In fact Mexico is now the most impressive success story in Latin America today (excepting Chile, which has been in a league of its own for 10 years). After decades of economic crises Mexico now combines high growth rates–7 percent last year–with low inflation. Its current-account deficit is an admirable 3 percent of GDP. Last year Moody’s, the credit-risk agency, gave Mexico an investment-grade rating for the first time in its history. This year Standard and Poor’s is likely to follow suit. NAFTA is working. And most important, Mexico’s transition to democracy, which began with Vicente Fox’s election last December, is maturing. The Institutional Revolutionary Party (PRI), after 71 years in power, is peacefully handing over the reins of one institution after another. For Mexico, this change is almost as significant as the fall of the Berlin wall was in Europe.
Of course problems remain. Real wages in Mexico have not moved much. Tensions between the rich north and the poor (and populous) south are growing. Narcotics traffic is getting worse. Many of President Fox’s ambitious reforms may not get implemented (which is why Standard and Poor’s has so far withheld its blessings). But with all these troubles, it is likely that 50 years from today historians will look back on these times and say, this is when Mexico turned the corner.
Citigroup’s announcement has another interesting consequence: Mexico no longer has a nationally owned banking sector. Citigroup and two large Spanish firms now own most of the country’s banks. Surprisingly this has not raised much of an outcry in a country that for decades thrived on nationalist outrage over foreign investment. It’s a sign of a change in the public mood. Good thing, too. Foreign ownership of banks is one of the best things that can happen to countries like Mexico.
Bad banking systems have been the silent killer of emerging-market growth over the past two decades. As these countries expanded, their economies got complex, drawing in large flows of foreign exchange. But their financial systems remained protected, closed, corrupt and incompetent. In Latin America, in 1995-96, Argentina, Brazil and Mexico all faced similar troubles with their banks. The East Asian economic crisis was in no small part a banking crisis. And Japan’s ailing banks remain at the heart of its continuing weakness. The cost to these countries, in terms of bailouts or lost growth, has been in the hundreds of billions of dollars. If Japan had mended its banking problems with the speed that America reorganized its savings-and-loan industry, it would not have lost 10 years of growth.
It’s not that foreigners are any better at lending than locals. Western banks have their problems (including Citibank, which was in deep trouble only a decade ago). In fact the record of the Spanish multinationals in Latin America is poor. But large international banks are usually strong, well capitalized and solvent. Think of it this way: if things went badly with Banacci in the past, Mexican taxpayers would suffer because they would pay for the inevitable bailout. If they go badly now, Citigroup’s shareholders will suffer. (With a $260 billion market capitalization, it can take the hit.)
The broader reason to softly cheer this trend is that Western banks bring with them internationally accepted standards of accounting–probably the most important change needed in most emerging markets today. Also, they tend to have a heightened concern about transparency and honesty. Not always. Citigroup has to live down its own murky role in helping launder money for Raul Salinas, but on the whole it and other Western banks are attentive to the law because they worry about their brand, their shareholders and their home-country regulators and courts.
Once upon a time countries believed that domestic ownership of key industries was a crucial symbol of national independence. In most cases they have realized that this attitude is both expensive and often a cover for cronyism. Steel, automobiles, telephones and airlines are all now getting ownership that is efficient and responsible, whatever its nationality. Banks should be next, not simply in middle-size countries like Mexico but large ones like India and China. It is not a panacea but clearly a step in the right direction. Otherwise emerging-market economies will keep going through the cycle of crises and bailouts that have been such a sorry feature of their recent past.
