IT'S TIME TO GET REAL ABOUT MEXICO ECONOMIC CRISIS HAS PULLED BACK THE CURTAIN ON A COUNTRY THAT, FOR ALL ITS PROMISE, IS TORMENTED BY ANCIENT DEMONS--AND THREATENED BY A RISING DRUG TRADE. THE LESSON FOR INVESTORS: LOOK AT MEXICO AS IT IS--NOT AS YOU WISH IT TO BE.
(FORTUNE Magazine) – Welcome to the nightmare." That was the message Mexico's incoming president, Ernesto Zedillo Ponce de Leon, received shortly before his inauguration last December. It came, via couriers, from Subcomandante Marcos, the ski-masked leader of the now famous peasant rebellion in the southern state of Chiapas, and given what's happened since, it would be hard to imagine more prescient words. In the short time Zedillo has been in office, Mexico has seen the peso plunge more than 40%; has seen desperately needed foreign capital yanked out of the country as its economy plunged into a ferocious recession; has seen its former president, Carlos Salinas de Gortari, flee into exile in the U.S. following the arrest of his brother, Raul Salinas Jr. (for allegedly masterminding the murder of Raul's corruption--fighting former brother-in-law); and has seen a shocking string of high-level political assassinations.
Most painful of all, it has seen the "economic miracle"--which the Salinas administration was supposed to have ushered in and which was supposedly transforming Mexico overnight into a modern, prosperous, Western democracy--exposed as largely a sham. Yes, the country boasts plenty of thriving, legitimate businesses, a number of which are weathering the peso devaluation in stride (see box). And yes, the Salinas administration deserves credit for working down the government's enormous budget deficits and privatizing key segments of the economy, starting with Telefonos de Mexico (Telmex), which became, for a short time, everybody's favorite "emerging market" stock.
But at its core, Mexico was--and is--what it has always been: a country tormented by persistent violence, huge class and racial divides, and an almost unrivaled degree of economic inequality. (Most of the nation's wealth is concentrated in the hands of some 30 families; despite the slow rise of a new middle class, 20% of the population still lives on roughly a dollar a day.) And it is a country that, for all the halting progress it has made in recent years, remains mired in a kind of systemic corruption that eats away at its soul.
Corruption, in fact, is the real Mexican nightmare, partly because it is proving so hard to eradicate and partly because it has such a corrosive effect on the political and business culture. The fact that Mexico's ruling Institutional Revolutionary Party (PRI) has routinely stolen elections for decades hardly engenders a fervent belief in the virtues of democracy. But election theft may be the least of it. Corruption in Mexico is part of daily life, starting at the bottom with the modest bribes, or mordidas (literally "bites"), demanded by people ranging from garbage collectors to policemen and rising to the very top of the social pyramid. Elected officials, including some cabinet officers and presidents, have regularly and brazenly gained enormous riches by having wealthy businessmen front for them--acting as a prestanombre, or "loaned name," and then turning over the gains once the politicians leave office. For their part, the officials ensure that their friends can go about their business unimpeded by, say, a tough-minded government investigator.
Now this toxic mix is being compounded by an even more poisonous phenomenon: the rise of los narcotraficos, or drug traffickers. Since the early 1980s shipments of illegal drugs to the U.S. via Mexico have climbed to an estimated $120 billion a year. That's equal to a third of Mexico's official GDP of $360 billion and more than twice the value of its exports of legal goods, such as oil. The combination of the drug chieftains' growing wealth and the political system in which they operate has made it possible for them to conduct their illegal affairs with remarkable impunity. Indeed, what has become increasingly clear in recent months, as the peso crisis has emboldened the reforming spirit of both the Mexican press and President Zedillo, is the degree to which the rise of los narcotraficos has paralleled--and intersected with--the rise of Salinas's "miracle."
Ultimately, then, Mexico's latest economic meltdown--the fourth in less than 20 years--has had an unintended salutary consequence. It has pulled the curtain back on the true state of America's most populous and secretive neighbor, revealing a country that, for all its genuine and enormous promise, remains deeply troubled. As investors contemplate jumping back into Mexico--now that Zedillo and his technocrats, buoyed by the Clinton Administration-led rescue, seem to have stabilized the economy, and a new round of privatization sales have begun --they would do well this time to look at Mexico as it really is, not simply as they wish it to be.
THE OWL AND THE OSTRICHES
Narco trafficking is in many ways a paradigm of Mexico's economy. It is dominated by a tiny handful of families; it is vertically integrated; it relies overtly on armed guards and covertly on prestanombres--in this case, the politicians it owns. Unlike the U.S., Mexico is primarily a transshipping and producing country, not a major consumer. Drugs are regarded by some Mexicans as another commodity like frijoles, and cynics take amoral delight in selling them to los gringos. Over 20% of the population in certain rural areas is employed by the narcotraficos, who have built schools and hospitals for their workers and invested in local banks.
Although the narcotrficos' sway over the political establishment is relatively new, the pervasiveness of their influence is fast spiraling toward Colombian levels. Example: in the summer of 1991, shortly after Carlos Salinas began privatizing Mexico's government monopolies, one Juan Garcia Abrego--who boasts a net worth of some $15 billion from his control of the northeastern Mexican cocaine routes and whose diabolically handsome face is now featured on the FBI's ten most wanted list--moved his headquarters from the border town of Matamoros to a new office in bustling Monterrey. Here's the kicker. According to the sworn testimony of a close relative, in making this move Garcia Abrego was acting on the advice of Mexico's then-deputy attorney general, Javier Coello.
Former assistant to the attorney general Eduardo Valle, known in his native country as El Buho ("The Owl"), defected to the U.S. last year complaining, among a host of other charges, that President Salinas had refused to support his efforts to apprehend Garcia Abrego. Meanwhile, though the investigation of Raul Salinas Jr., the president's brother, is far from complete, many involved in it believe that Raul himself may turn out to have been Garcia Abrego's main protector.
Valle contends that the roots of narco power date back to 1982 when the administration of then-President Miguel de la Madrid made a secret pact with the drug cartels to spare it the political embarrassment of seeking financial aid from the U.S. "Before that time, the narcos merely evaded and fooled the government, though they did so with respect," Valle says. "In 1982 it became state policy to encourage them to deposit their money in Mexican banks to help overcome the economic crisis."
What's indisputable is that the Mexican drug trade soon after got an unexpected boost from American interdiction efforts in the Caribbean, which forced Colombia's cocaine kingpins to find new supply routes. Today the U.S. Drug Enforcement Administration figures that 75% of drugs entering the U.S. from South America come through Mexico, up from 25% a decade ago. The narcotraficos also exploited a feud between the Cali and Medellin cartels, which enabled Mexican middlemen to demand a bigger piece of the action.
Typically, though, the U.S. chose to avert its eyes--even though officials at ground level knew exactly what was going on. "In 1984," recalls William Von Raab, who served as U.S. Customs chief for most of the 1980s, "my agents were telling me that drug traffic was increasing by 30%, so I decided I should sound the alarm to [then-Vice President George] Bush, who was handling the war on drugs. I took the position that de la Madrid's administration was an unworthy, dishonest group. But three weeks later, Bush said flat out that I was wrong, that controlling the drug traffic across the Mexican border was not a problem. I felt he didn't want to muddy the commercial relationships between the U.S. and Mexico." (Both Bush and de la Madrid refused to comment.)
Later, of course, official Washington's ostrichlike insistence on minimizing or ignoring Mexico's growing drug problem became even stronger during the Salinas years, as passage of the North American Free Trade Agreement became a top priority for the Bush and Clinton Administrations.
THE SALINAS MIRAGE
It is not hard to understand, even now, why U.S. investors and politicians fell so hard for Carlos Salinas. He was a member of the Mexican elite--groomed for much of his life to be president--an accomplished equestrian, and a Ph.D. from Harvard, whose command of English was no less nuanced than his command of free-market economics. His eloquent insistence on the need to reform the Mexican system and create a new middle class was exactly what America wanted to hear. And to his credit, he did ultimately privatize large swatches of the Mexican economy, including its banks, which had been nationalized barely a decade earlier.
But Salinas was never as admired in his own country as he was in the U.S. That's because many of his fellow citizens, for all his reforming fervor, could also see the abiding links between Salinas and the corrupt older generation of business and political elites, known as los dinosauros, who were still far from extinct within the PRI. Salinas's very election, for instance, said more about Mexico's past than it did about its future. His opponent, according to exit polls, handily won a majority of the votes. But election officials reported that "atmospheric conditions" had caused their computers to malfunction, and, when the dust finally settled, Salinas was declared the winner. The PRI-led majority in Congress later voted to burn the election records.
Then came the economic reforms: over the next five years, Salinas sold off some $14 billion worth of government-owned assets, giving foreign investors new stocks to invest in. Many of these divestitures, though, merely transformed former state monopolies into private monopolies or divvied up the spoils among members of the established oligarchy. They, too, thus said more about what continued to be wrong with Mexico than Americans cared to admit.
When Telmex was privatized, for example, ordinary investors who flocked to buy its shares were barred from purchasing a special class of preferred stock that conferred voting rights. Result: By paying only $400 million for a majority of these special shares, the richest legitimate businessman in Mexico, Carlos Slim Helu of Grupo Carso, ended up with control of a company that at the time had a market value of $8 billion.
Naturally a deal that sweet sparked rumors that Slim had collared Telmex by agreeing to act as a prestanombre for Salinas. Absolutely false, says Slim, 55, a former stock trader from a wealthy Lebanese family whose fortune was mainly built up through real estate deals. "Telmex was not a gift!" he told Fortune in a recent interview. "I've never had politicians as partners. They tell you what to do and how to do it. We prefer to be far from government."
In Mexico, though, it's hard to stay too far away. Consider television, an industry dominated by Televisa (1994 sales: $1.8 billion). Though a private company controlled by billionaire Emilio Azcarraga, Televisa for two decades enjoyed a government-condoned near-monopoly and, in exchange, could be relied upon to shill shamelessly for its PRI patrons in its news coverage. Two years ago that monopoly was dented but hardly dismantled: Televisa's market share slipped from 95% to a mere 80% or so. It is no surprise, then, to learn that in February 1993, when Carlos Salinas held a fundraising dinner for over two dozen leading industrialists and asked each to contribute $25 million to the PRI, Azcarraga reportedly announced he would give roughly triple that amount.
THE DANCE OF THE DINOSAURS
Soon after he was elected, Carlos Salinas picked as his agriculture minister a notorious politician named Carlos Hank Gonzalez, 68, who had a notorious motto. "The politician who is poor," he liked to say, "is a poor politician." During his long career, this former school teacher amassed a personal fortune widely believed to be in excess of $1 billion. It includes a neoclassical-style mansion in central Mexico City, an even more lavish suburban ranch that stretches for nearly a mile, and a 20-room house in New Canaan, Connecticut, where he sought refuge during the 1982 economic crisis.
A tall man with silver hair and a silky tongue, Hank is a classic example of the corrupt interplay between government and business in Mexico. While rising through a string of influential political offices--head of Conasupo (a giant government food subsidy agency), mayor of Toluca, mayor of Mexico City, tourism minister and agriculture minister--he became famous for his charm and his ability to dispense thousands of personal favors. A senior U.S. State Department antinarcotics official described him to FORTUNE as "a combination of Lyndon Johnson, Richard Daley, Jimmy Hoffa, and Vito Corleone." Throughout his ascent, one of Hank's most important friends was Raul Salinas Sr., father of Raul Jr. and Carlos Salinas. Raul Salinas Sr. was himself a politician, who also put in a stint as a Conasupo economist, and Raul Jr. later spent a portion of his career as a top Conasupo executive.
Thus, when Carlos Salinas became president of Mexico, Carlos Hank was perfectly positioned to reap the outsize benefits that can accrue to those who are friends with top politicians. In one case, his son Carlos Hank Jr. was able to buy in 1990, at government auction, the cellular phone concession for an important urbanized region for $10 million, a concession he was able to unload three years later for $100 million.
By the time he retired from government last fall, Carlos Hank and his sons controlled a business empire that included a Mexican banking and brokerage firm, a small Texas bank, and a truck-making partnership with Mercedes-Benz built from a small firm that once snared contracts from Conasupo. Carlos Jr. sits on the boards of several companies with close ties to the government: among them, Tribasa, a builder of toll roads. He is also married to the daughter of Maseca's founder, Roberto Gonzalez Barrerra, a close friend of Hank Sr. and godfather to Carlos Salinas. Maseca's corn flour production business is heavily influenced by the actions of both Conasupo and the agriculture ministry.
During this same period, the Salinas family may also have been enriching itself. Though a full accounting of the family's separate and jointly held assets has never been given, the Salinases' lavish compound in Mexico City has certainly raised eyebrows of even casual passers-by. Surrounded by high walls and protected by plainclothes guards, it features electronic gates with separate entrances for residentes and visitantes, a low-rise office building and an enormous metal sculpture visible from the street, as well as a cluster of freestanding homes nestled in the rear of the property. People who claim knowledge of Raul Jr.'s former lifestyle and travel itineraries say that his personal assets--masked by prestanombres--include a mansion in Monterrey, an island off the Pacific coast, a large ranch, and land around Mexico City's newly opened general aviation airport.
Whatever the precise tally may be, a lot of wealth seems to have been sloshing around the Salinas compound. A recent article in the muckraking Mexico City magazine Proceso tells the strange tale of the 1992 sale of a Salinas family-owned residential property to Luis Donaldo Colosio, the man who would later be tapped as Salinas's successor to head the PRI (and soon after that assassinated). According to Proceso, the price listed in the deed records was 250 million pesos, or more than $80 million in those predevaluation days--for a house!
A DRUG-LACED MIRACLE
Although Raul is the most prominent Salinas-era figure who has been arrested, he is by no means the only one suspected of links to drug traffickers. According to Valle and a variety of American and Mexican officials, others include Carlos Hank Gonzalez, former deputy attorney general Coello (the man, recall, who allegedly advised drug lord Garcia Abrego to move to Monterrey), at least one top military man, and former top-ranking presidential aide Jose Cordoba Montoya.
To prove he can document these charges, Valle provided FORTUNE with a set of U.S. Drug Enforcement Administration telephone logs listing calls by an alleged associate of Garcia Abrego's cartel to the offices of the military officer and Cordoba in November 1993. (Cordoba declined to comment on the charges, while Hank did not respond to interview requests.)
What's certain in retrospect is that the rise of the narcotraficos had more to do with Mexico's ensuing economic crisis than is generally recognized. Emboldened by the government's willingness to look the other way--or actively cooperate--the drug cartels began what drug cartels always begin doing when they think they can get away with it. They began killing people who were causing them problems. The first high-profile assassination came in spring 1993, when Cardinal Juan Jesus Posadas Ocampo, who had reportedly been gathering intelligence on one of the cartels, was shot 14 times at point-blank range. His assassins then flew to Tijuana, where they deplaned without being stopped by authorities. A year later came the next big target: PRI presidential candidate Luis Donaldo Colosio.
Then, in May 1994, Salinas appointed a new deputy attorney general, Mario Ruiz Massieu. Though supposedly committed to fighting drugs, Massieu, according to Valle, began reinstating many of the allegedly corrupt police officials his predecessors had ousted. Just three months later, Mario's brother who was secretary general of the PRI, Jose Massieu, was gunned down in Mexico City. This, as it happens, is the murder for which Raul Salinas Jr. was later arrested; he is said to have masterminded the assassination of Massieu, with whom he had a number of business and personal feuds stemming back to the mid-1970s when Jose Ruiz married and then divorced the Salinas brothers' sister, Adriana. (Under suspicion for instigating a massive cover-up of his brother's killing, Massieu later fled to the U.S., where authorities have since revealed that his bank accounts held some $20 million.)
By this time--fall 1994--the entire country was on edge, and the "crisis of confidence" that helped spark Mexico's economic collapse was very much in evidence. But with the Clinton Administration supporting his candidacy for president of the newly formed World Trade Organization, Salinas was ultimately unwilling to expose the Potemkin village nature of his "economic miracle." So he tabled an intensifying internal debate about how to deal with the by now seriously overvalued peso and left his successor to deal with the consequences.
INHERITING THE NIGHTMARE
It would be nice to believe that the six-year term of Ernesto Zedillo will somehow turn out differently--that this time the political reforms will be real; the drug trade will be fought fiercely, instead of tepidly (or not at all); and the rebuilding of the Mexican economy will open it up to real competition and new independent entrepreneurs rather than continuing as a game rigged for the benefit of the dinosauros and their ilk. And maybe it will turn out that way.
Certainly Zedillo does not seem to be cut from the same cloth as his predecessor. Though he has the requisite technocrat's credentials (a Ph.D. from Yale), his background is far from the elite upbringing that marked Salinas: he was raised in the border town of Mexicali, where his parents once sold candy on the streets.
And in the short time he has been in office, Zedillo has been saying all the right things. He has talked about the need to establish "clear rules" of law and pointedly declared to his cabinet at his inauguration that "the government is not a place to amass great wealth." His attorney general, Antonio Lozano Gracia, is a leader of the conservative middle-class National Action Party (PAN) and thus the first opposition cabinet member in modern Mexican history. He has talked repeatedly about the importance of taking on the drug trade--and has sounded convincing enough that Garcia Abrego, for one, is now in hiding. And though it's easy enough to make the case that his administration botched the peso devaluation, he at least looked the thing square in the eye and did what had to be done. The new Mexican economy that emerges will surely be healthier as a result.
Yet given Mexico's history, one would be foolish not to ask the same tough questions about Zedillo's early moves that are now being posed about the Salinas years. True, the new President oversaw the arrest of Raul Salinas Jr. and essentially ran Carlos Salinas out of the country. But how much of that has to do with a genuine desire to set Mexico on a new path and how much with simply demonizing his predecessor--one of the hoariest of Mexico's political traditions?
It is impossible to know the answer, but not all the signs are good. While Zedillo's cabinet has its share of young reformers --men like Commerce Secretary Herminio Blanco and finance minister Guillermo Ortiz--the new president has yet to distance himself from the dinosauro wing of the PRI. One of Zedillo's biggest backers during his campaign was none other than Carlos Hank Gonzalez, and his newly named interior minister is an old crony of Hank's. In early August, in documents filed in a Texas court case, the fugitive former chairman of Mexico's largest airline claimed that he made $8 million in illegal donations to the PRI for Zedillo's election campaign.
Even if he truly wants to change all this, Zedillo must tread a political tightrope strikingly similar to the one that Mikhail Gorbachev ultimately fell from in the former Soviet Union. The harder he pushes for real democracy and open rulemaking, the greater the odds he will unleash forces of dissent that will ultimately end the PRI's 66-year reign--and could lead to a period of even greater social turmoil. In a land with a long-standing affinity for absolute authority and benevolent dictatorship, the prospect that Zedillo may prove too weak and ineffectual is fueling unease, even among those known as los yuppies--younger, well-educated business and political leaders eager to curb the excesses of the dinosauros.
Indeed, the larger question may be whether the drug-fueled monster of corruption in Mexico has simply gotten too big for anyone to slay it. The Mexico City newspaper El Financiero recently published a chart showing that the mordidas paid by drug lords to bribe public officials and local policemen are roughly $500 million a year, more than twice the attorney general's total annual budget to fight all crimes. That money buys terrifying fealty. When Zedillo's new attorney general named a new federal police chief, bodyguards loyal to the old chief attempted to assassinate his successor. In late March, a gang of police officers tried to waylay Zedillo's eldest son as he was driving home in a Jeep Cherokee, only to be thwarted by presidential bodyguards in a following car. And so it goes.
THE LONG ROAD BACK
Finally, there is the Mexican economy, or what's left of it. Aided by the peso's fall, some of Mexico's larger companies and the foreign multinationals operating there have seen exports explode since January. Result: Mexico's current account, in deficit by nearly $29 billion last year, may even deliver a small but much-needed surplus in 1995.
But the domestic economy has been devastated. In Mexico City, once the jewel of Salinas's economic miracle, muggings and auto theft are rampant, and whorehouses have supplanted many of the discotheques in La Zona Roza that had catered to the new middle class. Even in relatively prosperous Monterrey, whose business community is far freer of the endemic corruption that pervades the capital, thousands of small businesses are on the verge of bankruptcy, and middle-class protesters are taking to the streets to resist foreclosures on homes. In small towns and rural provinces, once proud consumers of products like Crest and Fab are brushing their teeth with charcoal made from burned tortillas.
Nor is the view from above any prettier. The most optimistic government forecasts predict a 2% fall in GDP this year. And while many forecasters predict that the economy will start to rebound by 1996, it will likely take far longer before Mexico can achieve the kind of sustained Asian-style growth it needs to create jobs and lift incomes among its still rising populace. The long-term problem: a shortage of domestic savings. But the short-term crippler is a credit crunch whose severity is almost impossible for outsiders to fathom. Interest rates until recently hovered around 80% (they fell to 35% by early August). Even at those stratospheric levels, banks are making few loans, since aside from the two largest, Banamex and Bancomer, the Mexican banking system is in crisis. Credit card debt is another huge problem, with at least a third of cardholders now past due on payments.
Meanwhile, the very things Zedillo most needs to do to spark the economy's recovery are the things the populace will most resist. Nothing has the power to rekindle the forces of Mexican nationalism like proposals to privatize any part of Pemex, the government-owned oil company, yet part of the terms of the U.S.-led bailout call for Mexico to raise $12 billion to $14 billion over the next three years from the sale of government assets--including some owned by Pemex.
One big change the citizenry will probably not resist is the scheduled end, in late 1996, to Telmex's monopoly on long-distance service. Currently 90% of the 94 million population lack even basic local telephone service, and the perpetually outdated Telmex directory is sardonically known as "The Book of the Dead." The prospect of filling that gap, in partnership with various of Mexico's blue-chip companies, has every U.S. telecommunications company with two strings and a Dixie cup hustling to play.
What these newcomers will find, however, is what old foreign hands who've long operated successfully in Mexico--companies like Volkswagen, J.P. Morgan, and the Big Three automakers--already know. Sure, you can make money there. But no miracle is going to soon exorcise the ancient devils that plague Mexico's economy and its politics. Only time--and slow, steady, painful reform--can do that, perhaps sometime out in the next century.
One person who is still high on Mexico is the king of its corporate hill, Carlos Slim Helu. And why not? Mexico may be a mystery to foreigners, but not to him. With annual sales of $3.2 billion, his Grupo Carso includes a tiremaker, a copper mine, a construction materials firm, a brokerage house, and the Sanborn's restaurant/retailing chain. Along with Telmex, the companies he controls account for more than 25% of the capitalization of the Mexican stock market. And even with the more than 40% peso devaluation last December, his personal net worth is still said to be over $4 billion, a figure he coyly refuses to confirm or deny, shaking his head and chuckling, "Write down any number you want."
Having publicly proclaimed that "Mexico is a buy," Slim has recently increased his controlling stake in Telmex. He dismisses the current turmoil with a weary wave of his hand. "The problems of Mexico are systemic," he sighs, heaving himself up from his couch, "and they have happened much like this before." Somehow, these words don't offer much solace.