Thrawn Rickle 57
Third World Economic Aid
© 1994 Williscroft
Christmas 1994 in Mexico could have been better. In less than a week the Mexican peso lost over one third of its value. It went something like this.
With NAFTA in place, trade barriers between Mexico and the United States substantially disappeared. Mexican citizens went on a foreign products buying binge that upset Mexico’s balance of trade to the tune of nearly eight percent of its gross national product. By comparison, at its most negative, the U.S. trade deficit never exceeded about 3.2 percent of the U.S. gross national product.
Assuming the worst, international currency speculators began selling off Mexican pesos, even though the Mexican government had officially pegged the peso to the U.S. dollar. The resulting downward pressure on the peso forced the Mexican government to purchase pesos at the guaranteed value with its foreign currency reserves in order to underwrite the guarantee and maintain the peso’s value. The speculators assumed (correctly as it turned out) that Mexico had insufficient foreign currency reserves to keep this up for more than a few days. Mexican foreign currency reserves fell to dangerously low levels, and on December 20, 1994, the Mexican government was forced to devalue the peso to enable continued shoring up of its currency. Unfortunately, even this devaluation proved insufficient; the peso eventually was allowed to float, finding its own value based upon the whims of the financial marketplace. A shaky stability was finally established only after the direct intervention of the United States Government which guaranteed, in effect, that the Mexican government would continue to meet its currency demand payment obligations against the floating peso.
This devaluation has had far reaching consequences. As NAFTA became a virtual certainty, “emerging country investments” became a code word for large-scale investment in Mexico where bank interest rates had risen to sixteen percent, and return on more risky investments routinely exceeded twenty-five percent. Special funds were set up to take advantage of these exciting returns. Pension funds and other conservative U.S. investors funneled substantial money into the Mexican economy. A significant portion of this tremendous influx of foreign capital worked itself down to the Mexican consumer, who spent it on foreign goods in an unparalleled shopping spree, precipitating the peso’s collapse.
As the peso tumbled, the Mexican stock market tumbled along with it. Institutional investors from the U.S. scrambled to unload their holdings before losses got too high. Little investors followed close behind. This pressure resulted in a meteoric collapse of the entire market. Only the very early sellers escaped with their nearly intact investments. For all others, losses exceeded sixty percent. Then came the second shock, where everybody lost. Since the trades were conducted in pesos, the proceeds of every transaction were further reduced by thirty percent.
Interestingly, while all this was going on, one element of foreign investment in Mexico remained essentially unaffected. Investors who put their funds into infrastructure, underwriting factory machinery, farm equipment, and other “real things,” found their investments solid and safe. If a factory chose to sell a piece of machinery, for example, the number of pesos it would receive from the sale would simply reflect the peso’s new value, since the machine still carried an absolute dollar value on the international market. In effect the infrastructure investor saw the numerical value of an investment increase to compensate for the decreased peso value.
With typical hindsight, it is easy to understand how this happened. It is significantly more difficult to create a climate where the latter part of this Mexican saga happens routinely while avoiding the chaotic convulsions whose consequences will affect so many people for a long time. Throughout a large part of the Third World the United States is viewed as an international bully. Much of the world believes the U.S. forces its will on smaller nations, supports oppressive dictatorships when it suits its purpose, and generally exploits the planet’s smaller nations. When viewed from within the affected countries, the United States appears to have little regard for the effects these actions have on the individual people who scratch out subsistence-level existence while casting an envious eye on an unattainable standard of living enjoyed by average U.S. citizens.
This view is not helped when multinational corporations (which most of the world sees as U.S.-owned or U.S.-controlled) establish plants in Third World countries with the obvious purpose of exploiting cheap labor to increase bottom-line profits that disappear across local borders without so much as an economic ripple being left in their wakes.
There is a way to utilize American economic might that will enhance corporate bottom lines while simultaneously creating a permanent manufacturing economic base for emerging countries and combating America’s international bully image. This concept does not require major rethinking or redesign of current corporate methods, but rather a different focus that will allow realistic goals to be reached via alternative paths. Without expanding markets and profit, business cannot exist. In a world that gives lip service to free market ideas it is even more important to maintain profitability; an unsubsidized unprofitable business doesn’t stand a chance.
This takes us back to the recent Mexican peso crisis. With soft investment failing everywhere, infrastructure investment held its own. The reason is obvious. Like money fully underwritten by gold, machines and other hard equipment with significant lifetimes maintain their value precisely because their value is intrinsic, not subject to the vicissitudes of the marketplace. The first element, therefore, of any realistic long-lasting plan must be a significant investment in infrastructure. Since the typical emerging country does not have this kind of hardware available within its borders, the obvious source must be somewhere else. An American firm will have to spend hard money somewhere to purchase infrastructure hardware that it will install in an emerging country. Economic good sense dictates that this money be spent as close to home as possible. A large investment of this type will pump significant money into whatever local economy is able to supply the hardware.
The next element in this equation is to establish and operate an appropriate plant in the emerging country. Since it is unlikely that the local populace will be able to supply supervisory and management personnel, initially these people will have to be imported from outside. The key here is an absolute understanding with the emerging country government and with the local people that indigenous labor will be employed with the highest possible levels of pay and benefits consistent with ultimate profitability. These levels will still be lower than what would be paid in a more developed country, which increases the incentive to establish the plant in the first place. Furthermore, as soon as it can be made to happen, local supervisors will be put in place, and eventually the operation will be locally managed. To further encourage such an operation, the national government will establish tax incentives to lower the cost of doing businesses. In the past, these governments have exploited such business, seeing them as revenue sources. Within this proposed formula, the wages paid to workers, and eventually to supervisors and management, can be taxed according to the local scheme. At some point a portion of firm profits will also be accessible to taxation, but initially, the focus is establishing a viable permanent manufacturing facility that will eventually be locally managed and operated.
Local government guarantees to maintain an agreed upon climate that enhances the firm’s survivability. Local government guarantees not to nationalize the operation. And here is the next element: this guarantee is assured by the United States’ ability to enforce the contract at a future date. Unlike past operations where U.S. force was perceived as hostile to local interests, in this scenario local interests are being guaranteed by the United States against possible future bully tactics by the locals’ own government.
In effect, through a cooperative arrangement between a large firm, the United States government, the government of an emerging country, and the local people in the specific affected area, a new manufacturing facility can be established that enhances the overall economy of the emerging nation, significantly upgrades the living standards of the local population, and provides a bottom-line incentive and continued profitability to the firm that owns the facility. Among the guarantees would be a pledge, enforceable under United States law in U.S. courts, that all profits beyond an agreed upon amount would stay in the emerging country to be used for further development, and that these profits would come under local management control as soon as possible. While these local managers would still be accountable to their foreign owners, it would be in everybody’s interest to ensure that recognized good business practice would control their actions. It also follows that many of these local managers would own increasing amounts of company stock as they grow in experience and stature with the firm.
The goal remains the same: profitability. The path changes from exploitation to a cooperative venture where, ultimately, every participant wins. And beyond that, the entire world wins — and that is something to shoot for.