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dr. rudi dornbusch

dr. rudi dornbusch
Dr. Rudi Dornbusch is a professor at M.I.T. He is a free market economy specialist and has been an advisor to Carlos Salinas.
WHAT DO YOU THINK CARLOS SALINAS'S STRATEGY WAS?

Well, I think that in Mexico, under his predecessor at the time when he was in charge of the planning ministry, and during his own term, the central preoccupation was to modernize Mexico. Mexico was a totally antique country that had gotten stuck with a lower standard of living, and very, very inefficient government and he was watching around the world, particularly Asia, these kids at Japanese schools. In Asia, countries were having high growth rates and moving ahead fast. So the modernization of Mexico is a very delicate thing because any brick you pull out, the rest shakes.

So it was a very, very ambitious time, from privatization to NAFTA, to stabilization, to deregulation of a lot of monopolies, it was a very, very striking, surprising, and ambitious agenda that we sort of easily forget because we see too many sleaze pieces, and not the agenda of someone who is waiting in the sleaze because he's taking privileges away left, right, and center. So it was a very, very ambitious internationalist agenda.

THE SORT OF AGENDA THAT WOULD HAVE GARNERED A LOT OF ENEMIES WITHIN THE POLITICAL SYSTEM?

Well, certainly trade was part of the old Mexico, and protected in its use of power, and certainly he wouldn't have been popular with them. I think they were on the defensive, he was a very decisive man but surely that would not have been popular with them, no, definitely not. The north, the business community, would have liked it, they would see it as a mixed blessing because they were losing a lot of privilege but also opportunity was coming. The priests certainly wouldn't have liked it.

DO YOU THINK SOME OF THE THINGS THAT HAVE BEFALLEN THE FAMILY SINCE ARE A RESULT OF THE ENEMIES?

Oh, I have no idea. Some of it as reported seem so bizarre that who knows who could conspire to do it.

AT ONE POINT YOU WERE A CRITIC OF WHAT WAS HAPPENING IN MEXICO, PARTICULARLY ON THE VALUE OF THE PESO. WHAT MADE YOU CRY OUT SO STRONGLY ON THAT?

Well, I'm certainly critical of the currency policy of Salinas's administration. Their big mistake was to gamble on inflation reduction with a strong peso, expecting that in the end, external capital would be there to pay for it, and that the question of continuity would never arise. But in Mexico, everyone fears the peso will collapse and that happened exactly once again. I think that was predictable. Others would say no, that it was an accident, and my guess is that it's predictable and that was my criticism.

IN MORE LAYMAN'S TERMS, COULD YOU EXPLAIN WHAT THE MISTAKE WAS?

Mexico came out of a period of high inflation. The administration decided inflation reduction was very important and used everything they had to bring inflation down including in particular, to hold the peso relative to the dollar, so that import rises would rise little and as a result, that would start reducing the domestic rate of inflation. And that mechanism, Pinochet had used that mechanism Salinas was using. Does it work? Yes, wonderfully with one little problem. It overvalues the currency. When your inflation's down the currency is way up on competitive, a huge current account deficit, a huge trade deficit, no growth because imports are so cheap and why produce at home? That host of issues was clearly predictable in `93 and still Salinas accepted that bet. And it's hard to see why. He should have seen the Chilean president, he should have seen the vulnerability that Mexico was getting as a result. One has to ask whether his staff, his economists told him that NAFTA would produce a lot of direct investment and jobs and that this overvaluation in a sense was less harmful, or whether it was a calculated risk and he just lost them. But he certainly did make a bet and he lost it.

DID YOU EVER TALK TO HIM ABOUT THE BET?

Yes, I talked to him in `93 and showed him diagrams of what had happened in Chile and how Mexico was exactly on the same course and he understood that exactly the same was going on and thought he was going to devalue later, after the summer, and that never happened. If it had happened, I think Mexico today would look much, much better, and his influence when he was very, very strong, and devaluation would have been a minor issue and he could have gone on with growth and happiness. So I don't know why it didn't happen and I think it was a big mistake.

HOW WOULD YOU CHARACTERIZE THE SIZE OF THAT MISTAKE.

Well, it was like leasing to borrowing. Salinas for Mexico was a big time gamble and fantastically expensive. Of course many people would argue that any devaluation any time would have been expensive but that is not correct because in `94, Mexico shortened its debt, it dollarized its debt, so the mega meltdown in Mexico has much to do with trying to live with the exchange rate in 194 and keep the money coming. All of that would not have been necessary had there been a devaluation in `93. So even if it had been messy, it would have been far, far less messy than what ultimately happened. And Salinas was very good at writing the script. Things weren't messy when he was in charge, so I believe he could have done a nice and clean devaluation.

AND WHEN THE DEVALUATING CAME IN `95 AND THE ECONOMIC CRISIS THAT FOLLOWED, HOW BIG WAS THAT IN GLOBAL TERMS?

Well, I think it was an extraordinary situation, normally devaluation doesn't become a complete catastrophe. If you look in `92 when Italy and Britain devalued, there were moments of sweet liberation. Afterwards, the central banks think they had done it deliberately, so nice, it was a joy and when Mexico had no joy, the whole place went to pieces because the loss of confidence was extreme. People had been told for one year no, no, no we will never do that, they had dollarized the debt. The maturity of the debt was no surprise -- it was just a meltdown. And it has given devaluation a terrible name. So if Thailand had a problem, they say no, no, we will not devalue, we will not do a Mexico.

AND THERE IS NO DOUBT ALSO IN YOUR MIND THAT ULTIMATELY SALINAS IS CULPABLE FOR THIS?

Oh yes. In Mexico, there was a very, very clear command structure. Salinas made the policy choices, he wrote the script, and his ministers were the puppets. There is no doubt in the world about that. None. ........They had beengiven an unsustainable regime, a totally mismanaged public debt and with those balls in the air, there was no chance other than that they would crash.

YOU SAY IT WAS PREDICTABLE AND YOU DID SEE IT COMING. BUT WHY DID WALL STREET NOT SEE IT COMING?

Well, when it happened, it's a wide open question. An overvalued currency isn't tantamount to a crisis. The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought, and that's sort of exactly the Mexican story. It took forever and then it took a night. So to say it will happen is not enough. You really have to know when and the markets are comfortable with that. They're very liquid, they understand, they have great assurances and so they were hanging in, they were paid well, being paid well to be there. And not to be skeptical and not to be doubtful.

WAS THERE ALSO A SORT OF EUPHORIC SENSE ABOUT SALINAS AND THE MARKET?

No, not by the time you were in the devaluation. You had Colosio's assassinated, you had the campaigning, Salinas was out totally. So you might say surprise is how long it lasted, that it went right into the next administration. By that time, Salinas had no influence.

BUT PRIOR TO THAT, LIKE FROM `88 TO `90, EARLY `94?

Well, NAFTA was a good story, NAFTA was an excellent story and Salinas ran a very, very good policy and his ministers were superb, they were the best you could imagine in persuading people that there was a concept of policy, and that they would follow a given strategy. So if you ever wanted to be fooled, that was a good place to be fooled.

AND WHAT ABOUT WASHINGTON, THE ADMINISTRATION?

Well, the administration doesn't pay attention to what happened in Mexico except when it's too late. An overvalued currency is a discussion, but as long as the money goes in, why should you believe that tomorrow morning it won't come out. So the administration totally screwed up, there's no question. In part because the secretary of the treasury then thought he understood Mexico, and it's totally clear that he didn't. This was before Rubin.

WHAT SORT OF MAN IS CARLOS SALINAS IN YOUR OPINION?

Well, I think it's fair to say that he's superbly intelligent, that he's a strategist, that he keeps thinking about concepts and how to implement them both. He's a very, very strong manager. If he ran a corporation, you'd buy the stock. And he ran Mexico just like that and has moved it an enormous distance towards a more open and a far more competitive economy. And I think he even helped make the government more accountable. There are so many questions of exactly where did his information stop and did he know of this and that minister. And if you look at the minister of finance, who surely had a world of opportunity to be sleazy, he is the cleanest man afterwards, totally clean.

So there is a lot to Salinas, it's not a simple story of someone who was running his fleet out. And there's no question that he is a brilliant man. And if Mexico does well in ten years from now, if it has an economy that has good growth, and is strongly integrated with the U.S., you'll have to go back and give him a lot of the credit, however weird his last moments in Mexico were.

IS HE AMBITIOUS?

Oh, yes. Unlimited you would say, he was very, very ambitious and wouldn't let anyone screw up the script. No question. When he was privatizing there was a script on how to do it, he used the presence of the pope to diffuse the political issue, the previous owners of the banks were told not to make silly remarks. So there was choreography around how to do things. Nobody was going to make him fail, no question.

...... He's a superb manager, there's no question. And I think anyone who has dealt with him in that quality, they came away impressed. Certainly anyone in the U.S. business community thought there was someone there who knew what to do with Mexico, to create a bridge, and to get prosperity coming. And so did the people. He was a very popular president and not because he created a mega boom, there wasn't a mega boom, but there was a view of Mexico that people thought was very encouraging.

WHERE IS THE MEXICAN ECONOMY TODAY?

I would have to say that they have come out of the meltdown rather better than virtually anyone would have thought. In April '95, you couldn't get a dime for Mexico. And we've had recovery from that recession, with very substantial capital inflows. The stock market in Mexico is considerably up, and U.S. companies say well, we've seen a meltdown, it doesn't really scare us and we're investing. Whether you look at General Electric or General Motors or any number of companies that have major projects in Mexico, they say that's part of our immediate neighborhood and we're going to go there.

So a very large, very large direct investment in portfolio money, yes, Mexico's a wonderful parking lot, we're not worried about politics because we're following it. Worried about labor problems, well, we've heard about them, but we're not really worried. So nobody's worried. Mexico looks pretty good. Is that the last word, I have to say that at this point in the six year term, they always look good. And they looked good well into `94 and then nobody wanted to touch them, so there may be a little bit too much optimism. But I think there is a good chance that Mexico will make it, and that the direct investment increasingly has created a more transparent business environment. That people are insistent on opening the political process creates more accountability and that is a bit of support for a well functioning economy. So it isn't over but it is a good story and the recovery has been successful. There's no question of that.

IT'S TRULY A REMARKABLE POLITICAL STORY BECAUSE

HERE YOU HAVE, I THINK YOU WOULD SAY, A VISIONARY LEADER IN SALINAS TRYING TO COUPLE HIS COUNTRY TO NORTH AMERICA, AND YET LOOK AT THE DISARRAY THAT NOW SURROUNDS HIS LEGACY.

Well, I think nothing worked out the way he had hoped. Even in terms of timetables, the NAFTA negotiation really ran a year late and I think in large part because on the Mexican side, the team wasn't able to do the negotiation fast enough, was inexperienced, had too much consultation and too much interference. So NAFTA went a year late and that's where a lot of stuff went wrong. If NAFTA had been successful, then I think one would have had earlier stable capital flows, the short term borrowing wouldn't have happened, and devaluation might have been easier after NAFTA than while the process was going on. So I think there are a few reasons in that direction to say he was thrown off his timetable. And then of course he had never planned the meltdown. Both the effect and the size of the collapse just totally changed the view that we are forced to take of him, but that's an accident. I think that in terms of his thinking, it was an accident rather than a real possibility that he was taking.

DID HE MAKE ANY OTHER MISTAKES?

I think the central mistake is in the exchange rate management. I don't know how much he was cognizant of corruption issues, what he knew about his brother. And what he could do about his brother, I have no idea of the extent of that. Of course, that could be an area that we would call a mistake. But I don't know the facts, so I can't pass judgment.

Q:

Yeah, but I think anyone who goes to Harvard Square and holds up a microphone will hear ten thousand stories about Mexican corruption, whether it be Hank or someone else, I mean it's for everybody, all of Mexico, it's a little bit hard to know who is giving and taking from whom, and whether most of it goes towards a right or wrong. You would say that in any other place, people would pay maximum attention to appearance, and normally that would have been a Salinas strategy. So it's a bit surprising that people who had, at least in Cambridge and Harvard Square, reputations for corruption were serving as ministers. I think that one can surely state that that was incongruent with Salinas's style of trying to look efficient and clean. Why have someone like that in his cabinet. He's still running around in Mexico, so you would have to say it seems to be endemic to Mexico, not only a problem of the Salinas administration.

Q: HOW INDEBTED IS THE COUNTRY TODAY?

Mexico has very little internal debt. They had a terribly short dated, short maturity debt and it was dollarized, so there were overnight complications that were huge. But the total level of debt relative to GNP is actually very, very moderate. It's far lower than any other OECD country, not the lowest of any developing country but it's very, very low. So Mexico is not in trouble there. Salinas actually ran a very prudent fiscal policy and that meant that unlike previous governments he never got massively indebted. And that means that over time, just rolling the debt and borrowing the interest, Mexico won't have trouble.

So the debt is not a big deal. It seemed in `95, in the middle of the meltdown, to be large, but that was the maturity of the debt that every day 20% of the whole public debt was at maturity but it was just because it was so short-dated, and that of course is a gamble. To structure your debt so that it will run out in the next thirty days, people don't do that with their mortgages for their houses and you shouldn't do that for a country either. But the total is insignificant.

WHAT ABOUT THE PROBLEM OF TRYING TO CREATE A NEW VIBRANT ECONOMY IN A POLITICAL SYSTEM THAT STILL IS LABORING UNDER CORRUPTION?

I don't think that corruption is really so dominant an issue. There's two kinds of corruption. One is the style that comes in any emerging economy where you had a big government, the government isn't totally gone, so there is a lot of discretion, and whenever someone has discretion, someone else will pay them to exercise it. In the US, we don't have so much corruption because the government can't really make a lot of decisions.

.......The other part is drug related, which is very big, which is really the counterpart of the unwillingness of the U.S. to face the problem here. So we throw it to them and say control the supply side. Since the rewards are mega large, there is no amazement that there is corruption. There was in Columbia, there is in Mexico, there is starting to be in Brazil. We mustn't be surprised about that and anyone who can say here's five million dollars, let me run, it takes a strongly convinced official on the other side to say no. Five million is real money. And that's what happens when they try and catch someone, they're willing to pay very, very large amounts to go and have a coffee.

.........It's really true that we should legalize drugs. Then we won't export the problem to Mexico. That's what George Schultz says, former secretary of state. Gary Becker, a Nobel laureate. So it's really the counterpart of the unwillingness of the U.S. to face the drug problem more seriously. As a result it pays and in Mexico the rewards are collected and it's very, very hard to stop the supply side. So I don't blame Mexico in any way or Mexican society for that. We've had it during prohibition in Chicago just the same way Mexico has it today. It's absolutely no different between Chicago during prohibition and Mexico today in that drug area.

BUT CAN THE ECONOMY AND THE POLITICAL REFORMS SURVIVE IT?

Oh yes, I think that people want a more open society, people want accountability. And Zedillo will create accountability here. He runs a very, very transparent administration. He gives the courts a lot of room, he's taken it away from his own power. I think that process is underway. But any time you come to drugs, there will be surprises, no question.

BUT WHAT ABOUT THE GROWING EVIDENCE CONCERNING RAUL'S -AND OTHERS' - CORRUPTION, AND TIES TO DRUG TRAFFICKERS?

Well, we don't really know what the facts are. Did Bill Clinton know how the Lincoln Bedroom was being worked like a cash register. If he knew, that's a big problem. I don't know how much Salinas knew. He ran a very tight organization so it's surprising that all of these escaped him and he never heard about it and this is the first time that it comes to his attention. That leaves you then with the question of why he thought it couldn't become a bigger problem. It's known that he had his brother live outside Mexico so he wouldn't create trouble there. But maybe he didn't cut off his phone line. So it's a surprise, and we don't understand it because it's so incongruent with the rest of his administration.

AND ULTIMATELY MAYBE ONE OF THE SECOND BIG MISTAKES.

If it was an oversight, then it was a big mistake. If it was true ignorance of it happening, that was a big mistake too. But that is difficult to believe. So to me, it's a puzzle. I don't think there is an easy story there. And I certainly don't think that Salinas was in it for the money. That I have not heard from anyone who knew him and I'd be surprised about it. He wanted power and a lot more power afterwards and he wasn't there for nickel and dime payoffs. I would be amazed if that was the story

HE CAME UNDER A LOT OF CRITICISM FOR THE PRIVATIZATION CAMPAIGN--

Yeah, I think that's just nonsense. I think the privatization was a process with maximum transparency, maximum integrity and rich Mexicans that borrowed a lot of money to buy those assets. And they took big risks and they got very rich from it. I don't see any trouble with that. And I'm not aware of corruption in the privatization process.

THE SO-CALLED BILLIONAIRE'S BANQUET.......

......... it's absolutely no different from fund raising in the United States. It's just that you invite fewer people and you make them put larger amounts on the table. But they were billionaires. The U.S. billionaires are more creative in what they do with their money. They buy horses rather than politicians, and I doubt that they got anything for it. He didn't really have to offer them anything. The alternative of the left was enough of a terror for them.

STILL. A $25 MILLION-A-PLATE DINNER?

Yeah, but compare it to Lincoln's Bedroom, also quite a scene, right. So I'm sure that the amount, to these people, is less than what the people paid for sitting in Lincoln's Bedroom. They are very, very wealthy people. So a million is really not a big deal for them.

.....Look, if you want a parallel, what the Russian billionaires paid to keep Yeltsin floating is the same thing. They put really serious money on the table to get him elected and Mexicans did exactly the same, for exactly the same reasons. This was a business focused government, the very best that government money could buy, just like Russia.

ULTIMATELY WHAT IS THE LEGACY OF CARLOS SALINAS?

Well, I think it's too early to say. I think that if Mexico succeeds, he will get a lot of the credit for having done the transformation in Mexico. And if he fails, he'll look bad and people will say that if it hadn't been for the meltdown, Mexico would have had a good chance.

But if it succeeds, then he will deserve some of the credit. And I think that's what many Mexicans would say even if currently the scandals get a little better press than the reforms.



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