Download Chapter 22: The Mexican Economy to 1970

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CHAPTER 22: THE BASICS OF MEXICAN INDUSTRIALIZATION: 1950-1970 (Written 1996; Revised 2007)
The Mexican economy has had faces severe economic problems. At various times, there were falling standards of living, high rates
of unemployment and underemployment, high rates of inflation, high interest rates, high foreign debt, widening inequality, and so
forth ----the problems sometimes seemed almost insurmountable. But it was not always this way. Until the mid-1970s, people talked
of a "Mexican Miracle" and considered Mexico as the "Japan of Latin America".
(1) Some Facts about the Growth Record of Mexico to 1995
First, let us examine the record. From 1950 to 1970, Real Gross Domestic Product (GDP) in Mexico grew at a rate of about
6.6% per year--- 3% to 4% per year per capita. (Real GDP is the value of all final goods and services produced in Mexico in the
year adjusted for inflation). Inflation rates were generally in the range of a modest 3% to 4%. By 1970, Mexico was basically selfsufficient in food, steel, petroleum, and most consumer goods. If you examine the table on Page 2, you will see that the growth of
real GDP and real GDP per capita slowed in the mid-l970s. This was the first sign of a serious economic problem for Mexico.
The economic problem was not seen then because Real GDP began to grow rapidly from 1978 to 1981. This is the oil boom.
Beginning in 1982, real GDP growth slowed significantly; it even declined in several years. These are the years of "1a crisis"!
Following resumed growth in the early 1990s, the Mexican economy collapsed in 1995.
The table below shows another important aspect of the Mexican record: Mexico has had one of the world's highest rates of
population growth. In the early 1950s, birth rates exceeded 46 per 1000 population. With death rates of about 16 per 1000
population, the Mexican population grew at about 3% per year. At this rate, the population doubles approximately every 24 years. By
the late 1970s, the birth rate had fallen to about 37 per 1000 population. However, the death rate had also fallen (to about 8 per 1000
population) so that the population was continuing to rise at nearly the same 3% per year. This increase in population absorbed
much of the increase in production. High birth rates have meant that the Mexican population is very young and that a large percent
of the population are dependents (not in the labor force). As of 1980, 44.6% of the Mexican population was under age 15 and only
30.1% of the population was in the labor force.
Yet a third aspect of the Mexican record is shown in the table below: the structure of the Mexican economy has changed
considerably as it developed. Note that there has been a large shift of both production and employment out of agriculture, although
the share of employment in agriculture is still high by the standards of industrial countries. Note also that productivity in agriculture
is quite low (in l980, 32% of employed people produced only 8% of the output). Finally, note that most of those who left
agriculture became employed in services rather than industry (although much of what is called "services" is really disguised
unemployment).
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RATES OF GROWTH
Year
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
GDP
4.2%
8.5%
8.4%
6.1%
5.6%
4.2%
3.4%
8.3%
9.2%
8.3%
8.8%
-0.6%
-4.2%
3.6%
2.6%
-3.6%
1.7%
1.4%
3.1%
4.4%
3.6%
2.6%
2.2%
3.5%
-6.9%
Population
3.3%
3.4%
3.3%
3.3%
3.1%
3.0%
3.0%
2.9%
2.8%
2.7%
2.5%
2.3%
2.1%
2.2%
2.2%
2.3%
2.0%
2.0%
2.1%
1.9%
2.1%
2.0%
2.0%
1.5%
1.5%
Real GDP Per Capita
0.9%
5.1%
5.1%
2.8%
2.5%
1.2%
0.4%
5.4%
6.4%
5.6%
6.3%
-2.9%
-6.3%
1.4%
0.4%
-5.9%
-0.3%
-0.6%
1.0%
2.5%
1.5%
0.6%
0.2%
2.0%
-8.4%
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1940
1950
1960
1970
1980 1990-1993
Share of Real GDP
Agriculture
Industry
Services
21%
24
55
17%
27
56
16%
29
55
12%
34
54
8%
37
54
7%
39
54
65%
16
19
58%
16
26
54%
19
27
38%
23
39
32%
26
42
25%
29
46
Share of Employment
Agriculture
Industry
Services
(2) THE MEXICAN DEVELOPMENT STRATEGY UP TO 1970
From this brief introduction to the record of Mexican economic performance, let us now examine Mexico's development strategy:
the ways by which Mexico tried to achieve economic growth and development up to 1970. This was the period in which the Mexican
economy seemed to be doing well. Later chapters will examine the period from 1970 to the present, a period with considerable
economic problems. Of the many aspects of the development strategy, let us focus here on three important ones: trade policies,
agriculture, and the role of the government.
(a) Trade Policies
The most important feature of the Mexican development strategy was the adoption of import-substitution industrialization in the
1940s. In this strategy, industrialization was to occur through the development of Mexican consumer goods industries. To allow
these consumer goods industries to develop, imports, especially from the United States, had to be restricted (because the small
Mexican companies could not yet compete with the larger American companies). Imports were restricted partly through high tariff
rates. But the most important means used to restrict imports was the license requirement --- licenses had to be obtained from the
government to import foreign-made products. Because licenses were rarely granted to those wishing to import consumer goods, only
3% to 4% of all consumer goods typically were imported. To produce consumer goods, Mexican companies needed capital goods
(machinery, equipment, and so forth). Since the Mexican capital goods industry was quite small, licenses were issued relatively freely
to those who wished to import capital goods. The licensing policy was reinforced by a policy of keeping the peso overvalued in
relation to the American dollar. From 1954 to 1976, 12.5 (old) pesos were the equivalent of one American dollar. In terms of
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buying power, $1 would buy more than 12.5 pesos. The rate of 12.5 pesos for $1 kept imported products artificially cheap for
Mexicans and Mexican products artificially expensive for Americans. Because of the licensing procedures and the overvalued peso,
more than half of all capital goods were imported. By keeping capital relatively cheap (since the peso was overvalued), the
import-substitution industrialization policies provided incentives for Mexican companies to use capital-intensive production. (This
means producing in a way that used a large amount of machinery combined with relatively few workers.) However, capital-intensive
production did not create many jobs, which is especially important given the very high population growth Mexico was experiencing.
The approach was therefore inappropriate for the Mexican situation. In choosing an import-substitution industrialization strategy,
Mexico was choosing not to rely on its exports to promote economic growth (in contrast to the approach of the Porfirato).
Mexican leaders believed that relying on exports would make Mexico dependent upon other countries, especially the United States.
This dependency could have serious economic and political repercussions for Mexico. For example, a minor recession in the United
States could reduce American purchases of Mexican goods so much as to cause a major depression in Mexico. Mexican leaders also
worried about the prices of the main export products, which would be natural resources (agriculture, livestock, fishing, and
forestry products) or processed food products. These prices of these natural resources are subject to considerable instability but the
long-run trend has been downward. Mexico's main export products have inelastic demand, both with respect to prices and to
income. This means that, as the prices fell, people in other countries would buy very little more than they had been buying. And, as
world incomes rose, the desire to buy Mexican export products would rise very little. The worry about dependency was surely
influenced by the fact that about 60% of Mexico's trade was with the United States. While Mexico did export to earn dollars to pay
for the imports of capital goods, exports were never the leading sector in Mexico's development strategy. The export earnings were
not sufficient to pay for all of Mexico's imports. The rest of the imports were paid for by international borrowing. But until the
mid-1970s, the level of Mexico's international borrowing was not so high as to create problems.
As a result of the import-substitution industrialization strategy, Mexican resources were shifted to the production of
consumer goods for the Mexican market. Because of the very unequal distribution of income, it was most profitable to make luxury
items for the rich. And because of the lack of international (and domestic) competition, the Mexican consumer goods companies
produced products of poor quality and sold them at high prices (average prices were 15% to 20% above international levels; some
prices were 50% to 100% above international levels). Economists have long debated the desirability of import-substitution
industrialization. But it is very clear that, in a country like Mexico where the distribution of income was so unequal and the
level of domestic competition was so low, the import-substitution industrialization strategy had serious flaws. Those who
produced consumer goods for the domestic market benefited greatly from import-substitution industrialization and became a major
political force for its perpetuation.
(b) Agriculture
In any country just beginning the experience of economic development, most people live in rural areas and work in agriculture.
Because of this, the agricultural sector has a major role to play in any development strategy. As we saw with China, a prospering
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agricultural sector provides food and raw materials for industry, a labor force for manufacturing, export products to pay for imports of
capital goods, and savings to finance the capital goods needed for industrialization. A prospering agricultural sector also creates a
demand for locally produced products. The problem facing Mexican policy-makers was to find ways to achieve this prospering
agricultural sector, especially given the fact that farms in Mexico are often very small. (As of 1960, the average farm in Mexico was
only 4 acres.)
Compared to many developing countries, Mexico decided to devote a relatively large amount of resources to the development of
agriculture. With American aid and technical advice, large amounts of money were spent on irrigation works, roads, farm machinery,
and so forth. Agricultural production grew rapidly up to 1970; growth rates of agricultural production were 4.4% per year in the
l950s and 3.3% per year in the l960s. By 1970, Mexico was basically self-sufficient in food. What occurred in Mexico is popularly
called the first successful example of the "Green Revolution". Fully one half of the increase in production was due to increases in
agricultural productivity. Agriculture was able to provide a large part of the export revenues that were used to pay for the imports of
capital goods under the import substitution industrialization strategy. After 1970, however, investment in agriculture fell and growth
rates of agricultural production fell accordingly. Mexico was forced to resort to imports of essential food products, such and corn,
beans, and wheat.
While the government's policies up to 1970 increased agricultural production overall, they also created what is called "agricultural
dualism". Most of the money for investment went to irrigation projects and roads in the north and northwest states where
landholdings are of large size and where much of the production went for export to the United States (and where, not coincidentally,
much of the land is owned by people with political influence). Little was provided for those in the central plateau area or in the south.
In these areas, the combination of low investment spending by the government and the very small plots perpetuated traditional
agricultural methods with very low productivity. In addition, government agricultural price policies set prices to favor production of
cattle, tomatoes, strawberries, and so forth for export to the United States rather than corn and beans for the domestic market.
In summary, this dualism involves about 400,000 farms on very large landholdings located in the north and northwest producing
mainly export products, on the one hand, and about 2.5 million very small landholdings located in the central plateau and the south
producing with low productivity on the other hand. Those in the central plateau and south are very poor. More than half are purely
subsistence farmers --- they neither buy nor sell in markets. In addition, there are about 600,000 to 700,000 poor landless workers.
One study concluded that 90% of the rural population had some degree of caloric and protein deficiency; almost one-half of these
people suffered from a significantly inadequate diet.
There are at least three reasons that this poverty and malnutrition did not lead to a greater tendency toward protest. First,
the peasants in the central plateau and the south were often organized into ejidos, as mentioned in the previous chapter. This
organization provides a form of security. Second, local leaders in rural areas have often been co-opted by the government. These
leaders trade allegiance to the government in exchange for economic and political benefits as well as assurance of their control over
the local areas. Thus, rural protests lack adequate leadership. Third, there has been a large-scale migration of peasants who could not
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earn even a subsistence living from their landholdings. Part of this migration went to the urban areas of Mexico, especially Mexico
City. And part of the migration came to the United States. This latter part will be discussed in a later chapter.
(c) The Role of the Government
In examining trade and agricultural policies, we have also been focusing on the role of the government in creating economic
development. But the Mexican government affected economic development in other ways. One way was through the parastatal
sector. Parastatal corporations are owned by the government. The chief executive is appointed by the government, but is not
a minister nor other member of the government. The goal of the company is to make profits, subject to meeting certain goals
considered to be in the social interest. By the late-l960s, there were about 400 corporations that were parastatal or at least partially
government-owned. They were found mainly in the following industries: petroleum, electric power, steel, railroads, and fertilizers.
Their profits were a major source of the government's revenues. Through these revenues and through control over the policy decisions
of these corporations, the government was able to influence the investment rate (investment spending as a percent of GDP). The
investment rate in Mexico was over 20%, somewhat above the rate typically found in the United States, but well below the rates found
in many Asian and European countries. Of all of the investment spending in Mexico, about 40% was done by the government.
And of the government's investment, about half was in infrastructure, such as the irrigation projects described above. The other half
went to industry --- large-scale public investments in steel, oil, railways, electrical capacity, etc. --- done through the parastatal
corporations.
Besides the parastatal corporations, the Mexican government also regulated the activities of many of the private corporations.
Activities that the government wished to eliminate were made illegal or were otherwise penalized. Activities that the government
wished to encourage were often subsidized. And price ceilings were placed on certain products. For example, price ceilings and
subsidies were used to keep food prices low in urban areas. This allowed private companies to be able to recruit a labor force while
paying low wages.
Despite the importance of government investments and subsidies, government spending in total as a percent of GDP was quite
low (about 20% to 25%). Thus, a second way that the government affected economic development was by keeping taxes low. In
fact, tax revenues as a percent of GDP were lower in Mexico than in any other Latin American country. Despite the government
investment spending and subsidies, the government could maintain low taxation and also borrow very little from the public (less than
10% of all savings) because its expenditures for defense and social programs were so low. Social programs include education,
health, public assistance, social security, and so forth. Low business taxes allowed for high profits to pay for private business
investment spending on new capital goods. Low borrowing freed private savings to also finance private business investment
spending. While this approach enhanced profits and business investment spending, it also perpetuated poverty, limiting the growth of
a domestic market in Mexico. And it reduced the productivity of the workforce by denying people access to adequate education and
health care.
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Two final aspects of the role of the government were its population and labor policies. Until the l970s, Mexico had no specific
policy to reduce the rate of growth of the population. Some people even believe that the government contributed to the high rates of
population growth by subsidizing housing and food and therefore reducing the cost of raising children in the cities. And, in regard to
labor, the government failed to enforce the minimum wage and employment conditions laws for the small-scale, labor-intensive
producers (although these were enforced for the larger enterprises). The government also gained control of unions through the
development of "official unions" (see the Appendix to Chapter 21 on the political system in Mexico). Through this control and
through a centralized process of wage bargaining that set minimum wages by region and by job, the government helped to keep
wages low for the businesses.
The goal of the government was to transfer resources into manufacturing. It accomplished this in several ways. First, the prices for
industrial products rose faster than the prices of agricultural products. Second, the government provided manufacturing businesses
cheap electricity, cheap fuel, and cheap railroad transportation through its subsidized state owned enterprises (parastatals). Third, the
government invested in infrastructure in urban areas where manufacturing enterprises were located. Fourth, the government gave
good credit terms to manufacturing enterprises through its control over the banks and through its own credit provision. Finally, by
deliberately keeping the peso overvalued, the government burdened agricultural producers (who were exporters) and benefited
manufacturing enterprises (who were importers).
(3) THE SITUATION IN 1970
In the l960s, people talked of a "Mexican Miracle". Yet, by 1970, major structural problems were becoming evident. First, the
high rates of population growth had not been addressed. With low productivity in agriculture and with industries using capitalintensive techniques in production, many people moved into urban areas that were not able to handle them, commonly becoming
unemployed or under-employed. Second, the distribution of income was very unequal and was becoming more unequal. Third,
not only were tax revenues low, but income taxes were easy to evade. The government was forced to rely on indirect taxes (such
as sales taxes), which are regressive (that is, they take a higher portion of income from the poor than from the rich). Fourth,
education had been neglected. Mexico devoted less than 3% of its GDP to education. In the mid-l960s, only two-thirds of 6 to l4
year olds were in primary school and only 28% of l4 to l8 year olds were in secondary school. About one-third of the population was
illiterate. Health care had also been neglected. Up to half of the population could not receive modern medical care.
From 1940 to 1970, Mexico had definitely been a businessman's government. Despite this, agricultural output was beginning to
stagnate, internal savings were less than the amount needed for investment, necessitating foreign borrowing, no domestic
capital goods industry had developed, and Mexico was heavily dependent on foreign businesses for technology. In the late
l960s, there was the beginning of a protest movement that culminated in violence at the time of the Olympic Games in l968. This led
to repression by the government, including the killing of many people. It also led to the populist administration of Luis Etcheveria in
1970. At this time, the economic performance in Mexico begins to worsen. We consider the story from 1970 in the next Chapter.