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Economics: The Great Science Of Hindsight

TUESDAY, FEB. 7, 1995

No one has come out of the Big Peso Panic covered with glory.

But aside from Mexico’s own leaders, those who have emerged with the most salsa on their faces are the economic pundits who didn’t have the slightest inkling that a major crisis was lurking when it erupted in December.

Many of these sages were at the annual World Economic Forum in Davos, Switzerland, this week commenting gravely to journalists on the ramifications of the mess and upbraiding the American and Mexican governments for their failure to prevent the crisis.

Unfortunately, nobody posed the only question really worth asking to the assorted central bankers, Wall Street wizards and senior economists of a multitude of international organizations who flock to the plush Alpine resort every year around this time - skiing time - to set the world right.

That question is, of course: How come you didn’t see it coming?

The short answer is: They almost never do.

Even David Smith, a well-known British economic analyst, has conceded that “economists have flunked all the big questions of recent years.”

They certainly flunked their Mexican exam.

A look back at press accounts from last year’s Davos festivities shows that not a single expert expressed misgivings about Mexico’s financial stability during the wide-ranging discussions that were held there concerning the then-new North American Free Trade Agreement.

There was plenty of talk about the accord’s impact on “trade flows” and its presumed beneficial influence on so-called emerging markets the world over. But nary a speaker pointed out there might be some risk, given Mexico’s less-than sterling record for financial probity.

None so much as hinted a year ago that NAFTA, by tying Mexico much closer to the United States, and therefore to the international financial big leagues, would inevitably heighten the danger of a fresh outbreak of peso juggling leading to trouble on a world scale.

It didn’t exactly require super-human powers of prophecy to foresee the possibility. After all, serious bouts of financial hanky-panky had struck Mexico as recently as 1981 and 1987. During the 1993 U.S. congressional debate over NAFTA, some political foes warned of a peso devaluation but were ignored.

Nobody, including the economic big hitters of the Bush and Clinton administrations in drafting the agreement, seems to have given this a lot of thought.

The Mexican government pledged to maintain the peso at around 30 cents as part of its new relationship with the United States under NAFTA. However, no iron-clad steps were taken to ensure that it lived up to the bargain.

It has now been revealed that Mexican officials began side-stepping their promise at least eight months ago, stealthily printing pesos in order to expand the domestic economy.

The reason was that a presidential election was coming up and political unrest, which included a peasants’ revolt and a couple of assassinations, was mounting. Domestic credit expansion was aimed at making Mexican voters feel better.

Outgoing President Carlos Salinas kept the lid on as long as he was in office by spending nearly all of the country’s foreign reserves to maintain the peso at an artificially high level, thus making the problem worse in the end.

He acted on the assumption that what happened afterward was not his problem, but his successor’s. It’s a well-known Mexican custom to handle the national finances that way.

President Clinton clearly was ill-served by economic advisers who gave no indication that they had any clue beforehand that big trouble was brewing.

But, then, neither apparently did the legion of financial “consultants” and market gurus around the world who earn their munificent salaries supposedly because of their skill at anticipating crises like this one and heading them off. After this blooper, they should take a wage cut.


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