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• • • Forging new ways to finance broad-based production and popular consumption The combination of economic recovery with the democratization of the economy requires a bold overcoming of the constraint imposed by the fact that credit remains rationed, despite the relatively low level that the underlying interest rate has now reached. The effort to overcome credit rationing should be anchored in a commitment to develop, out of the existing public banks, a grassroots network of bank branches able and willing to lend to small and start-up businesses. The development of this network should be accelerated under a fixed timetable, conceived and executed in the same climate of wartime urgency that should mark the remainder of this program. The private-sector banks should be told that the development of this grassroots bank network by the federal government will continue on so long as they fail to do the job themselves. They should be assured of the government's intention to privatize the network as soon as the private banks demonstrate that they are able and willing to undertake the task. Foreign banks should be treated equally with Mexican banks, and their relatively greater interest in retail lending exploited as a prod to their Mexican competitors. The effort to engage the private-sector banks may in turn lead them to pressure the Central Bank to loosen monetary policy in relatively limited forms, such as the lowering of the reserve deposit requirements. The loosening of monetary policy in direct conjunction with the financing of production should be much less troublesome to the monetary authorities than would be pressure to lower interest rates across the broad. In such a context, bank regulation needs to become both more effective and less burdensome. In principle, there is no reason to believe that the extension of bank lending to businesses risks causing a rapid increase in non-performing loans, so long as two crucial conditions are met. The first condition is that credit programs be administered independently and professionally, and under suitable internal and external supervisory procedures. The second condition is that the macroeconomic environment not degenerate ruinously, which is the very risk the entire reactivation program seeks to avoid and reverse. The creation of a national, on-the-ground network of business-oriented lending should not be confused with "mini-credit," in the style of the Grameen Bank. It should be compared, instead, with the successful struggle, in nineteenth-century America, to develop local banks and credit unions. It is an initiative addressed to the millions of Mexicans who want to build a business, not to a Gandhian fringe of artisans. The construction of such a network in Mexico should be accompanied by a concerted effort to develop mortgage-backed home buying, supported by a secondary market in mortgage-based securities. Comparative experience demonstrates that a mass practice of mortgage-based home buying exercises vast and connected effects on the level of saving as well as on the level of activity and employment. The greater organized saving associated with the development of a mass practice of mortgage-based home buying would help diminish Mexico's dependence on foreign capital. In so doing, it would also broaden the room for maneuver in the formulation of a national project. It would come to the rescue of a construction industry that, now depressed, has the potential to stand in the front line of a broad-based economic recovery. And it would help form the constituency of small-property stakeholders on which the future of this entire political and economic program depends. Now that the basic interest rate in Mexico has reached a level compatible with the popularization of mortgages, a second obstacle remains to be overcome: the term structure of finance, that is the ability of financial institutions to organize long-term lending and borrowing, as well as the long-term saving that helps make long-term lending and borrowing possible. The development of the term structure of finance requires, above all, confidence in the ability to master economic uncertainty, to keep it within bounds and to hedge against its destructive consequence. Has Mexico acquired this ability in sufficient measure to dispense with bold action by the government? No one can know unless the government itself tests the limits by taking the initiative. The way by which the government would take the initiative does not require that it develop public mortgage lending facilities, as under the present Infonavit program. Neither, however, should you exclude such direct governmental action. The measure of governmental activism, in this as in all other aspects of this program, should be determined experimentally, rather than on the basis of preconceptions and ideologies. A paramount consideration should be what the government needs to do to do bring the private sector along. The experience of the United States is telling. The mortgage market is central to the American system of long-term saving and investment. It is unthinkable in its present form and vast dimension without two governmental supports: the mortgage interest income tax deduction and the practice of mortgage securitization through the unique, semi-public Fannie Mae and Freddie Mac agencies. Through this system, the federal government effectively guarantees the credit risk in mortgages up to a certain ceiling, thus lowering the price of mortgages and homes and establishing the basis for liquidity in the mortgage market. This liquidity has in turn made possible the development of a secondary market in mortgage-backed securities, practiced on a mass basis by the same semi-public entities, thus contributing to an enormous deepening of the American capital market. Mexico needs some such device, whether or not combined in its initial stages with a broadening of public mortgage lending to low-income home buyers. There is great interest among fund managers in the United States in long-term peso-denominated Mexican securities indexed to inflation. The development of a secondary mortgage market in Mexico, predicated, as it would have to be, on a solution to the problems of the term structure of finance, would enable Mexico to access large pools of American capital. Generalizing the example of agricultural extension Agricultural extension is the name commonly given to decentralized public assistance to farming, especially to family-size farms. It emerged in the nineteenth-century, both in the United States and in some European countries, as part of the effort to develop family farming on the basis of a series of partnerships between the family farmer and the local and national governments. The core of agricultural extension was the combination of direct technical advice and assistance to the farmer with the facilitation of access to information, technology, and markets and the encouragement of networks of cooperative competition among the farmers. The farmers in such networks competed among themselves while pooling some resources and efforts. In no country has the system of agricultural extension been generalized to the non-agricultural economy. (On the other hand, cooperative competition has become a mainstay of some of the most successful regional economies in the world, from Silicon Valley to north central Italy.) Yet such a generalization is precisely what Mexico now needs as part of a program for economic reactivation. I doubt that any of the existing development banks or agencies in Mexico offer a suitable starting point for such a national effort. It may be better to begin from scratch, with a National Development Organization that would emphasize the opening of access to credit, technology, expertise, and markets. Such an agency would have to commandeer for its own use some of the offices and personnel of existing federal establishments throughout the country as well as to build new offices and hire new personnel. Its most important jobs would be: (1) to screen individual workers for jobs and training programs;(2) to administer such programs in cooperation with private business; (3) to identify technologies and practices suitable to the needs and capacities of small and medium-sized enterprises and start-up business; (4) to make such technologies available, especially by joint-ventures both with Mexicans firms and with public or private firms in other parts of the world (e.g. China and India); (5) to identify and help propagate the most successful local business practices; (6) to support the development of cooperative-competitive networks among groups of small and medium-sized businesses; (7) to work with larger export-oriented firms in efforts to identify and overcome obstacles to the deepening of "clusters" or "chains" of enterprises in established capital-intensive sectors of industry; and (8) to fund and direct, preferably in partnership with private firms, a few strategic production initiatives that would make simple technologies available to groups of smaller, less advanced businesses, or that would contribute to the emergence of clusters of world-standard enterprises. Everything except money. Yet rapid economic reactivation is impossible without a massive expansion of access to credit. How is such an expansion to be achieved under the prevailing restraints of a relatively restrictive monetary policy adopted by the Central Bank? And how can it be made fiscally and financially responsible? Expanding credit under conditions of monetary restraint The government does not, and will not, have either the money or the personnel to lend money, prudently and effectively, on the vast scale that is needed for a program of economic reactivation and reorganization like the one I propose here. How can the government gain the most benefit from its limited financial and human resources? How can it use these resources to lay the basis for a deepened and decentralized credit system, one that can learn to dispense with the crutch of public intervention and assistance? The basic solution lies in the relation of public screening and public guarantees to private lending. The government would act in three ways. First, it would work with the private-sector banks to establish an agency that would screen the credit risk small, medium-sized and start-up businesses. It would also establish, together with the private sector banks, a training program to form the personnel needed for the decentralized credit efforts I next describe. The second form of governmental initiative would be the provision of credit enhancement: the award of partial public guarantees of the loans made by the private or public-sector banks to such screened debtors. These guarantees would compensate for the inability of the private borrowers to provide sufficient collateral. To limit moral hazard problems, however, the public guarantees would offer only partial coverage of the credit risks. It is a solution analogous to the Fannie Mae and Freddie Mac mortgage system as well as to the use of IMF or United States Treasury money to guarantee government paper in some of the sovereign-debt restructurings of the recent past. Such a system can work on a large scale only if the private-sector foreign and Mexican banks can be persuaded quickly to expand their retail banking operations. The professional credit screening and the partial public guarantees would compensate for the relative costliness of the small-scale lending, and make possible cost-effective administration of a loan portfolio with what should be (to judge by comparative and historical experience) a relatively low level of nonperformance. In the present Mexican environment, foreign (and especially the Spanish) banks seem the most likely pioneers in this effort to democratize credit under the aegis of a decentralized public-private partnership. If necessary, they should be offered other advantages to induce them to begin the process, in just the way that a foreign investor might be induced to make large capital investments in transport, communication, and energy. And the federal government should encourage the expansion of Mexican banks that could use their comparative advantage of local knowledge and connections to develop a national branch network. The third initiative would be a public-private venture capital system, focused on start-up businesses, particularly those with the potential to replace imports, to add value to exports, or to multiply linkages between the more advanced and the more backward sectors of the production system. Such a venture-capital system should become a private-sector business as soon as possible. It may, however, have to begin as a public enterprise, following the example of the public venture funds with which the European Community has been experimenting. Given the unavoidable limitation of scale, the goal would be to launch a broad range of experiments at the production frontiers of the Mexican economy. Such experiments could help
inspire the transformation of the Mexican economy in two distinct ways. Some of
the experiments would show how advanced economic practices can be made useful to
smaller, relatively uncapitalized businesses. Others would help push Mexican
production beyond the practices of standardization and copying that now
characterize it at all levels.
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