SYNOPSIS:

Bill Clinton's visit to Mexico this week undoubtedly will be an awkward affair. Although Congress didn't succeed in forcing him to "decertify" Mexico -- that is, to declare it an enemy in the war against drugs -- in reality, revelations about the involvement of high-level Mexican officials in drug trafficking have deeply strained relations. Many in the U.S. now regard Mexico as little better than a conduit for cocaine. Meanwhile, Mexicans regard themselves as the victims: the USA, they say, is trying to blame others for its own inability to kick the drug habit.

And yet things easily could have been much worse. If Clinton hadn't done the right thing two years ago, he probably wouldn't be going to Mexico at all; indeed, he might well not be president. In early 1995, only months after the crushing GOP congressional victory, a handful of officials persuaded Clinton to support a daring and extremely unpopular policy initiative: the rescue, with a huge loan, of Mexico's collapsing economy. Had that initiative failed, it might well have doomed Clinton's presidency. But it succeeded, and history may record the decision to go ahead with the plan as Clinton's finest hour.

In the early '90s, Mexico was the darling of international investors. Despite the warnings of a few economists, money poured in at the rate of $ 30 billion a year. But during 1994, a series of disturbing events -- a peasant rebellion, the assassination of a presidential candidate and some bad economic statistics -- made the markets increasingly nervous. Finally, in December, the number of fidgety investors reached critical mass, and there was a full-blown run on the Mexican peso. Investors began pulling their money out as blindly as they had put it in.

A key figure in what happened next was Treasury Undersecretary (now Deputy Secretary) Lawrence Summers. Summers reached two conclusions about the crisis: that there was a chance U.S. intervention could make the difference between recovery and catastrophe, and that this chance was worth taking. Summers and colleagues realized that Mexico was plunging into a political-economic death spiral. Investor panic could not be rationalized by the weakness of the economy alone. What was driving money out of Mexico was political fear, the concern that Mexico's recent openness to foreign capital and goods might be reversed, that the country might revert to anti-Americanism. The capital flight inspired by this fear was causing a disastrous business slump. And it was this slump that, in turn, was the most powerful cause of political unrest. In short, there was every prospect that pessimism about Mexico's future could turn into a self-fulfilling prophecy.

The answer was to give Mexico a bit of breathing room: to lend it some money. If all went well, this would, in turn, give private investors a chance to recover their nerve. Of course, if all did not go well, the loan might not be repaid. And then there would be hell to pay.

Why, then, take such a huge risk? Because Mexico is not just any country. Not only does it share a 2,000-mile border with the United States; it happened to be ruled by U.S.-educated technocrats. To have "our guys" preside over an economic collapse would have been a major foreign-policy disaster. There was also the question of protecting private money already invested in Mexico; but it is possible to be too cynical. For what it's worth, my sources say foreign policy, not the interests of Robert Rubin's Wall Street friends, was the decisive concern.

And so one day Rubin and Summers marched into the Oval Office with their plan -- and, incredibly, Clinton agreed. Mexico's economy, after plunging 10% in the first year after the crisis, has recovered most of the lost ground. Private investors are returning, and the Mexican government, years ahead of schedule, has repaid that emergency loan.

So what are the morals of the story? One is that sometimes it pays to listen to experts like Larry Summers -- and Clinton did. The other is that sometimes it actually pays to do the unpopular thing. If Clinton had listened to the polls that winter day, Mexico probably would be a basket case -- and Bob Dole probably would be president.

Originally published, 5.5.97