You had a convergence of factors. You had the Americans who were pushing. They
were pushing, firstly, because during most of the early '80s and early '90s,
the United States was running an increasingly large current account deficit
with the rest of the world, and wanted to try and redress that as much as it
could. Although it couldn't get too much leeway in Latin America, it could get
a lot of leeway for very little. That is, it's easier to push the Latin
Americans around than it is to push the Japanese. It's easier to force the
Mexicans to open their economy than it is to force the Chinese or the Japanese
to open their economies. The U.S. deficit is bigger with Japan or with China
than it is with Latin America, but they can't push those guys around as easily
as they can push us around.|
At the same time, the Latin Americans, this was particularly true in Mexico in
the case of the Salinas de Gortari regime, wanted U.S. legitimacy, friendship,
seal of approval for a personal long term political ambition. They figured
rightly, the Mexicans that is, that if they did what the Americans wanted, the
Americans would be very happy and would basically go along for the ride, and
... the Americans had this problem of the current account deficit. How were
they going to help solve it by changing things in Mexico?
Essentially, what the Americans wanted all of Latin America to do, and
everybody with the exception of Brazil went along, was to totally open up their
borders to trade with the United States on the understanding that that would
signify a huge increase in U.S. exports to Latin America. And, perhaps, a minor
increase in Latin American exports to the United States, particularly raw
materials, commodities and some low technology manufactured goods or some
assembled goods like automobiles in Mexico. This would improve the U.S. trade
position with the rest of the world. It wouldn't do it overnight. And as I
said, it wouldn't do it terribly significantly, but on the margins it would and
it would do so cheaply.
This was not presented in those terms. The United States never presents things
in terms of its own interests. Unlike former imperial powers who said, "You
should do this because I want you to do this," the United States always
presents things in terms of, "It's in your best interest to do this. You should
open up your borders because trade liberalization is good for you ... Not
because I want you to do it, but because it's the right thing to do." That's
the way the Americans do it. They've been doing this for 100 years. It's not
terribly new. That's how it was presented to the Mexicans and the Latin
Did opening up also include getting rid of any regulations on the flow of
Well, inevitably the two go together. It's very difficult to open up trade
barriers and to bring down tariffs and non-tariff barriers and other
restrictions without also freeing up capital movements. Because if you're going
to have, for example, what Mexico had in the early '90s--huge current accounts
deficits because of huge import bills, among other things--you have to bring in
capital to finance it. You can't bring in that capital, particularly
speculative capital, unless you remove domestically in Mexico, or in Brazil, or
in Argentina, the restrictions on entry to those capital flows. If not, you're
going to end up with an unmanageable deficit overnight.
By 1994, Mexico was running a $30 billion current account deficit or 8% of GDP.
That's unfinancable whatever you do, but it's certainly unfinancable if you're
not attracting around $30 billion of speculative capital per year. You can only
do that if you have high domestic interest rates to make it interesting. And
secondly, if you have no restrictions.
So was there any debate in Mexico or in Latin America about the wisdom of
suddenly opening up to the world economy?
Well, you have to distinguish between the situation in Mexico and the situation
in most of the rest of Latin America. Mexico was then and up to a point still
is today, living under a terribly authoritarian system; today, under an
authoritarian system that's on its way out. But 10 years ago when all of this
began, the Mexican political system did not allow much debate. It didn't kill
people for arguing, but it simply silenced them. The debate did not take place.
So in the case of Mexico, all of this was done by the Salinas regime without
much debate or discussion internally.The case of the rest of Latin America, there was a great deal of debate, but it
was a very biased or skewed debate by two factors. One, all of this was
happening at the same time the Berlin Wall was collapsing. The fall of the
socialist world was taking place. This gave an ideological impetus to the other
trend. In fact, the two things had nothing to do [with each other]. It's not
because the Polish economy didn't work that Brazil had to open up to
international capital flows, but that's how it came to be viewed.
The second element, that skewed the debate that did take place in the rest of
Latin America, was that the Americans were presenting this as something that
was also apparently taking place within Western European and North Atlantic
countries. That is, the Latin Americans were being told, "This is the tide of
history. You have to go along with it."
The fact that it never really happened, even under Mrs. Thatcher in Britain,
let alone in mainland Europe or in Japan, that nobody else really did this, was
not apparent to the Latin Americans. They couldn't figure it out very well. So
where the debate did take place, it took place In a terribly skewed or unfair
way. That is, on the one hand you had a bunch of crazies who were against the
tide of history in Eastern Europe and in Western Europe, who were fighting the
last ditch battle to keep their economies closed. On the other hand, you had
the reformers, the whiz kids, the visionaries, the people that were moving
along with the tide of history. Well, I mean, it was open and shut who was
going to win that debate.
So essentially, is the United States presenting opening everything up as the
price of admission into the global economy?
That's the way it presents it. That is, what it says is, "Everybody is like us
now. Before there were the Japanese. There were the Europeans. There were the
East Asians. Forget it. Now, everyone in the world wants to be like us. Look,
everybody drinks Coca-Cola and eats hamburgers ... You are not like us. If you
want to join the club, you have to be like us."This is a sophism. It's false. The rest of the world is not like the United
States. The Japanese are not becoming like the Americans and the Western
Europeans are not becoming like the Americans. They may drink Coca-Cola and eat
Big Mac hamburgers, which is fine, but they are not running their economies or
their societies the way the Americans are. The Americans want them to, but
they're not. And a lot of time has gone by now ... everything that the
Americans said was going to happen inevitably, has not happened. The only
people who believed them were the dumb Latin Americans because they believe
everything they're told by the Americans.
... So the Latin Americans and Mexico agree basically to the rules of the
game that the U.S. has set forward. Then what starts happening in
Mexico begins first opening up to trade, then to capital, and then privatizing,
in order to get the capital to pay for the deficit coming from the trade
opening. Then it begins also having to carry out a series of other policies in
order to keep attracting that capital. Among those policies are high domestic
interest rates and a stable, virtually frozen, exchange rate so that investors
don't get scared about devaluations.
Very quickly, two things happen during the early and mid-1990s. First, domestic
interest rates were so high in order to attract capital that the economy can't
grow. Because if domestic interest rates paid out to foreign investors are
high, they're also high as charged to domestic borrowers. Nobody can borrow.
Nobody lends. Nobody invests. The economy remains relatively stagnant. Better
years or worse years, but on average. Secondly, the exchange rate becomes
rapidly overvalued, because if you can't play with it, you can't move it. Your
inflation is still higher than elsewhere. You're beginning to overvalue in real
Overvalue the peso.
Overvalue the peso. This happens between 1990 and 1994. The third element,
NAFTA, which is the instrument designed by the Mexican government, not by the
Americans, to get out of the mess they had gotten into. That is, a way to
attract enough U.S. foreign investment, direct foreign investment, to be able
to finance this huge current account deficit without high domestic interest
rates and without, at least in the long term, having to prop up the peso
indefinitely. That's what NAFTA was for from the Mexican perspective. But all
of this, of course, got messed up. It didn't work and you have the crash.
Before we get to the crash, explain what the Mexican government faced when
it promised ... to keep the value of the peso as things begin to change.
Well, you have two different problems. You can have general problems that are
applicable almost in all cases and in all countries when something similar
arises. And you have specific problems that a given country can have at a given
moment in history.
The general problem that a country like Mexico faced, on several occasions, the
'70s, '80s and '90s, that Brazil has just faced now late 1998 or early 1999, is
that you commit yourself to an exchange rate in order to guarantee returns on
investments in the domestic currency to foreign investors or to domestic
investors, and in order to guarantee prices, incomes to your domestic
That guarantee is only worth how much money you have in the bank. And it's only
worth the confidence, the trust, you can instill in investors and speculators
that you will have enough wherewithal to sustain your currency. If they decide
you can't, you've had it. Because they will end up getting you. Because they're
acting rationally. They have to speculate against you if they think that you
will not be able to sustain your currency.
Now, specifically in the case of Mexico in 1993 and 1994, there was a problem
involving NAFTA. There is increasing evidence, this has not been proven yet ...
that makes it probable to say that the Salinas administration made a tacit or
explicit commitment to the Clinton administration in early 1993 that there
would be no devaluation of the peso through '93 and '94 or at least through mid
'94 so that Clinton could get NAFTA ratified in the U.S. Congress.
Why? If you recall, the main argument used by opponents of NAFTA in the United
States from Ross Perot to the AFL/CIO and including Congressmen Gephardt,
Bonier ... was that Mexican labor was too cheap and that new Mexican exports to
the United States skyrocketed, U.S. jobs would flow to Mexico. Now, if there
was one policy that could make this much worse, that could accentuate this, it
was a devaluation of the Mexican peso. So, in a sense, what Clinton needed was
a promise from the Mexicans that at least while the process was moving forward,
they wouldn't do something stupid like make him look like a fool and make his
opponents look right by devaluing the currency.
So they made a commitment not to devalue the currency during all of '93. But
also during the first few months at least after ratification. Because if not,
Clinton would still have looked like a fool. Imagine what Perot and others
would have said if a week or a month or three months after NAFTA was approved
in the Congress, the Mexicans go ahead and do exactly what the opponents of
NAFTA had said they were going to do, devalue the peso.
So there was a commitment there not to touch it. Then that commitment ... gave
way to a domestic political constraint. There were presidential elections in
Mexico in August of 1994. If there's one thing governments don't do it's
devalue a currency before elections. It's just not done. There are things you
don't do in life and that's one of them. If you want to win an election, you
don't devalue a currency before the election. So that meant Mexico couldn't
devalue before August.We had, by then, almost two full years of an overvalued currency for political
reasons. It had nothing to do with economics. It had to do with NAFTA and it
had to do with elections. Then Salinas was leaving office ... in December of
1994 ... He had three months left. He could have devalued the currency during
those three months. But, hell, you almost made it. It's really not nice to be
the president who devalues. Let's have the other guy do it. It's only three
months away. Why don't I hand the whole problem over to him and he'll know what
to do, I'm sure.
So during these two years ... for political reasons the peso is being held
up. What's happening to the foreign currency reserves?
Well, step-by-step what's happening is really quite simple. Mexican exports are
becoming more and more expensive in dollars, so they're becoming less and less
competitive. Foreign goods are becoming cheaper in Mexico because of the
overvalued currency and they're flooding the country. Mainly from the United
States, but also from elsewhere in the world. The trade deficit is
skyrocketing. The need to bring in more speculative capital from abroad is
growing to finance that skyrocketing current account deficit. You have to raise
interest rates and you have to make more promises that you won't devalue the
exchange rate. Once people stop believing you, you have to start then assuming
commitments or obligations in dollars. These are the famous instruments that
emerged in Mexico called, peso bonos.
In the middle of 1994 when investors, particularly American ones, started
getting nervous and started telling the Mexicans, "Look we're leaving." And the
Mexicans, "Hey, wait, don't go away. You don't like our pesos? Fine. I'll
transform your investment in pesos into dollars and I'll pay you back dollars.
I won't give you pesos as any exchange rate since you don't believe me anymore.
You don't trust me. I'll give you dollars. Don't worry about it. And I'll pay
you 12, 13, 15, 16, 17% per year on your dollar investment, three to four times
what you can get money market funds in dollars in the United States." This was
a great deal--16% in dollars? Backed by the Mexican government and turned back
by the Federal Reserve and NAFTA. This is as good a deal as you can get.
So, of course, they stayed in. But the danger was, of course, Mexico didn't
have the dollars to pay those investors back if they all wanted their money at
some point because reserves were dwindling. All throughout 1994, reserves were
dropping precipitously. By the end of the year, there's only about $6 or $7
billion left in reserves and short term dollar denominated liabilities are over
$30 billion. Well, it's pretty simple what happens--collapse.
What was the response in the U.S.?
I think there's a double response. The first one is of disbelief and confusion,
partly because it occurs in December of 1994 when Secretary of Treasury Bentsen
is just leaving and [Robert] Rubin has not yet been confirmed ...... This was not something that was supposed to happen. Even if they had
information that made it clear to them that something along these lines was
supposed to happen. So, on the one hand, you have confusion. You have disbelief
and you have a little bit of panic. Although in the first few days they don't
think it's going to be that bad. Then by January of 1995, they realize that
they have a major crisis on their hands and they try to cobble a package
together quickly to try and save this.
They underestimate the magnitude of the problem in the first few days or weeks.
The package that they need to put together keeps growing and growing. It will
end up being a $50+ billion package, which never really materialized. That is,
the $50 billion was never needed by Mexico. What was necessary was to give the
markets the sense that those $50 billion were available. So that the Mexican
government could stabilize the currency at some level in a credible fashion.
Why were they so upset and panicked in Washington? Well, essentially there were
all these American investors, both institutional and sort of mom and pop
investors, who had money in these Mexican bonds. These $30 billion of dollar
denominated Mexican financial instruments which were not going to be paid. This
was your pension fund or your pension account even, because you maybe decided
that you wanted to put your money in Mexico--telephone bonds or whatever. You
had seen Salinas on television and said, "My, he went to Harvard, he speaks
English; this is a very intelligent young man. Let's give him some money." All
of a sudden your life savings were on the brink of collapsing.
So, the Clinton administration essentially guaranteed those investments. Since
they couldn't say so in those terms, they presented it in terms of a systemic
crisis. That if the Mexican crisis was not solved, it would spread to the rest
of Latin America--the famous Tequila effect--and from there to Malaysia, to it
doesn't matter, whatever, Singapore, Korea, what have you.
It was partly true and partly not true. That is, on the one hand, the crisis
actually spread anyway three years later despite the bailout; it happened
anyway. Secondly, it's not entirely clear that there really was a systemic
crisis. Unlike the debt crisis of the early 1980s, which probably was a
systemic crisis and where if there hadn't been a concerted action, things could
have gone very serious.
In the case of the Mexican crash of '94, it was probably the investors who
would have taken a hit, but that's it. Nobody else. In any case, the Clinton
people bailed out the Mexicans. The Mexican political system was propped up.
The same people who had been running the country for the previous 70 years, and
particularly the previous 10, stayed in power despite their fifth consecutive
mess-up or crisis each time power changes in Mexico. And they're still
And Washington imposed conditions on this money.
Washington essentially imposed conditions of a very abstract nature, because by
that point, Mexico had already done just about everything Washington wanted it
to do. It had liberalized trade. It had privatized just about everything there
was to privatize except the oil company. It had gone for NAFTA and become
involved in NAFTA. It had deregulated capital flows, etc. There wasn't a whole
lot left to do.
The only significant impositions were, once again, of an adjustment nature, not
of a structural nature. In other words, Mexico had to cut spending, devalue the
currency, raise domestic interest rates, going to a recession, etc. But there
weren't that many strategic demands made because Mexico had already complied
with most of them. There wasn't a whole lot left to pressure the Mexicans to do
You said [that Mexico] had to go into recession. That seems to be a bigger
deal ... Did it necessarily have to go into recession? Did it make any economic
sense to throw the country into recession?
Well, once you accepted the fact that you had to massively devalue the
currency, raise interest rates, cut spending and raise taxes, you were going to
go into a major recession. It was probably unavoidable in Mexico given the
magnitude of the collapse, the magnitude of the crash. They were falling from
so high that it was very difficult to avoid a recession in 1995.
Probably what could have been avoided was for it to be that big a recession,
and mainly to transform all of those peso liabilities from before and then
short term dollar liabilities into long term liabilities. Because what it means
today is that we're still dragging that along with us in Mexico. This is
particular true of the banking crisis. All of the recently privatized Mexican
banks in 1995 went down the tubes, essentially because all of their loans
became non-performing. With the tremendous rise in domestic interest rates,
people couldn't pay back their domestic loans.
So all of these banks went technically broke. Then the Mexican government had
to step in and bail them out, like the savings and loan crisis in the U.S.,
with money borrowed from abroad. All of us, now in Mexico, owe that money to
foreign lenders. The magnitude of the bank bailout, which is bigger than the
international bailout ... so far has cost the country about $65 billion. And
it's still going.
At the time that this bailout was being put together, was there the sense
that the U.S. government, the U.S. Treasury, was trying to micromanage Mexico's
There was more than the sense. There was the reality. The treasury team,
so-called country team, went straight into the Mexican treasury and the central
bank and sat there and basically monitored everything hour by hour, day by day.
This was a lot of American money that was behind this and in a sense the
Americans sort of said, "Look. You guys have crises every six years. Before
we'd give you the money and you would manage it, but frankly this is getting a
little repetitive. So this time we're going to give you the money, but we'll
monitor it and manage it much more closely and carefully than on previous
occasions." I think that's largely what happened.
So who, in the end, was rescued by this bailout money?
First, investors were rescued unquestionably. Nobody lost their shirt. That was
very important from Clinton's Wall Street connection, bond market connection
policy. Not because he has friends and he rescued his friends. That's not the
issue. The issue is that there was not a revolt on Wall Street and among
investors and in the bond markets because of a Mexican collapse. It didn't
happen. There is a marked difference between that and the Russian collapse of
August '98, when some investors, did lose their shirts.
Secondly, the Mexican banks were rescued. They were all technically broke if it
had not been for the Mexican governments plowing in an enormous amount of
money, $60-, $70 billion to bail them out. But that money came from abroad
because the Mexican government had no money to do this on its own. It borrowed
money from abroad and lent it to the banks to bail them out. So they were
Finally, the Mexican political system was bailed out. Probably, it would have
collapsed if there had been no financial bailout. Probably, the government of
Ernesto Zedillo in one way or another would have collapsed, and a new political
system would have finally emerged in Mexican, painfully. There's no way you can
move from 70 years of authoritarian rule to a democratic system easily. There
would have been a price to pay. I think it would still have been a lower price,
a cheaper price, than the one we will end up paying. But that is, obviously, a
In your opinion, if investors had lost their shirts ... would the rolling
crisis that we've been experiencing since East Asia, through Russia and now
into Brazil been as likely to have happened?
Well, probably not, because they would have really have had to face the risk
and premium dilemma more forcefully. When people invest, whether it's banks,
who don't do this a whole lot, but brokerage firms, institutional firms, mom
and pop investors; whatever, when they invest in Mexican paper, Brazilian
paper, Ukrainian paper; whatever, they know somewhere that the reason they're
getting three, four, five, eight, 10 points above Treasury bills in the United
States is because it's riskier. But they don't really face up to what that
means. What it means is you might not get your money back. That's what it
really means. The logic of that investment is that you're getting more because
you might not get anything. And you decide you want to take that risk.
That relationship or that dilemma has been skewed or nullified by these
bailouts. A banker once said to me [when] I asked him, "Why are Mexico premiums
now fall[ing] so low when apparently the place is collapsing?" He said,
"Because you Mexicans," referring to me, "you have a rich uncle ... he'll post
bail every time you get drunk and get thrown into jail overnight."
The rich uncle is, of course, the United States. Everyone thinks that whatever
happens there are some countries that the U.S. will not allow to sink: Mexico,
Brazil, perhaps Russia, although that didn't turn out to be totally true, a few
others. So you can invest in those countries risk free. You can sort of win on
both sides of the ledger.
... after Mexico has opened its markets, opened its financial sector ...
describe for me the kinds of people, specifically Americans, who come rushing
in. How much do they know about Mexico, about this new market, etc.?
They have no idea. Investors who are playing with their own money or even
direct foreign investment, people who go in and build a factory, who want to
export or buy land, build a hotel, they don't know what they're getting
Now, in theory, they don't have to know. That is if the markets are open and
are stable, even if the rule of law is a fact of life, if the governments are
more or less democratic, if the U.S. embassy and trade bureaus are doing their
job, they don't have to know much. They just have to know what they know how to
do whatever--build cars, widgets--it doesn't make any difference.
Unfortunately, those other givens don't always hold. The markets are not really
even fair, because of corruption, because of the cartels, because of insider
information, etc. The rule of law does not exist in most of these countries.
The democracies they have are very superficial, very thin skinned.
And the U.S. embassy most of the time doesn't do its job in the sense that most
of the time it's in bed with the local ruler whoever he or she may be. It may
be a Democrat and a decent, intelligent individual like Fernando Henrique
Cardoso in Brazil. Or it may be an ... authoritarian ruler ... like Salinas.
It doesn't make any difference. In both cases, the American embassy is not
going to tell somebody, "Hey. If I were you, I wouldn't put my money in Brazil
or Mexico right now because God knows what's going to happen." It's not going
to do that because the embassy's in bed with the local system ... they know it
would become a self-fulfilling prophecy ...
... Who's in charge in this new global economy?
To a large extent, no one is. This is one of the problems that there is no
regulation anymore of international capital flow. At the same time, it's
impossible to live without some form of regulation. Since you can't have it on
a national scale or it's very difficult to have it at a national scale, you
have to have some form of regional or international regulation.
There simply hasn't been the leadership, there hasn't been the vision to build
that new type of international regulation of capital flows in this new era.
There hasn't been a Bretton Woods. There hasn't been, consequently, an
international consensus hammered out by the leading economies about how those
international flows are going to be regulated.
It's not true that it can't be done. It can be done. It was done then and it
can be done again. It's not that big of a problem. It's just a question of the
largest economies in the world deciding to do it and to establish the
regulations that have to be followed. But for the moment they don't want to,
largely because the United States doesn't believe in it.
And as long as the United States doesn't believe in it, it's pretty tough.
It can't happen.
It can't happen.
So does that leave the markets in charge?
No, because the markets aren't an agency. There's no one there. The markets
don't exist in that sense. That is, there's no one. George Soros doesn't decide
he's going to attack the real [currency] and consequently if you sit down and
talk with him and convince him that he shouldn't, he won't. That's not the way
it works. There's no one in charge. The markets as a subject or as an agency
don't exist. They're just trends and processes and movements, which can have
these devastating effects, which we've now seen ... The fund people love to say
that, "If you have your fundamentals right, you're in good shape." It's not
true. The markets' speculative flows attack people with good fundamentals, bad
fundamentals, no fundamentals. That's not the way that works.
How is the U.S. increasingly viewed?
Well, I think it depends, in many ways. Obviously, it's still the country that
puts together the bailouts. So you can't be too upset at them, because these
are the guys who save you when you're in trouble. It's also the country that is
seen as the only one that could put together a new consensus for some form of
And finally, it's also seen as a country where that leadership doesn't exist
because American ideology gets in the way. Americans don't believe in
regulations. So how are they going to build a consensus for regulation? They
would be the first ones to be against that consensus. And this is a real
problem, because you can't do anything without the United States. But the way
things are, you can't do anything with the United States.
Are we looked at as a bully?
I don't think so much as a bully as rather a combination of altruism for
bailing people out, selfishness because of having your own ideology about how
the world works, and a certain amount of naiveté and ignorance, of not
understanding the way the world really works ...