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Alternative Paths among
Developing Economies
Chapter XVIII
Revolution and Reform in the
Mexican Economy
1
Mexican Economy

Mexico ranks 12th in the world in regard to
GDP and has the highest per capita income
in its region

World's largest producer of silver and one of
the five major producers of oil
2
Mexican Economy

Conjunction of culture and history involves the
essential tensions and contradictions of Mexico’s
economy and society

It is a rapidly industrializing and urbanizing middleincome economy that is integrating itself into the
world economy

At the same time, it contains large pockets of
poverty in traditionalist sectors
3
Mexican Economy

At the top of the Mexican economy is a mostly
Spanish-descended elite who operate successfully
within the modern market capitalist economy

In the middle are the majority mixed-race mestizos

At the bottom is a large poor minority, mostly pure
Indians, living in a traditional Mexican economic
form in village agricultural units known as ejidos

Similar to culture, a modern US-related economy
sits on top of a colonial Spanish-derived system that
in turn sits on top of the remnant of a pre-colonial
traditional economy
4
Mexican Economy

The Mexican economy is difficult to categorize, that
is a common characteristics with other Latin
American economies

Since late 19th century, it has market capitalist
elements

It also had a highly centralized state sector reflecting
patterns from the Spanish colonial period

The economy includes the traditional remnant of the
rural ejidos, reconstructed by revolutionary populism
in the 20th century
5
Mexican Economy

The Mexican system can be labeled as technocratic
populist corporatism → technocratic populism,
dominated by a politicized and technocratic bureaucracy

A movement toward market capitalism began after a
macroeconomic crisis in 1982

In 1994, a new financial crisis erupted with a sharp
devaluation of the peso

North American Free Trade Agreement (NAFTA) went
into effect in 1994
6
Mexican Economy

NAFTA, privatization and sales of ejido lands providing a
serious challenge for the post- PRI leadership

The outbreak of an armed rebellion in Chiapas, the poorest
state of Mexico by the Zapatista National Liberation Army

RIP’s fall from power in 2000 with the presidential election of
Fox

This was an end of a more than 70-year old period of
domination of Mexican politics and society by PRI

After the end of the armed revolts in late 2001, Mexico
confronted a dramatic question: Will economic reform lead to
revolution or to the end of reform?
7
Historical Background:
From Origins to Independence
Mayans and Aztecs

First cultivated agriculture in the Western
Hemisphere, starting 6000 years ago with
domestication of corn

The country contains several independent centers of
culture and economic development, Mayans in the
Yucatan peninsula in the south

14th century Aztecs conquered Mexico

Spanish defeated Aztecs in 1521

Mexico became the main part of Spain
8
Historical Background:
From Origins to Independence


Spanish Control
Spanish controlled vast estates and Indians were
forced to work, initially as slaves and later as debt
peons
Most Indians were converted to Roman Catholicism

As long as they accepted Catholicism and paid their taxes,
Indian villages were left to the rule of their own leaders and
were allowed to control their traditional communal lands

Agriculture is the main source of income

Main export was silver
9
Historical Background:
From Independence to the Revolution

Independence from Spain was achieved in 1821, followed by
economic stagnation, large budget deficit, political instability,
severe foreign indebtness

In 1830s and 1840s Mexico lost half of the nation’s area to the
United States in wars

Until 1911, economic policy with openness to trade and
investment

Technocratic advisers balanced the budget and oversaw the
beginning of industrialization and the development of Mexico’s oil
industry by US and British investors

The economy grew substantially with general inequality and
poverty
10
Historical Background:
From the Revolution to the Present

1911-1920 Mexico experienced a civil war

During WW I, a secret agreement was devised
between the Mexican government and the German
government

Mexican government would support the German war
effort against the United States in exchange for
German assistance in invading the Southern United
States-did not work
11
Historical Background:
From the Revolution to the Present


Rule of Revolutionary Institutional Party
(PRI-1920-2000)
PRI was victorious in the revolution that took place
in the aftermath of the civil war in 1920
Since the late 19th century, it has had both



strong market capitalist elements
a highly centralized state sector
This system had many labels including “state
capitalism” or “technocratic populist corporation”

Technocratic populism, dominated by a politicized and
technocratic bureaucracy
12
Historical Background:
From the Revolution to the Present

1917 Constitution
No rights for private property

Laid the groundwork for:



Nationalizing oil industry
Redistributing hacienda (Spanish controlled vast
estates) lands to peons and villages as reconstructed
ejidos
Labor rights were guaranteed
13
Historical Background:
From the Revolution to the Present
Mexican Corporatism: President Cardenas’ Period
(1934-1940)

Established the essential institutions of Mexican
corporatism by
 Accelerating land distribution
 Emphasizing communalism
 Organizing a ruling party related peasant interest
group
 Organizing a party-related national union federation
 Nationalizing the oil industry in 1938
14
Historical Background:
From the Revolution to the Present
The 1940-1970 Period

Land distribution was halted in 1940s but resumed after 1958

In 1946, Economic policy encouraging privately owned and
irrigated farms

Import-subsidized industrialization that continued until 1982

Despite restrictions for some industries, foreign investment was
allowed → Special incentives for investments on the Mexican-US
border in 1960s

Between 1940-1980, strong growth and reasonable
macroeconomic stability
15
Historical Background:
From the Revolution to the Present

1970s: Shift to Populism and Leftist Stance
Student uprising of 1968 triggered a shift to
populism and a leftist international stance after 1970

Expanded social spending undermined
macroeconomic stability and foreign indebtedness
rose

These problems culminated in the 1982 crisis
16
Historical Background:
From the Revolution to the Present
1982 Crisis

1982 Crisis was a result of
 Increasing foreign debt
 Rising interest rates on that debt
 Falling oil prices

Government borrowed massively from abroad to finance rising
social expenditures and subsidies for state-owned firms

In 1982 Mexican government could not meet its interest
obligations and negotiated with the US and the IMF
 a program of fiscal austerity
 import reductions

This led to declining output for several years after decades of
rapid growth
17
Historical Background:
From the Revolution to the Present

Aftermath of 1982 Crisis:
Movement Toward Market Capitalism
After 1989 came major efforts




To reduce government ownership and control in the
economy
Opening the economy to free trade
Reducing endemic corruption
Economy grew rapidly again, especially its export
manufacturing sector, but later it returned to
recession
18
Historical Background:
From the Revolution to the Present
Pacto (1987) : A Corporatist Incomes Policy

Set wage and price targets

Tightened monetary and fiscal policies and
liberalized trade that reduced the rate of inflation

In 1989, President Salinas extended and renewed
Pacto six times until 1994

Focused on microeconomic reforms such as
privatization and trade liberalization
19
Historical Background:
From the Revolution to the Present
1995 Crisis

Steepest decline of output since the Great
Depression, with a reversion to a fiscal austerity
policy

In 1994, a new financial crisis erupted with a sharp
devaluation of the peso

US government provided an emergency loan of $ 40
billion

A deep recession in 1995 followed by export-led
growth
20
Historical Background:
From the Revolution to the Present
NAFTA (1994)

North American Free Trade Agreement went into effect on
Jan. 1, 1994

NAFTA freed trade and investment relations among Mexico,
US and Canada after a long process of marketization and
privatization reforms

Signing NAFTA put Mexico under US economic domination

The ejidos were reformed by allowing the farmers involved to
privatize and sell their plots

There was a reduction in subsidies for corn production, the
principal crop of the ejidos and the mainstay of poor
Mexicans’ diet
21
Historical Background:
From the Revolution to the Present

The result has been rising inequality and poverty in
Mexico since the mid-1980s, providing a serious
challenge for the post- PRI leadership

The outbreak of an armed rebellion in Chiapas, the
poorest state of Mexico by the Zapatista National
Liberation Army

This revolt led by non-Indians that declared opposition to
NAFTA, to land control reforms and to long ruling
Revolutionary Institutional Party (RIP)

RIP’s fall from power in 2000 with the presidential
election of Fox who promised to help Indians and
negotiated an end to revolts in 2001
22
The Land Question:
Types of Land Tenure

The most controversial issue as agriculture
accounts for only 8 % of GDP and 25 % of
employment

Three types of farms existed:



Hacienda
Rancho
Ejido
23
The Land Question:
Types of Land Tenure

Hacienda → derive mostly from royal land grants to
the conquistadores

Many were enormous, containing thousands of
people and functioning as self-contained
communities

Many still exist, but they have lost their special
powers over rural labor

Today, there is no legal difference between them
and the ranchos
24
The Land Question:
Types of Land Tenure

Ranchos → Owned by mestizos (mixed white and
Indigenous)

Tends to be smaller

Derived from land grants given to foot soldiers and small
farmer immigrants who married local Indian women

Ranchos did not have laborers attached to them

They were often sites on poor soil

The favored base for adopting Green Revolution techniques,
especially they were aided by government investment in road
and irrigation systems
25
The Land Question:
Types of Land Tenure

Ejidos → derived from communal lands held in Indian villages
before the Spanish conquest

Landholding was based on extended kinship groups identified
with certain areas

Although held in common, most of the land was divided and
assigned to individual families for their use

Ejido areas contain the poorest Mexicans

In 1992 President Juarez tried to turn them into rancho-style,
capitalist farms
26
The Land Question:
Reestablishment of the Ejidos

1917 Constitution allowed haciendas to be broken
up and distributed as ejidos to the former peons

This involved both individual use of collectively
owned land and communal farming

Thus there are now three types of land tenure:



Private farms
Individual-use ejido farms
Communal ejido farms
27
The Land Question:
Reestablishment of the Ejidos

Land distribution

President Cardenas distributed more than 20 million
hectares (47.4 percent of Mexico’s total cultivated
land)

Although ejido holdings increased, successive
presidents continued to focus infrastructure
investment on the increasingly more productive
private farms

As of 1998, national shares of agricultural land were
43 % in private farms, 52 % in individual-use ejidos
and 5 % in communal ejido farms
28
The Land Question:
The Emergence of Dual Agricultural Development





Since the presidency of Cardenas, a sharp dualism
has emerged between private and ejido farms
Ejidos are more common in densely populated
areas
Majority of them are smaller than 4 hectares, too
small to be efficient under any tenure or technology
system
Ejidos concentrate on traditional corn and beans
production
Not much irrigation investment
29
The Land Question:
The Emergence of Dual Agricultural Development

Private farms have branched out into such
commercial crops as soybeans and sorghum, and
more recently fresh fruits and vegetables

These have increased larger increase in yields than
corn

Federal government irrigation investment increased
supporting them

Favoritism toward private farms also extended to
government credits and financing
30
The Land Question:
The Emergence of Dual Agricultural Development

NAFTA removed protection of corn from competition
with low cost US producers

Major reduction of general government subsidies to
agriculture during the 1980 austerity period

This policy of attacking rural poverty by forcing the
poorest farmers off the farms leads to the Zapatista
rebellion

Although President Fox has promised to aid the
rural poor, he has made no major change in
agricultural or land ownership policies
31
The Oil Question and the External Debt Crisis of
1982: Development of the Mexican Oil Industry

Since its discovery in 1901, Amoco, Royal Dutch
Shell, Exxon all invested in Mexico

President Cardenas's efforts to get involved in the
managerial control of Royal Dutch/Shell, and Exxon
did not work

In 1938 Cardenas nationalized Mexico's petroleum
reserves and expropriated the equipment of the
foreign oil companies in Mexico

Pemex was established to run the oil industry
32
The Oil Question and the External Debt Crisis of
1982: Development of the Mexican Oil Industry

With the 1979 oil price increases, PEMEX borrow
massively from abroad to expand production

Overoptimistic forecasts about future oil price
increase, government increased foreign borrowing

Although oil price increases of the 1970s helped
Mexican economy, Mexico’s foreign debt tripled
from 1976 to 1981

Oil prices started declining and the inflation started
increasing

Foreign and public indebtedness increased
33
The Oil Question and the External Debt Crisis of
1982: Development of the Mexican Oil Industry

In 1982 negotiations with IMF and the US, resulted
with a shift in US policy to lower interest rates and
with IMF’s imposing strict fiscal austerity

Austerity combined with moves to privatization,
marketization, tariff reduction, and the corporatist
Pacto led to a sustained reduction of inflation after
1987

Current account balance went into surplus and the
budget deficit declined
34
The Oil Question and the External Debt Crisis of
1982: Development of the Mexican Oil Industry

However, oil industry remained nationalized

Pemex was restructured internally in 1988 by President Salinas

Allowed foreign investment in peripheral parts of the industry

Mexico's state-owned oil company, Pemex, holds a constitutionally
established monopoly for exploration, production, transportation,
and marketing of the nation's oil

Since 1995, private investment in natural gas transportation,
distribution, and storage has been permitted, but Pemex remains in
sole control of natural gas exploration and production

Pemex remains as a symbol of Mexico’s independence from foreign
domination
35
Transformation of the Mexican Economy:
Privatization

Major feature of the Mexican reform process from 1982 to
1995 was privatization

Focusing mostly on liquidating or merging small enterprises

These privatizations took place as cash sales

Privatization of the telecommunications company was the
largest privatization in terms of revenues earned for the
government

Copper mining company, two airline companies, two sugar
refineries, a pasta and vegetable company and a motor
vehicle company were among the largest ones → mostly went
to Mexican buyers
36
Transformation of the Mexican Economy:
Maquiladoras, NAFTA, and the Opening of the Mexican
Economy

Since the 19th century, fear of domination by the US

After WW II, President Aleman enacted import
restrictions for industrial development led by import
substitution

The most dramatic anti-US moves for economic
independence were oil and railroad nationalizations
during the 1930s

Policy relaxation came in 1965 with the US-Mexico
Border Industrialization Program, maquiladora program
37
Transformation of the Mexican Economy:
Maquiladoras, NAFTA, and the Opening of the Mexican
Economy

US plants invest on the border and sell output in the US
freely

The investment in industries leads to increasing
employment of Mexican labor force and triggering a
great expansion of manufacturing output and exports

However, controversies over conditions in the
maquiladoras have increased like wages being lower,
workers treated badly, especially female workers

Along with the initiation of NAFTA negotiations → trade
liberalization, tariff reduction, establishment of free trade
zones, removing restrictions on foreign investment
38
Conclusion

Mexico is opening, marketizing and privatizing an
economy long characterized by a state-dominated,
inward-looking policy designed to protect it from US
domination

Institutional Revolutionary Party includes conflicting
socioeconomic forces within a corporatist structure:


Revolutionary in its populist appeal to peasants through
land redistribution and to workers through party-related
unions
Protect business through its institutionalized, technocratic
bureaucracy
39
Conclusion

Mexico’s technocratic populist corporatism began to change
with reform policies developed since the foreign debt crisis of
1982

Mexico has since escaped from its dependence on raw
materials exports and has engaged in an industrialization
drive fueled by foreign investment, further encouraged by
trade liberalization culminating in the NAFTA

These gains were challenged as rising imports of intermediate
goods triggered peso devaluation and an austerity program in
1994

After a recession in 1995 and some policy readjustments,
export-led growth resumed
40
Conclusion

The development and reform policies have
been successful

Living standards improved for most citizens

Economic reform also brought increased
income inequality and opposition, especially
from rural peasants still living in traditional
ejidos
41