Looks Good on Paper : Key will be how Zedillo implements his program to restore economic confidence in Mexico

Will Mexican President Ernesto Zedillo’s tough emergency economic plan restore credibility and confidence in the economy? He announced bold moves on Tuesday, but that did not placate critics. His success will depend on how he cuts spending and keeps wages and prices under control. Mexicans will have to make painful sacrifices because, in the short term, the key to reviving their economy is keeping foreign investors happy.

Dealing with the conflicting demands between Mexico’s domestic and international interests will be the next big challenge for the Zedillo government. The overextended Mexican economy was due for some corrective measures, but the unexpected decision to allow the peso’s value to float late last month (after reassuring Wall Street otherwise a few days earlier) sent financial circles into a panic, and that sent the Mexican currency into a free fall. Zedillo made a mistake in trying to devalue the peso on the sly, and now he must administer harsh fiscal medicine to convince investors that Mexico’s economy will be healthy again.

Under the new emergency plan, government spending will be cut to bring down the $28-billion deficit. Inflation may run as high as 15% in the short term--far more than the 4% the government predicted a month ago.

Economic growth is now forecast at 1.5% to 2%, compared to the 4% originally projected. Wage increases will be limited to 7%, but Zedillo conceded that the peso devaluation “will mean a drop in real earnings” for nearly every Mexican.

The test of credibility for Zedillo’s plan will be in its implementation. The president wisely delayed his plan until he was able to negotiate labor and industry support. Now the big question is what government spending will be cut. Are the cuts politically doable without leading to social unrest or labor problems?

The peso’s devaluation also is destabilizing. The currency is now worth 30% less--which means that imported consumer goods or manufactured goods using foreign parts will be more expensive for Mexican consumers. Companies hit hard by the devaluation will cut workers, so unemployment is likely to rise.

But the United States and other allies of Mexico are betting on the emergency plan and are extending an $18-billion line of credit. The funds should help to bolster international confidence and help Mexico redeem short-term bonds.

The emergency stabilization plan should bring spooked foreign investors to understand that Mexico is working conscientiously at pulling itself out of a financial mess. Now comes the test of whether the plan is adequate and well executed enough to allay fears about the Mexican economy.