ernesto Zedillo. Perhaps it will increase investors’ and everyone else’s confidence; indeed, Mexico has just succeeded wildly in its first debt offering since December, selling $1 billion in new two-year notes on July 10, the day they were introduced. In any event, it has been announced that in the fall Serra will go to the Woodrow Wilson Center at Princeton. He will serve a one-year appointment as John L. Weinberg/Goldman Sachs & Company Professor of Economics. He is to teach a graduate course on “Economic Policy in Emerging Economies.”

This Issue

August 10, 1995