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Volume 55 / Social Sciences


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

MEXICO'S MOST RECENT ECONOMIC CRISIS took many in the international business community by surprise. In early Dec. 1994, the Blue Chip consensus forecast for Mexico's 1995 real Gross Domestic Product growth was 3.8 percent. A few weeks later, on Dec. 20, 1994, the devaluation of the Mexican peso rocked international financial markets. What first appeared to be a minor correction in Mexico's nominal exchange rate quickly developed into a broader financial crunch felt inside and outside Mexico. The Mexican government now expects the country's real GDP to fall about three percent in 1995; some private economists suggest an even greater decline. What caused Mexico's recent economic crisis, and how long will it take the country to recover? Were Mexico's economic reforms reality or illusion? Although it will be some time until in-depth analyses of the current crisis appear in published form, it is apparent that to assess Mexico's future, one must look at the country's past. In this regard, many of the works annotated in this chapter provide the framework and background necessary to understand the significance of the current emergency.

Unlike the period prior to Mexico's 1982 debt crisis, the recent trend in Mexico's economic policies has been toward greater economic integration in the world economy and less reliance on the government. Although Mexico may need several years to regain the investor confidence it lost during the recent economic crisis, the trend in Mexico's policies is more consistent with future low inflation and higher growth than the country's previous closed-market policies.

From the perspective of those previous policies, the country's 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 1980s' most enthusiastic converts to the cause of economic liberalism. For one thing, it opened up large tracts of its economy to foreign competition. Since joining the General Agreement on Tariffs and Trade (GATT) in 1987, Mexico's average tariff on imports has dropped from 45 percent to nine percent. The North American Free Trade Agreement (NAFTA) recently signed with the US and Canada is the continuation of this process, not the start of it. In many industries Mexican businessmen already face the full brunt of foreign competition.

Mexico has also privatized large segments of its economy including the telephone company, the banks, and, more recently, agriculture. It has also liberated most aspects of commercial life, a sharp change from the old system of tight controls. Decision-making in both the private and public sectors is now largely dictated by economic rather than political factors. Deregulation is perhaps the biggest change of all to daily life and popular attitudes. Many of the writings annotated below attempt to assess the consequences of the country's recent policy shifts and dramatic improvements in economic performance in various fields (e.g., agriculture, energy, finance, foreign investment, income distribution, industry, labor, macroeconomics, population, regional development, services, social conditions, trade, and urbanization).

In contrast to the last several HLAS volumes, the economic literature on Mexico has shifted from a preoccupation with the country's debt crisis to that of assessing recent policy initiatives. Of recent developments, the signing of the North American Free Trade Agreement is by far the most important. While NAFTA does have its critics (items bi 93021783, bi 93019355, and bi 93021783), most writers have concluded that both Mexico and the US should benefit from the new arrangement (e.g., items bi 94005585, bi 93024898, bi 94011011, and bi 93005199). First, the American economy is all important to Mexico. Even though Mexico is the US's third largest trade partner after Japan and Canada, bilateral trade has grown at a rate well over twice the average for both countries. Second, NAFTA provides the regulatory framework to encourage both Mexicans and foreign investors to believe that the economic reforms are irreversible. Third, NAFTA will help the country create more jobs thus slowing the flow of workers to the US. Job creation is especially important considering that the Mexican workforce is still expanding by three percent per annum (reflecting a higher population growth rate 15-20 years ago) even though population growth has slowed to just under two percent in recent years (see items bi 94005202 and bi 94011037). Since more than a third of the population is under 15 years of age and more than 80 percent are under 40, Mexico must create more than one million jobs each year to provide employment for its working-age population. Fourth, NAFTA is vital for attracting foreign investment to Mexico (items bi 93001812 and bi 94004244 ). Mexico's savings rate of around 19 percent of Gross Domestic Product (GDP) is simply not enough to finance the five to six percent sustained rate of growth that the country needs to reduce unemployment (item bi 93019250). NAFTA will create an established order in the new relationship with the US and Canada, with a specific timetable for the opening of most key industries.

On the other hand, the country is still nervous that foreign investment is not more diversified: the US accounts for two-thirds and the European Community for 25 percent, with only five percent coming from Japan. Furthermore, two-thirds of direct foreign investment is in manufacturing and 20 percent in tourism. On a brighter note, the border's famous maquiladoras - manufacturing plants which assemble components imported (beginning in 1965) tax-free for reexport - are no longer receiving a disproportionate share of foreign investment. Although total sales of maquiladoras reached about $15 billion in 1993, they accounted for only eight percent of total foreign investment. Maquiladoras tend to be labor-intensive operations where the level of capital investment is not large (items bi 93019321, bi 94126422, and bi 92019341). In fact, because much of the maquiladora machinery is leased, it is not even registered as a Mexican asset. The chief attraction of the maquiladoras continues to be their cheap labor: in the automotive industry, for example, American workers still earn eight times more than Mexican workers. The Mexican government now wants to encourage the domestic manufacture of components that are currently imported into the country for use in the maquiladora plants. With NAFTA, the flow of foreign money - into maquiladoras and elsewhere - should spread more rapidly away from the border areas (items bi 94010991).

The fate of the agricultural sector is more indirectly related to NAFTA (item bi 94002075). Here the consequences of dismantling the land tenure system created by the 1910 revolution are critical (item bi 94005268). At the onset of the revolution, 260 families owned 80 percent of Mexican territory, sparking cries for land reform. The result, Article 27 of the Mexican Constitution of 1917 (item bi 94005216), compelled the government to give land to any group of peasants who asked for it. To comply with these requests, the government was given the authority to expropriate land from private owners and form new ejidos or communal-ownership arrangements. The constitutional drafters were so anxious to avoid the reappearance of large land-holdings that the peasants who owned these ejidos could not sell the land nor rent it, nor even pledge it as collateral for loans. The core of the ejido system remained intact until 1991. The consequences of this attachment to collectivist dogma have become only too apparent (item bi 93004092). Agriculture accounted for only seven percent of GDP in the early 1990s, yet 23 percent of economically active Mexicans work in agriculture and 30 percent of the population live in rural areas. Out of the 40 million Mexicans considered living in poverty, 70 percent reside in the countryside. Agricultural GDP per head is now lower than it was in 1965 and the country is importing food, with the trade balance in food turning negative in 1989 for the first time in years. Mexico is now a net importer of maize and wheat and is the world's largest importer of milk powder.

In a dramatic departure from past policies, agriculture is to join the market economy as part of the reforms undertaken by President Salinas. Three new provisions will make this possible: 1) the constitutional right to be granted land by the State has been eliminated; 2) well-defined rights of private ownership of property have been reestablished; and 3) the ejido system has been reformed so that land can once again be rented, sold, or pledged for the purpose of borrowing money (though only to someone inside the ejido unless the majority of the community agrees). Yet the changes to agriculture are even bigger than those implied above. For instance, one must also consider the impact of NAFTA. Under the terms of the treaty, tariffs on the most sensitive agricultural goods such as maize, beans, and powdered milk will be reduced to zero over the next 15 years, and tariffs and other barriers for seasonal fruits and vegetables will be phased out. Mexico will also remove 82 percent of the tariffs on American agricultural goods, and America will cut 95 percent of the tariffs on Mexican goods within ten years. The Mexican government knows that it cannot simply switch to international prices without wiping out, for example, more then 90 percent of the country's 2.4 million corn (maize) producers, whose families make up almost half of the rural population. The government is therefore committed to channeling welfare payments to these groups - but, as much as possible, in a way that will not encourage uneconomic production (item bi 93004102). Support programs, however, do not solve the problem of what will happen to most of the current subsistence farmers, though solidarity projects may provide work for some of them. The only viable long-term solution is more industrialization and the development of a larger services industry.

In sum, although NAFTA will cause Mexico considerable short-term pain it will be worth the cost for it represents the country's best hope for delivering a large number of its citizens out of extreme poverty. Politically, agricultural change will also compel the government to develop a more democratic system; electoral tampering is far easier in the countryside, and in the future more of the voters will be found in cities. Successful agricultural reform is the key to Mexico's modernization overall. To have nearly one third of the population living in rural areas is simply not sustainable if the country is to live up to its aspirations.

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