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Volume 53 / Social Sciences


ROBERT E. LOONEY, Professor of National Security Affairs, Naval Postgraduate School

THE MEXICAN ECONOMY HAS BEEN REVITALIZED in recent years. Its recent achievements are impressive both in themselves and for the break with the past which they represent. Mexico, home of what can be regarded as the world's first socialist constitution in 1917, was one of the most enthusiastic converts to the cause of economic liberalism in the 1980s.

Maxfield posits that this swing between policy extremes may reflect a continuing battle between two key policy alliances: the bankers' alliance and the Cárdenas coalition (item bi 92005697). In the long run, the institutional and organizational base of the bankers' alliance was stronger than that of the Cardenistas, and therefore Mexico's long-run economic policy patterns more often reflect the policy preferences of bankers than peasants, laborers, or their national populist state allies.

These patterns aside, the recent liberalization has in large part been forced on the country as a result of the 1982 debt crisis. Ayala and Ruiz Durán (item bi 89003531) point out that at the time of the 1982 debt crisis, Mexico had not developed an internal, self-generating growth process. Growth was unbalanced, since the only dynamic sectors of the economy were consumer durables and other import substitutes. Both agriculture and capital goods production lagged. Thus, rather than providing a mutually reinforcing expansion of demand and supply, Mexico's unbalanced growth led to rising prices and balance-of-payments deficits.

Liberalization has opened up large tracts of the economy to foreign competition. Since joining the General Agreement on Tariffs and Trade (GATT) in 1987, Mexico's average tariffs on imports have dropped from 45 percent to 9 percent. The negotiated - though not yet ratified - North American Free Trade Agreement (NAFTA) with the US and Canada is a continuation of this process, not the start of it. In many industries Mexican businessmen already face the full brunt of foreign competition. However, as Kate demonstrates, for many industries the exposure of domestic industry to foreign competition was delayed considerably as a result of the exchange rate management during the process (item bi 93003892).

NAFTA is controversial with some authors such as Donahue (item bi 93014018) who argue that among those who would suffer most from the agreement are industrial workers in the US. It is possible that the short-run loss of jobs and potential output would take many years to recoup through the expanded volume of trade between the two countries.

On the other hand, writers such as Batres (item bi 93013627) contend that NAFTA will create jobs in the US, not eliminate them; and that beyond trading pluses and minuses, the trade agreement represents a truly strategic opportunity for the participating nations.

More formally, Dornbusch (item bi 93014043) presents several arguments in favor of US-Mexico free trade and its benefits for the US: 1) the Mexican economy is very small relative to the US economy, so any significant increase in Mexican exports (measured on the US scale) would increase labor requirements and wages in Mexico dramatically and thereby eliminate their competitiveness; 2) Although Mexican labor costs are lower than those of the US, low wages also reflect a low level of productivity and in some areas (such as textiles) poor quality of goods; and 3) the US is already a wide open economy - competition from abroad is not a threat but a complete reality. A similar interpretation is presented by Masur (item bi 93015153).

The agreement does present a number of problems for both countries. Reynolds notes that the changing world economic situation will demand much greater flexibility than past responses to labor market conditions have offered (item bi 93015554). Enterprises must be able to adjust more rapidly than ever to the evolution of technology, product and process innovation, and the opening and closing of market niches.

To sense the problems presented to Mexican industry by the new trade agreement, one needs to understand the evolution of this sector. As Haber (item bi 91002850) indicates, the relevant questions are: Why did Mexican industry develop with production oriented almost entirely to the home market and protected behind a wall of government subsidies, tariffs, and import quotas? Similarly, why did oligopolies and monopolies dominate the manufacture of most goods? How did Mexico's political and economic organization combine with exogenous factors related to the "lateness" of Mexican industrialization to form this peculiar industrial structure?

Agriculture has also been touched by the liberalization program. The outcomes are much less certain in this sector. García-Barrios and García Barrios (item bi 91006826) note that semiproletarianization and emigration have led to a local shortage of labor and consequently to the weakening of indigenous institutions that regulate collective action in agriculture. Because these institutions are required to maintain practices that preserve and reinforce ecological equilibrium and resource sustainability in the area, local farming now suffers from chronic environmental degradation and productivity stagnation.

In sum, Mexico has managed to dramatically cut inflation and its main cause, the government deficit. Inflation declined from a peak of 159 percent in 1987 to 12 percent in 1992. The government deficit reached a high of 167 percent of GDP in 1987; yet, in 1992 the government ran a surplus equivalent to 1 percent of GDP, excluding the many billions of dollars raised from privatization, most of which has wisely gone to pay off the national debt. Mexico's outstanding public sector debt is only 39 percent of GDP. The comparative figure for the US is 63 percent and 65 percent for Japan.

Mexico has privatized large segments of its economy, including the telephone company, the banks, and crucially, agriculture. It has also liberated most aspects of commercial life. This deregulatory movement represents the most dramatic change of all to daily life and popular attitudes.

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