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Volume 57 / Social Sciences


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

MUCH OF THE RECENT LITERATURE on the Mexican economy focuses on the events and consequences of the disastrous devaluation of December 1994. The economy contracted by seven percent in 1995 and will not recover the ground lost until the end of 1997 at best. Wages will take even longer to recover (item bi 96020227). In a country where one million new workers enter the job market each year, one million jobs were lost. Unofficial estimates suggest open and hidden unemployment combined may amount to one quarter of the work force.

Clearly, the economy that is emerging after two years of shock therapy and a crippling recession is very different from that of Mexico when it joined the North American Free Trade Area in January 1994. Gone are the high expectations (item bi 96012016) that characterized much of the economic writing on the country during the early days of NAFTA membership.

The main objective of economic policy since the devaluation of the currency has been to restore credibility and regain investor confidence. The government therefore has been following an austere fiscal policy and is expected to continue to do so. The IMF-linked austerity program, introduced by President Zedillo and Finance Minister Ortiz in March 1995 as part of a US-led international financial rescue package, has had mixed results. The economy has stabilized: inflation shows signs of improvement and the currency has remained fairly stable within the floating regime established in 1995. However, there are significant questions concerning the success of the austerity program in dealing with the underlying causes of the peso crisis (item bi 97000070).

This pattern of collapse and resurrection is not new to Mexico. Three of the last four presidential election years were followed by an economic crisis – high inflation, recession, and devaluation. In a growing world economy, Mexico's per capita real income (in US dollars) has fallen to about half its 1980 peak. On average, Mexico has less real income today than it did 20 years ago. In June 1997, the government announced a three-year economic plan designed to speed growth, boost investment, and prevent a recurrence of the financial crises which have plagued the country at the end of each six-year government term. Why does Mexico keep dashing hopes? How can the cycle be broken? The works cited in this section provide interpretations that vary across a wide spectrum.

The writings of those on the left (item bi 96010649) emphasize the connection between economic and political factors and maintain that three fundamental facts can be learned from the crisis: 1) the neoliberal economic model has been a failure; 2) Mexico cannot make the necessary decisions within the framework of the current corrupt political system; and 3) the nation is well on its way to losing its identity. In general, these authors stress solutions that redefine the economic strategy to regain an option of real growth and fair income distribution based on the expansion of the internal market; open up the political system (elections, media, disclosure of political party funding) to real competition, establish mechanisms for accountability in the management of public affairs, and create checks and balances between the State powers; and establish a new consensus over the "national interest" which in practical terms, means defining a clearer and more sovereign relationship with the rest of the world.

Here the critical issue in economic terms is to promote a dynamic and growing internal market. This requires that Mexico examine its basic needs: how to feed, clothe, house, and educate its people; and then determine how to insure jobs for all. The left stresses that the government has abandoned the internal market to its fate; basic agricultural production has plummeted and there is no existing industrial policy. The only way to solve the Mexico-US migratory problem is to create jobs within Mexico. The necessary resources will come from the drastic renegotiation of Mexico's foreign debt; a redefinition of the NAFTA agreement, including the temporary suspension of some of its sectorial effects; and a political negotiation with Washington to suspend the effects of the February 1995 accords.

The centrist view is a bit harder to summarize. Here writers give varying degrees of emphasis to government incompetence, corruption, and the authorities' mistaken assumptions concerning the implications of globalization (item bi 97000547). A common theme is that the Mexican economic reforms followed "the Washington consensus" – that is, policy goals of fiscal discipline, tax reform, financial liberalization, a single competitive exchange rate, liberalization of trade and foreign investment, privatization, and deregulation. A boom in foreign portfolio investment, induced mainly by transient economic conditions abroad, initially helped, but eventually undermined Mexican reforms. Portfolio flows – investment in Mexican stocks and bonds – initially masked the gravity of Mexico's current account deficit. Then, even when it should have been evident that the country was importing more than was prudent and that its currency was overvalued, foreign investors continued to pump dollars into the economy, exacerbating the peso's overvaluation, stimulating imports, and constraining the government's policy options.

Centrist writings point out that the Mexican government was not a passive spectator in the unfolding drama, rather it was the central actor performing a tightly scripted role that greatly constrained its flexibility. The government needed to rid the economy of its legacy of instability and inefficiency; domestic political restrictions made that task more difficult, while powerful and volatile external forces clouded the government's vision and compromised its policies.

The writings of those on the right are less numerous and often confined to the editorial pages of the conservative press and business publications (item bi 96010655). Among these works, the emphasis is usually on the incompleteness of the economic reform process and the reform trap into which the country seems to have fallen. These authors contend that in Mexico political leaders don't engage as deeply as is really needed into radical reforms, thus the reforms are short-sighted, limited by political correctness and ambiguous language. Suggested reforms include restructuring the tax system to create greater investment incentives; reforming monetary policy through,for example, the creation of a currency board system; reducing public spending; completing the deregulation process, including deregulation of strategic industries such as oil and energy (necessary to generate net reserves for the currency board); and, finally, social reforms, such as privatizing the social security system.

More narrowly focused writings concentrate on aspects of the peso crisis, such as the increased instability brought about by volatile capital flows (item bi 95021600). Also of concern is the marked shift in patterns of ownership and control. Investment-starved Mexican companies are increasingly accepting "strategic foreign partners" - the standard euphemism for selling out to a multinational. These arrangements have brought hundreds of millions of dollars into the country, making Mexico a more open economy today than at any previous time in its history. Such openness, however, makes the country vulnerable to external shocks (item bi 97000069).

The most dramatic change has taken place in Mexico's external sector. In fewer than five years, exports have doubled. Most of this growth has taken place since the peso devaluation as manufacturers sought foreign buyers for goods they could no longer sell at home. By 1996 there were approximately 31,000 Mexican companies directly involved in export activities compared with 15,000 in 1993. In short, Mexico's economic recovery has been driven by the export sector. Unfortunately, this recovery has been very uneven.

The peso crisis accentuated the divide between Mexico's modern export-oriented economy, which now accounts for almost 30 percent of the national output, and the deeply depressed local economy. The latter contracted by 15 percent during the 1995 recession, and only recovered an estimated one percent of lost output in 1996.

Many writers are worried about the poor linkages between the dynamic export sector and the backward local economy (item bi 96020087). This situation makes Mexico vulnerable since it has only a limited ability to substitute imports. Export industries are overdependent on imported inputs, while imports of consumer goods tend to surge as soon as there is a modest recovery in real income.

Rapid increases in imports are due, in part, to the poor management and low productivity that plague the country's small- and medium-sized companies. Many hope that technical assistance provided by State development banks, universities, and business councils will begin to remedy these shortcomings. The government is trying to persuade large exporters to increase local sourcing, particularly within the maquiladora (in bond) industry on the US border, which draws less than three percent of its inputs from within Mexico.

The country's recent crisis and export boom are also causing regional frictions (item bi 96011995). Southern states such as Chiapas, Oaxaca, and Guerrero have been left behind as the rest of the country races to integrate with the US. The gap between Mexico's industrial north and more backward south has widened with the dollar economy's concentration of resources. Average labor wages in the northern state of Nuevo Leon are three times the level in Chiapas, a state that borders Guatemala. Per capita consumption in Baja California, another northern state, is five times higher than in Oaxaca, which lies 3,000 km. further south. Life expectancy is 20 years higher in northern Mexico than it is in the sough. One quarter of the population is illiterate in southern Mexico, compared with less than six percent of the population on the US border. Not surprisingly, the two guerrilla uprisings that since 1994 have shaken Mexico erupted in Chiapas and Guerrero.

Even within regions, inequalities are growing (items bi 96003571 and bi 95004788): real incomes have lost one-fifth of their purchasing power since the devaluation, while more than 50 percent of urban families subsist on less than two minimum wages - the equivalent of 52 pesos or $6.50 a day.

The squeeze on incomes is unlikely to lead to a surge in wage demands - Mexico's labor movement is too subservient to protest. But growing economic hardships are fueling a smoldering popular anger that some economists fear could explode without warning.

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