Mexico's liberalized economy

Mexico's peso crisis has obviously shaken Mexican officials and foreign investors alike and could damage Mexico's short-term economic prospects. But it does not reflect fundamental flaws in Mexico's newly liberalized economy. Moreover, President Ernesto Zedillo's economic ministers have responded to the challenge competently, avoiding premature efforts to peg a new exchange rate. The markets will eventually stabilize. On Wednesday, the peso rebounded some 15 percent.

Devaluations inspire temporary crises of confidence, and this one is no exception. It is likely to lead to slower growth, faster inflation, and fewer imports from the U.S. A larger gap between U.S. and Mexican wages could tempt more Mexicans to cross the border seeking work.

Opponents of the North American Free Trade Agreement will be tempted to say they told you so. But without NAFTA, these negative consequences might have been even more pronounced. NAFTA also helped bring emergency financial support from the U.S., in the form of $6 billion in credits aimed at shoring up investor confidence. A far larger package is now reportedly being prepared.

It is up to Zedillo, however, to reassure poor Mexicans that after years of waiting for the rewards of economic liberalization to trickle down, they will not be put off again with promises. His task will be all the harder because restoring confidence abroad will require a degree of budgetary austerity at home that could force Zedillo to defer some of his planned new social spending for a while. But he need not retreat from his promises to open up Mexico's political system by disentangling the ruling party from the government and assuring more honest state and local elections.

Traditionally, outgoing Mexican administrations take responsibility for any devaluations during a transition period. But Zedillo's predecessor, Carlos Salinas, gambled that foreign investment would soon recover from the slowdown it experienced amid last year's political troubles and that no devaluation would be necessary. It was reasonable to bet that Mexico needed to woo investors with a period of exchange-rate stability and could afford the cost of growing trade deficits.

But those investors held back, and Zedillo had little choice but to let the peso fall. His finance minister has been criticized for denying the possibility of devaluation until the last moment, but that is standard practice everywhere. Now there are demands that the government intervene to defend a new exchange rate, but that would be premature before the market begins to settle down on its own.

Zedillo, who won the ruling party's presidential nomination only after the original nominee was assassinated, and won the presidency after the fairest vote count in modern Mexican history, is being faulted in some quarters for not being a take- charge leader like his predecessor. Yet he could turn out to be the right man for these times.

He understands the economic imperatives of the moment and is right to resist calls to defend an indefensible fixed peso rate. He also seems to understand the political imperatives just as clearly and has committed his administration to long-overdue political reforms. He should remain confident, disregard panicky advice, and maintain his sensible course.

-- The New York Times