COLUMN ONE : NEWS ANALYSIS : The Peso’s Plunge: A Case of <i> Deja Vu</i> : By now, it’s a familiar story. Mexico rises toward world-class development. And then disaster strikes. Why does it keep dashing its own best hopes?

This was supposed to be a time of deliverance for Mexico’s 90 million people--a new period of growth, job creation and rising living standards. Rewards for good behavior were anticipated because cutbacks and reforms in the last six years had reduced inflation from 159% a year to less than 10%.

But the devaluation of the peso three weeks ago dashed those hopes and sentenced Mexicans to yet more years of austerity and hardship, beginning with a shrinking economy that will hurt U.S. exporters along with Mexican workers and farmers. One leading Mexican economist estimates that the nation’s buying power was cut, in an instant, by more than one-fourth.

“We thought we had escaped that syndrome of a devaluation every six years,” a Mexico City businessman said. “But the government took the sacrifices made by so many people in recent years and threw them away.”

Frustratingly, this has all happened before--in the debt crisis of 1982 and almost a dozen other times over the last half-century. Each time, Mexico’s economy was on its way to world-class, developed status. Then a financial crisis erupted, condemning Mexican industry once again to capital starvation and the Mexican people to further years of low-wage hardship.

Why does Mexico keep dashing hopes? And how can the cycle be broken? Must some unthinkable step be taken--such as selling off the oil monopoly that is so entwined with Mexico’s national identity?

The stakes are high--for both Mexico and the United States. Mexico needs to create 1 million jobs a year. Its failure to create those jobs in recent years has fueled both immigration to the United States and the growing rebellion in the Mexican countryside. Don’t think for a moment that the current economic fiasco is unrelated to the armed uprising in the southern state of Chiapas or the urban violence that last year claimed the lives of two leading political figures.

Mexico has repeatedly committed the sin of trying to buy long-term prosperity with short-term loans. Partly, it had no option. As a poor country, Mexico could borrow only on unattractive terms and at high interest.

But also, experts say, such borrowing is politically convenient. Mexico’s way of development creates prosperity for some, especially friends of the governing party, but leaves half a nation still in distressing poverty.

Thus the strategy undertaken by President Ernesto Zedillo in the troubled first days of his regime sounds drearily familiar to students of Mexican history.

“In the 1940s, after the war, there was the beginning of industry, but it was hard to grow fast without provoking inflation because we had no capital from abroad,” recalls Francisco Gil Diaz, deputy governor of Banco de Mexico, the central bank. There were recurring payments crises, he said, as Mexico had trouble paying for the industrial equipment it was importing from the United States.

The solution each time was a halt to growth, a devaluation of the peso and an austerity program to cool inflation. There were three devaluations from 1946 to 1954--a way of making Mexican exports cheaper and more salable.

That was not an unusual policy. Japan, a much more industrially advanced country than Mexico even when it was devastated by war, kept the yen’s value low against other currencies to help exports. (And the United States in recent years has followed an export strategy of keeping the dollar weak against the yen.) Japan, however, kept a tight rein on its domestic economy, with the government encouraging and controlling savings and funneling them to industry. It welcomed foreign investment--but made sure of having its own.

Mexico, a poorer country, relied more on foreign investment to fill the void. But international lenders treated the country like a risky start-up business, keeping loans and investments short-term and demanding high returns.

“When the man from the Girard Trust (a venerable Philadelphia bank) came down, you got your children out to dance for him,” a Mexican businessman said.

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In the late 1950s, Mexico decided to protect its growing companies by keeping out imports and encouraging manufacture at home. This helped develop some skills, but companies producing for a limited market made high-priced goods and did not become efficient. Capital for investment was not generated, and more crises and devaluations followed in the 1970s.

That was when new oil was discovered in Chiapas and the southern Gulf of Mexico. Mexico went on a binge of borrowing against the rising price of oil to finance what looked like an industrial breakthrough. But the price of oil fell in the 1980s, leaving Mexico in a debt crisis that affected the whole world.

It was only in the last six years, under President Carlos Salinas de Gortari, that many debts from that time were paid off or retired and that inflation was curbed.

Yet even under Salinas, Mexico’s dependence on foreign money, much of it nervous and short-term, only deepened. Of more than $80 billion in foreign investment drawn to Mexico in the last three years, only about $15 billion was direct permanent investment in plants and equipment. The rest represented loans to the government or investment in Mexico’s stock market.

The difficulty of keeping such money in the country led the government to offer extremely high interest rates or unwise terms, and that led to crisis. Salinas, who left office a hero on Dec. 1, was derided weeks later as a traitor in the wake of the economic debacle.

“They were trying to finance long-term development with short-term credit, and that always leads to financial cliffhangers and breakdown,” said Rudiger Dornbusch, a Massachusetts Institute of Technology economics professor who taught some of Mexico’s top officials.

In this latest crisis, criticism is being directed not at the foreign investors--pension and mutual funds, largely--but at the government. International borrowings have been excessive and short-term, say both Mexican and foreign economic experts.

Political motives are suggested too--that the borrowings kept the economy rolling to help the Institutional Revolutionary Party (PRI), which has ruled Mexico since 1929, elect not only Zedillo as president but PRI candidates to the national legislature.

Such recriminations aside, the Mexican government’s negligence has dealt a blow to the credit standing of all Latin American countries, damaging the economic prospects of millions of people and undercutting an enormous market for the United States.

And Mexico has played into the hands of those in the United States who see it mainly as a source of troubles--and of illegal immigrants.

So as Mexico goes back to the drawing board once again, how can it do things better?

It can encourage small firms to participate in the world economy through the opening that the North American Free Trade Agreement (NAFTA) gives the country, said Rafael Rangel-Sostmann, president of the Institute of Technology and Higher Education of Monterrey, a university system with 65,000 students and 25 campuses in Mexico.

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Rangel, a mechanical engineer with a doctorate from the University of Wisconsin, has long recognized the need for Mexico to do more to create jobs. His solution would be for the government to encourage small companies to supply larger firms, whether Mexican or foreign. “Mexico is still a country lacking in many services of industrialization; we need to develop the small enterprise,” he said in an interview last year.

More than 95% of the companies in Mexico have fewer than 100 employees--as is the case in the United States. But in Mexico, Rangel points out, small companies don’t have the capital to install modern equipment. Relationships with large firms within the market created by NAFTA would help them get both capital equipment and industrial skills.

But to bring about that happy combination of big and small, foreign and domestic, several changes are needed. One is a lowering of Mexico’s domestic interest rates--which, understandably in a country lacking capital, are extremely high. In effect, small and medium-sized companies have no credit in a system in which the longest business loan is for 90 days at 30% interest, plus fees to the bank.

To remedy that situation, the Ministry of Finance, now led by Guillermo Ortiz, is encouraging foreign banks to set up in Mexico, bring in capital and provide competition for Mexican banks.

The next step will be encouraging more long-term investment in Mexican operations by foreign companies. One American banker with decades of experience in Mexico, Chairman Tom Frost of Cullen/Frost Bankers Inc. in San Antonio, has an idea to bring that about:

“Ortiz should tell the foreign banks, ‘Get your best industrial customers, whether from the States or Germany or Japan, to invest here.’ Let the banks work for their access to the big Mexican market.”

The vision is of an industrial infrastructure building up in Mexico, not through protection but through openness to foreign investment and trade. Would that tend to put Americans out of work? No, because developing Mexican companies would buy their industrial equipment from the United States. And years from now, when they had developed further, they would buy other goods and services. The growth of California did not impoverish Detroit and the industrial Midwest. Rather, it offered them a big customer--as it does still.

That vision is long-term, just like NAFTA, which Dornbusch of MIT describes as a “10-year aid to development in Mexico.”

But in the short term, despite evident gloom, the outlook is not without bright spots. Despite $20 billion in loans coming due in the next few months, there will be no debt crisis this time and therefore no decade-long recession in Mexico’s economy. With at least $18 billion of support pledged by the United States, Canada and most of the world’s wealthy nations, Mexico will probably be able to convert those debts into longer-term obligations, experts say.

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And also on the positive side, Mexico does have abundant oil reserves--possibly 65 billion barrels--that are not being aggressively developed these days.

Right now, in fact, foreign investors are urging Zedillo to sell all or part of the national oil company, Petroleos Mexicanos (Pemex), to private investors--and thus give his government a transfusion of tens of billions of dollars in one dramatic gesture.

Politically, of course, selling Pemex would be intensely difficult. The oil company has been central to Mexico’s sovereignty since 1938, when workers seized oil fields that had been owned by U.S. companies and investors and run by foremen with bullwhips.

However, “there is no reason Pemex couldn’t do joint ventures with foreign companies, which would be glad to put up the capital, as they have in Venezuela and elsewhere,” said Albert Anton Jr. of Carl H. Pforzheimer & Co., a petroleum investment banking firm with knowledge of Mexico.

Indeed, say U.S. and Mexican business people, the difference between the country’s current crisis and earlier ones is that Mexico today has some options and possibilities.

But it also has some obligations in a new world in which Americans who wouldn’t know where to vacation in Mexico are sending some of their retirement money there through mutual fund investments. Mexican governments in the future will have to do better than borrow excessively to support a Mexico City elite while farmers in the mountains of Nayarit endure unpaved roads.

Yes, the challenge is awesome. By the government’s own admission, one in four Mexican workers is underemployed. That’s one reason a country with almost three times the population of California produces only half as much in goods and services.

But that challenge will never truly be met unless Mexico can break its cycle of prosperity delayed and hope denied.

* DIMINISHED HOPES

The optimism that NAFTA spured in Mexico is fading. D1