Over the past few years, an increasing number of international observers have been closely watching President Carlos Salinas de Gortari completely revamp Mexico's economic system.

Despite the miraculous economic transformation -- which has been widely cited as a model for developing countries seeking to modernize their economies and integrate them successfully into the international marketplace -- some concerns have recently been voiced as to whether Mexico will be able to surmount its complex short-term problems relating to the economic slowdown and current account deficit.

This situation has also cast some doubts on the country's ability to maintain a stable exchange rate for the peso, which is particularly troubling for Mexico as the North American Free Trade Agreement awaits ratification by Congress.

A Solid Foundation

Any objective assessment of these concerns, however, can't be made without analyzing the overall economic strategy Mexico has successfully put in place.

To start, consider the following achievements: The Mexican government currently runs a fiscal surplus equivalent to 0.5% of GDP, even after the extraordinary revenues from privatization are excluded; total public debt is well below 30% of GDP, a ratio lower than that of the OECD country; and exports have been substantially diversified, as illustrated by the fact that non-oil exports, which ten years ago represented only 22% of total external sales, now account for 70% of the total.

These are just some of the bottom line results of an economic program characterized by fiscal discipline, substantial liberalization of trade and investment flows, and deregulation of markets.

Given the solid macroeconomic foundations that Mexico has laid, analysts agree that the medium and long-term prospects for the country are quite promising. Some of the concerns, however, must be addressed.

Factors in the Slowdown

The recent slowdown in economic growth is only a natural result of Mexico's determination to build upon the progress made in recent years in bringing inflation down to single-digit levels.

In December, the government set an inflation target of 7% for 1993. The results achieved thus far suggest that this target is feasible, although at the cost of slower short-term growth.

A second factor behind the relatively weak economic output this year is all the industrial restructuring going on.

Mexico's liberalized trade policies are forcing many industries to undertake major adjustments to make themselves internationally competitive. Progress is being made on this front.

For example, over the last five years labor productivity in the manufacturing sector has grown at annual rate of 5%. And since the economy is increasingly export-oriented, these developments lay the foundations of a rapid recovery once growth is rekindled in the United States and other leading industrial nations.

Reinforcing Trends

The uncertainties about the timely implementation of the trade pact and their possible effects should also be addressed in the context of the economic policy program that Mexico has adopted.

To appreciate this, one must bear in mind -- even before the trade agreement has been ratified -- that today Mexico already has a very open economy, with many of its firms competing successfully in world markets; sizable amounts of foreign capital have been invested in Mexico, a process that started well ahead of the time when the trade agreement was first seen as a possibility, and the standard of living is improving for large sectors of Mexican society.

Average real wages in manufacturing have increased by almost 30% over the last four and a half years.

The trade accord will only reinforce trends that are now well under way in the Mexican economy. Once the agreement is finally in place, the bulk of its effects will be long term in nature as tariffs are gradually lowered and Mexican exports gain steady access to the U.S. and Canadian markets.

Program Shows Consistency

Thus, Mexico's short-term economic performance is very much independent of the date when the pact is implemented. If anything, its timely ratification should only be seen as a source of additional certainty about the continuity of existing economic policies.

In this sense, the trade agreement is properly seen as the proverbial "frosting on the cake," not the cake itself.

Consistency has been a distinctive feature of the Mexican economic program, with the stability of the exchange rate playing a central role in bringing down inflation.

The question in the mind of some observers today, however, is whether such stability can be maintained.

In this regard, the following must be considered. Unlike other countries, the current account deficit that Mexico is running is unique in the sense that it is explained entirely by private-sector behavior.

It doesn't reflect a government budget deficit, but the fact that private investment is being financed to an important extent by external savings. These funds, consequently, are going to profitable private projects that in time will pay off.

Moreover, spontaneous capital inflows have not only financed the current account deficit, but have enabled the country to steadily build up its foreign exchange reserves.

Such reserves, in fact, now stand at unprecedented levels and are still rising.

Capital Inflow Drives Deficit

These two points underscore the fact that the current account deficit is driven by the size of capital inflows, not the other way around. Should the latter lose momentum, the former will be reduced accordingly.

And finally, non-oil exports will continue to expand at healthy, double-digit rates, at a time when growth in the world economy is sluggish.

That is a clear sign that Mexican exporters remain competitive. Foreign sales are also growing faster than imports, a fact that has led analysts to expect that the current account deficit this year could be below the 1992 figure.

Room to Maneuver

On this basis, it's safe to say that the current exchange rate policy is not only sustainable, but offers ample maneuvering space for the central bank. It is to be expected that the peso exchange rate will retain its role as nominal anchor for price and wage levels.

Stability in these key variables and a dynamic flow of private investment capital are, in turn, providing a solid foundation for stable and sustained growth in Mexico.

So the bottom line should be clear: the current economic slowdown in Mexico doesn't mean that the successful economic program is losing steam.

It's only a temporary respite in the country;'s decisive bid to transform its economy into a modern, world-class economy.

Mr. Hernandez is chairman of Banco Nacional de Mexico, one of Mexico's major banks.

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