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The Mexican economy: Present situation, perspectives and alternatives
World Development, Vol. 11, No. 5, pp. 455 -465,1983. Printed in Great Britain.
03055750X/83 $3.00 + 0.00 Pergamon Press Ltd.
The Mexican Economy: Present Situation, Perspectives and Alternatives JULIO L6PEZ
G.*
Universidad National Autbnoma de Mkxico, Mexico City Summary.
economy.
- The paper begins by sketching the build up to the recent crisis of the Mexican Then it examines the strategic alternatives which are open in the future. The author
points out that the present situation is ‘fluid’ and that two extremely different strategic options are shaping up: one which could be called nationalist and with a populist orientation; and the other which would prefer simply to reformulate the previous model of growth. Finally, the short-term economic perspectives are analysed and some factors will be considered which may well be included in an economic strategy of a nationalist and populist orientation. The crisis which the Mexican economyis going through has taken the majority of Mexicans and also the observers of that country’s reality by surprise. Even further amazement was caused by the economic policy decisions announced by Lit. Jose Lopez Portillo in his last Presidential Address in September 1982. The majority, if not all, were expecting an essentially conservative and contractionary solution to face such a crisis. However, what was announced was a series of policy measures which potentially meant a 180 degree change of course, taking into account the previous Government orthodoxy. The complete control over the system of foreign exchange and the nationalization of the banking system are indeed far removed from a conservative economic policy. The economic strategy of the new president Lit. Miguel de la Madrid is not yet known. However, his short-run economic policy can be easily deduced from the measures he took or announced in this field during his very first days in office (December 1982). Neither the nationalization of the banking system has been annulled, nor is there any evidence that the government will reduce its outstanding weight in the economy. But other steps and announcements strongly suggest a return to orthodoxy. The aim of this essay is to reflect upon the present situation with its perspectives and alternatives for the Mexican economy. The following points will be discussed: (1) the framework of the present crisis; (2) alternative strategies for the Mexican economy; (3) short-term economic perspectives; (4) some factors to be included in anationalist 455
economic strategy with a popular orientation. There is a limit to the scope of this paper which must be warned about from the beginning: only the economic dimension of the problem will be examined. The political aspect, equally or more important than the former, will not be touched upon for the moment. 1. THE FRAMEWORK OF THE PRESENT CRISIS (a) The economic strategy After a four-year period of intense growth, the highest registered in the history of the country, the economy crashed downward to a crisis point, also without precedent. The more immediate and explosive manifestations of the crisis were produced on the external front (capital flight and a brutal drop in international reserves) and as regards prices - inflationary tendencies were estimated to be of the order of 100% annually; but also in other aspects, which will be referred to later, the situation was seen to be a difficult one. * Professor in the Post-Graduate School of the Economics Faculty, National University of Mexico. The fist version of this essay, written in September 1982, was discussed in the seminar on The Mexican Economy at the above-mentioned school. 1 am grateful to the participants in this seminar for their comments and observations, especially to F. Herniindez and A. Montoya for their help with the statistical eroundwork; also to E. Gonzalez, J. Valenzuela and Carlos Montes for many fruitful discussions on the topic. This version was completed in January 1983.
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WORLD DEVELOPMENT
At a very general level which will serve to bring the problem into focus, we may say that the crisis which occurred is not exogenous or external to the national economy, even though it may have been sparked off by recent unfavourable international events, for example the fall in the oil price. It is rather the result of the economic strategy adopted. This option was by no means unilateral and without ambiguities.’ Even so it can be said that its most relevant features were the following. (a) To use oil, and all the possible external resources to be obtained by Mexico as a powerful oil producer, with a semi-industrialized economy of large dimensions, in order to cause income, and even more so investment, to grow at a very fast rate. This was to be carried out in the context of a semi-stagnant international economic situation but with a strong demand and good prices for hydrocarbons. (b) To maintain and reinforce the leading role and the strategic position of the public sector, especially from the point of view of increasing its demand, and the channelling of an enormous amount of resources towards strategic sectors (especially oil). (c) To strengthen, through diverse mechanisms (tax reductions, high profits, facilities for a further centralization and concentration of capital, etc.) the most powerful group of the business community, the financial monopolistic sector, and to make it a co-partner in the leadership of the economic process.’ (d) To limit the normal indirect participation of the State, and to weaken certain state controls that previously existed: for example, the reduction in 1976 of price controls, or partial liberalization of import controls in 1977; the maintaining of a less restrictive free exchange
policy ~ and in this way giving market forces and the private sector the responsibility of being co-leaders in the process and of correcting its eventual maladjustments.
(b) Economic
indicators
The available empirical data, some of which is to be found in Table 1, show us these factors which were behind the recent economic process. The mechanics of the economic process can be presented in the following simplified schema. As regards aggregate demand, the factor of major importance during the first years of the Lopez-Portillo administration was government spending in consumption and, most outstandingly, in investment. For every year of the sixyear Presidential period - with the exception of 1977 - public spending increased at a faster rate than GNP. Furthermore there was a change in the financing of government spending which widened its multiplier effect. Indeed, deficit spending strongly increased, financed with national and foreign loans. Also, taxes or surpluses from the oil sector grew as a proportion of government incomes. To the extent that this way of financing the public sector did not imply a reduction of disposable income for the private sector, net private demand did not fall, thus generating those well-known multiplier effects and raising the levels of economic activity (GNP, employment and income, private profits, etc).3 After the first year (in which it could be said that because of ‘inertia’ previous economic tendencies of stagnation and depression were maintained), the private sector also began to strongly increase its spending above all in investment. The latter, which had fallen slightly
Table 1. Gross Domestic Product and demand* 1977-1980 GDP$ Total Investment a) Government b) Private Private consumption Government consumption Exports Imports Total wages 5 Government deficit * Rates of growth on annual basis. : ssppPp (estimates). § Deflated by the cost of living.
7.4
15.0 18.5 13.1 6.9 6.6 11.1 17.0 5.4 18.6
1980C1981t 8.1 15.1 17.9 13.6 8.1 9.1 5.7 18.5 7.0 n.d.
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THEMEXICANECONOMY in 1976 and much more strongly in 1977 (a fall of 21.6% for that year according to the Banco de Mexico), revived its dynamism from 1978, growing at a fast rate, even though always less than the public rate. This was due to the ‘new climate of confidence’ which the President sought to establish with the private sector, to the increase of private profits and sales, and to the expectation of a strong growth in demand along with the profits which arose from the latter, and above all to the transformation of the country into a powerful oil producer.4 Private consumption kept behind the rest of the components of aggregate demand. Above all, this was due to the change in the functional distribution of income, against wage earners and to the benefit of the capitalist class. The proportion of wages in value-added, which had been 40.8% in 1976, was reduced to 36.1% for 1980. It is true that total earnings increased in this period. But this was due more to the increase in employment than to the increase in wages per worker. Actually the latter increased slightly between 1976 and 1980 at the average annual rate of 0.5%, far less than the rate of growth of productivity (2.4%).’ Possibly, the lag in the expansion of private consumption in relation to the other components of aggregate demand would have been more marked if an increase in private spending financed with credit (as a proportion of total spending) had not also occurred. Specific figures are not available on this point, but indirect information suggests that the rate of family debt expanded (contributing to a rise in wage-earners’ consumption) at a higher rate than personal income. On the other hand, the already-mentioned lag in the expansion of private consumption would have created realization problems if this had not taken place in the context of a strong growth rate in the other components of aggregate demand. The expansion of private investment and public spending fulfilled the role, in the period studied, of widening such markets. In this sense, the relatively slow growth of consumption, and within this wage-earner’s consumption, was one of the principal, if not the principal source of financing for the recent process of growth. Finally, regarding the balance of the external accounts what stands out is the violent expansion of exports as well as imports. To the extent that the latter grew at a faster rate than the former, national spending could exceed domestic production and in this way, the country could capture a net external saving (which was transformed into a bigger external debt). Thus, in this
period - as in other previous periods - the role of the external sector, globally, was not so much to create markets but to give additional resources to the economy. In other words, from a global point of view, the domestic market continued to be by far the most important for the Mexican economy. (Naturally this point does not take away the vital importance of the external sector as a market for oil and as a provider of foreign currency.) On the other hand, domestic supply showed high elasticity in response to almost all of the productive sectors. Of a total of 46 sectors are differentiated in the National (which Accounts series elaborated by SEPAFIN), 34 showed a higher growth rate in 1977- 198 1 than in 1970-1976. In this context the agricultural sector stands out: its expansion rate, which had hardly been at 0.4% (annual average) for 1970-1976, rose to 5.0% for the 197661981 period. Furthermore, within this sector, those products whose supply grew more intensely were staples destined for the domestic market. In this way (eventually, and thanks to the orientation of the SAM)6 the previous tendency which gave a privileged position to those crops for foreign markets, for industry and for cattle, has been stopped.7 Although it should also be pointed out that the non-oil sectors have shown a slower growth than the oil sector and that manufactured output grew less than GNP in 1980 and 1981, it was still the case that expansion in both cases was quite high. From the point of view of the factors which explain the high elasticity of supply of the productive sectors, the increase in employment was undoubtedly important, as was the increase in productivity. The growth of the latter stemmed largely from the intense investment process, the high rates of which have already been referred to. Naturally in terms of volume the oil sector was the most important. But from the point of view of growth r&es of investment, this was quite intense in almost all sectors, irrespective of their degree of modernity or type of ownership. For example the construction industry reached high rates of investment (growth at an annuaZ average rate of 66.1% for 19766 1980) followed by electric machinery (48.3%), other manufactures (47.4%), textiles and soft fibres (47.3%).
(c) Side effects of economic growth In synthesis, as a result of the above, economic growth of the country in these
the last
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years has been outstanding from every point of view. The GNP has expanded at rates above 7%, and public and private investment have risen at rates of 15% (the former at a faster rate), employment has expanded at a greater rate than the working-class population, etc. From this point of view the picture is impressive indeed. However, there are also other factors to be taken into account. On the one hand, income distribution and productive resources became still more concentrated than they were before.’ At the same time, the presence of foreign capital became more decisive as much from the point of view of its amount as its location, mainly in strategic areas. On the other hand, the cost for the country of such growth in terms of the excesses and squandering which went with it, was clearly amazing. What has been most important is not costs in the strict sense of the word, measured for example in terms of the ‘filtrations towards the outside world’ of a large part of the demand for capital goods because of deficiencies in the national productive apparatus; nor the increase of the capital-output ratio due to the lengthening of the period of maturity of investments, as a result of their inadequate handling ~ even though these existed and were of considerable size. The most important factor has been the waste of resources for other reasons. From the figures available in the September 1982 Presidential Address, it can be estimated that capital flight in these last years has been near $30 billion, nearly 20% of the total international currency which entered the country for different reasons in the same period. Lastly - and this is also very important but difficult to assess and to measure precisely and adequately - it is not clear that the intense process of accumulation experienced in these years has led to a better, more solid economic base and a more integrated industrial sector which could contribute to fortifying and making the material capacity of accumulation more endogenous.” It is true that investment grew strongly, particularly in the oil industry, which is the basis for import capacity, and in those sectors which produce capital goods. But the economy as a whole grew too and with it the need for national as well as international means of production. Up to what point can we say that imbalances in the productive apparatus were lessened, from the point of view of its necessities and its capacity to be self-sufficient? The intense growth of the imports of capital goods and intermediate inputs - an expression of the imbalances at an
internal level - permit us to state that it is not possible to give an outright affirmative a priori answer to the question posed.
(d) The monetarist
approach
In any case, this intense growth led to accentuated imbalances, which clashed conspicuously and dramatically at two levels which showed a high interrelation: the external and that of prices. We will examine the functioning of those immediate factors which led to the chain reaction. Before this, however, it is worth mentioning briefly and schematically a different and alternative explanation of the process, which we do not share but which has had a lot of influence and received a lot of prestige. This refers to what is usually called the ‘monetarist approach’ (even though this term is not meant to be strictly scientific). According to this approach, the intense growth of public spending (especially deficit spending) would have caused a brutal expansion both in the quantity of money and in aggregate demand; the latter, pressuring the productive capacity of its limit, would have led to its full utilization. In this way, an imbalance would have been generated between demand and supply capacity, which is the basis for price and import rises (totals and per unit of domestic product). We do not deny that strong pressures on demand resulted in the creation of an unfavourable climate as regards inflation so that it became persistent and constantly on the rise.” We also recognize that a significant component of the external imbalance is to be found in the increase of imports. However the analysis of one factor or the other is more complex than the orthodox economists claim. Indirect proof of the partiality of their approach lies in the lack of success which constrictive and recessionary policies (implemented since the beginning of 1982) have had in the correcting of inflation and the external imbalance.
(e) The inflationary
process
To our mind, the inflationary process (which increased notoriously in 1980) responded to other causes, the most outstanding of which were the following. In the first place, it was a result of certain ‘shocks’ which were added to inflationary tendencies already operating within the economy. Secondly, it responded to increases
THEMEXICANECONOMY in primary (direct) industrial costs, and thirdly, to increases in fixed costs, especially those of a financial nature. Lastly, the generation of inflationary expectations in all of the agents acting in the economy acted as a diffusive factor. The mechanics of the process can be presented as follows: beginning with an inflationary ‘floor’ of the order of 15- 20% for 1978-1979 (whose origin was expectations of inflation at this level), three phenomenon are produced in the recent period which push this ‘floor’ up higher. These were: (1) the introduction of a sales tax (IVA: tax on value-added) at the beginning of 1980; (2) the rise in credit costs, which served as an impulse to firms to raise their gross profit margins (before interest payments) in order to defend their net profit margins; (3) most recently, a rise in primary costs for industry due to the policy of adjustment of the peso’s rate. Still more important, the rise in interest rate caused a rise in inflationary expectations of all economic agents, due to the fact that these rates were the main point of objective reference in the fixing of such expectations.” With the rise in inflationary expectations, business firms increased their ex-ante profit margins (that is in relation to their direct real costs) in order to conserve their ex-post profit margins (the relation between their prices and their costs calculated at a future replacement price). In an economy like the Mexican one which produces commodities by means of commodities, sales prices for some businesses are costs for others, so that a rise in expectations was converted into a rise in costs through the whole productive chain, finally becoming validated and stabilizing at this higher level. Workers pressured for wage increases due to the previous redistribution of income unfavourable to them and in favour of business interests, and also due to those already-mentioned inflationary expectations. Even though fixed minimum wages were reduced in real terms, the better situation in the labour market and the bargaining power of the organized workers movement made possible a reduction in the proportion of workers earning the minimum salary, or less. Due to this, even though the workers cannot be accused of sparking off inflation, its persistent nature is partly a result of the capitalists’ lack of capacity to change, in a more brutal form, the distribution of income through an even larger shift to profits. (f) The external imbalance The
external
imbalance
is due
to
three
459
immediate causes: (1) the increase of imports; (2) the increasing outlay for financial payments, linked to an external debt, also constantly increasing; (3) the speculative capital movements and particularly the exodus of foreign reserves. These factors will now be analysed. Reference will be made to more structural, deeper problems, the root causes of the imbalance. From every angle the growth of imports in the period was impressive. The elasticity of imports in relation to domestic demand (a proportional increase in imports originated from a 1% rise in domestic demand) which had been of the order of 0.67% during 196331970, rose to 3.4% in 1980. With regard to manufacturing, this elasticity rose from 3% in 1978 to 4.6% in 1980.13 The explanation of such a rise is to be found in diverse factors. Firstly, the acceleration of growth in both income and demand. Both Mexican and international experience show that a growth of imports in a certain period depends on the one hand on the rate of growth of income and demand (in a relation that is not constant but increasing), and on the other, on the change in the rate of growth between the period under study and the preceding one. An acceleration of growth in income commonly causes more than proportional growth of imports due to the fact that domestic productive capacities face ‘bottlenecks’ in the expansion of supply levels. This obviously affects the material supply, and/or price competitiveness between national and imported goods. Even so, a recent study on manufacturing (C. Shatan, 1981) shows that for the period 1977-1980, the growth of aggregate demand only accounts for 32% of the total expansion of manufactured imports.14 A further 21% is accounted for by a change in the composition of domestic demand, in favour of goods whose imported input requirements (per unit of production) are above average. Another 47% can be attributed to a greater penetration of imports or de-substitution which is expressed through a rise in the coefficients of imports per unit of domestic demand. Within this last effect, the freeing of import restrictions in 1977 explains the greater penetration by 30% (that is, 14% of the total increase in imports). As regards the effect of financial payments related to the external debt, those linked to the public debt represented in 1980 about 60% of income in the current account; furthermore, if the debt services of the private sector are considered, the share rises to approximately 75%. For 1981 the figures must have been even more
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WORLD DEVELOPMENT
dramatic, given that public and private debt services reached $8200 million for that year. The exponential growth of the debt service is not so much related to the rise in interest rates on a world scale but especially to both private and public debt policies. The latter is related to the state decision to make the economy grow at high rates without significantly increasing government current incomes - by taxes and other mechanisms ~ from the well-off sectors of the population,” and to bring about no change in the ‘rules of the game’ as regards foreign trade and currency exchange. The growth of the private debt, in turn, also responds to an expansionary policy in this sector, in the framework of a significant differential between national and international rates of interest (which originate above all because of monopoly control over the banks, restrictive monetarist policies and the virtual absence of a selective credit policy) and an increasingly overvalued national currency. Finally, speculative, short-term capital movements are to be considered. In relation to external payments when the country’s external financial position was ‘sound’, given that the domestic interest rates were higher than the international ones, such capital movements produced a positive effect on the balance of payments. However, when this position began to deteriorate, the country suffered an increasingly violent reverse situation.16
(g) Structural factors The external imbalance is due to deeper, more structural causes than the ones just discussed. Although these causes are well known we will mention them briefly at least. Schematically, the roots of this imbalance are to be found in a strategy of rapid growth, in the context of an international recession, while preserving fundamental aspects of a ‘neo-liberal’ framework; and in an economy with a structural tendency for external imbalance. At the risk of repeating things that have already been mentioned, certain phenomena, like the following, stand out. (i) A certain style of growth (in terms of the goods demanded and produced) which in itself is unbalanced and lacks integration, especially because those commodities which show a faster growth rate require a large quantity of imports of inputs and capital goods. Such a difference (in growth rates of the goods in demand, in favour of those which consume more foreign
currency) is usually more marked in boom periods, and notably, it is a feature of the recent boom. (ii) A high level of inefficiency and reduced capacity of supply in essential sectors of the economy. (For example in the cattle, fish, meat and milk industries, and in chemicals and other foodstuffs, growth rates were less than 3% annually. ) (iii) Extreme concentration in the pattern of income distribution (before as much as after taxes and transfers) which did not change and thereby did not help to limit luxury spending, and to capture these resources for more important ends. (iv) An unrestricted liberalism as regards fundamental aspects of the economy like those of prices and foreign currency exchange. (v) Excessive confidence that the private agents (especially the big national groups and the transnationals) would direct their investments spontaneously towards a greater articulation and integration of the industrial plant, and in this way would also develop their export capacity. (vi) Finally, in the present context the structural problems of the Mexican industrial sector should be mentioned. From the point of view of their effects, these problems are related to the tendency for a permanent industrial external imbalance. In the first place, this is due to the difficulties which arise in making its growth process more endogenous ~ and consequently to strengthen its internal impact and reduce its external requirements. In other words, we refer to the difficulties in achieving and maintaining high growth rates without causing external imbalances which largely exceed the long-run external capabilities of the country. In the second place, they are the consequence of Mexico’s lack of international competitiveness -~- so that its industrial sector is incapable of contributing with its own exports to the payment of such import volume as is required for its normal functioning. From the point of view of their causes, these structural problems arise out of the following features of the sector. In the first place, a main causal factor is its deficient vertical (internal) and horizontal (with other sectors) integration. In the second place, is its lack of specialization ~~ from which economies of scale and specialization might be achieved ~ both at the overall sectoral and at the firm level. Finally, one should mention the absence of an endogenous nucleus of Research and Development, which might take advantage of the technical progress originating mainly in the advanced countries, adapting
461
THEMEXICANECONOMY it to the requirements economy such as Mexico.
of
a semi-industrial
ing of the economy will be examined; and then we shall explore the possible courses which one could expect the imbalances to follow owing to the new policy measures.
2. ALTERNATIVE ECONOMIC STRATEGIES FOR THE MEXICAN ECONOMY The Mexican economy is presently under the strain of a very serious crisis. Therefore, structural measures will have to be undertaken in order to correct its causes, control its immediate effects and lay down the basis of the future process of growth. Now, in general terms it can be said that two extreme alternative strategies exist for the future (obviously with a number of intermediate combinations). (a) A strategy which, while preserving the basic capitalist socio-economic structure, may be labellet nationalist and with a populist whose central features could be orientation the following ones: (i) a strengthening of the direct and indirect leadership of the State; (ii) a strengthening of national autonomous capacity, redefining the international position of the country; (iii) a redefinition of priority growth areas in terms of the requirements of the broad masses of the population. (b) A strategy, which would be essentially a continuation of the previous one in as much as it would only seek to sort out the crisis, and when that is achieved, to perpetuate the old style of economic growth. In short, it would contract public sector deficit levels, restrict public and private spending and forcefully undercut real wages in an attempt to reduce the external imbalance and inflationary pressures. In any case, it is self-evident that the alternative to be adopted depends to a very large extent upon the long-run economic strategy of the new President de la Madrid. Such a strategy has not been precisely defined as yet ~~ at least at the public level. However, the short-run economic policy measures adopted so far are clear enough in their immediate content and even in their message. They suggest that in the near future what can be expected is not a policy leading to (what we have labelled) a nationalist and populist strategy, but rather an attempt to reassume the old style of development. In any case, the final definition will depend in no small degree on how the present situation develops in the short run (let us say in a year) both at the economic and political levels. Therefore, what follows will be an analysis of the economic perspectives. First the global function-
3. SHORT-TERM ECONOMIC PERSPECTIVES The present economic situation is a difficult one. Alongside the former difficulties and imbalances we must now add new ones generated by the new policy measures. As regards the general functioning of the economy, especially the levels of employment and economic activity, the previous tendencies were leading to a very low or even zero growth rate for 1982, with a rise in unemployment (which began to grow in June-July of 1982). This was basically linked to the fall (in levels or rates of growth) in effective demand, for the following reasons: (a) a reduction of public spending, especially deficit spending; (b) a reduction (perhaps not very strong due to the existence of projects already under way) in private investment as a result of lower expectations of profit rates and the rise in interest rates; (c) a reduction in wage earner’s demand and private consumption owing to the fall in the purchasing power of the broad masses of the population and the credit restrictions introduced since the beginning of 1982. In so far as the imbalances are concerned, we already mentioned that the most important ones were the external one and inflation. The expected rate of inflation must have been around 80. lOO%, similar to the previous rate (on an annual basis). Also the foreign deficit was becoming more acute every day, due to speculative capital flights which grew exponentially. It is true that the policy measures adopted by the Central Bank in September may have reduced the cumulative character of these imbalances, but these measures were rapidly abandoned by the new administration. Obviously, the new economic policy measures (already taken or announced by the new Government during their first two weeks in office) must be taken into consideration when attempting to evaluate the future perspectives of the country. The most important among these measures are the following. (a) A 40% rise in the preferential rate of exchange (rate of exchange for intermediate inputs and essential final goods). Partial control over the foreign exchange market
462
WORLDDEVELOPMENT
has been maintained - although a free market for foreign currency coexists now with the controlled one - but there have been indications that suggest that the preferential rate will be raised gradually until both markets are unified. (b) Reduction in the public sector deficit (from 16.5 to 8% of GDP), as a result of the contraction of government expenditure and the increase in both taxes and the prices of goods and services produced by state enterprises. (c) Partial liberalization of price controls, due to the reduction in the number of goods and services subject to these controls. The orthodox flavour of the new short-run economic policy is evident enough. Were it to be actually implemented, its probable results can be foreseen with quite a degree of certainty. Unfortunately, in Latin America we already have a certain historical experience with these orthodox economic policies. Their effects may be summarized as follows. (a) A contraction in the level of economic activity (GDP, employment, etc.) due to the fall in final demand (both public and private). The most probable result, in the Mexican case, will be an absolute fall in GDP in 1983 (as compared to 1982). This is an experience the Mexican economy has not had to face in several decades. (b) A process of income redistribution adverse to the popular classes and in favour of the richest strata of the population. This would be the logical result of the rise in the levels of unemployment, on the one hand, and the fall in the proportion of wages in value added in most of the sectors of the economy, on the other. (c) A further increase in inflationary tendencies, since these tendencies are dependent upon the evolution of prime costs, profit margins and expectations, and not upon an excess of demand over productive capacities. (d) A reduction in the foreign deficit. This reduction, however, will be above all the result of the fall in the level of effective demand and domestic production. Exports will probably not grow very much (if they actually grow), due to the large share of oil in total exports, and also to the low priceelasticity of demand for other Mexican exports - this is particularly so in the context of the present world slump. Furthermore the reduction in the foreign deficit will not be very large, owing to the high share of financial payments in total foreign payments. The economists of the present government
would probably agree in that the level of economic activity will contract owing to the measures they have taken to face the present crisis. But they would also argue that this treatment is absolutely necessary in order to resume growth in the future. The reasoning that lies behind their thought seems to be that the new economic policy is the precondition for stimulating a new wave of private investment, at least in the mediu.m and long run. Now, it is not clear at all why this should be actually the case. Indeed, those firms which during the boom period embarked upon a rapid process of expansion, either for the domestic or for the foreign market, faced problems of effective demand already in 1982. They will confront an even more difficult situation during the present year: their markets will become even narrower, precisely when their financial position has worsened considerably (owing to their external outstanding debt and the internal credit restriction). It is not likely, accordingly, that private national investment will expand - rather, one should expect it to contract. As to foreign investment - which is in any case a small proportion of total investment ~ it is a well-known fact that it enters mainly in order to produce for the domestic market. Indeed, it is estimated that only about 5% of the total sales of Mexico’s foreign-owned firms are from exports. In the present context, one could hardly expect foreign investment to greatly increase its rate of expansion.
4. SOME FEATURES OF A NATIONALIST STRATEGY WITH A POPULIST ORIENTATION As has already been pointed out a strategy of this nature is based on three premises: state leadership; strengthening of the autonomous and national economic capacity; and the satisfaction of the needs of the broad masses of the population as a first priority.
(a) State leadership This point is related to the strengthening of the State’s capacity to direct the economic process as a whole. The capitalist nature of the system (or if the term is preferred ~ the mixed economy), would be maintained. Therefore, state leadership would not have to be interpreted as an increase in the State’s direct participation in the sphere of production, with the exception
463
THEMEXICANECONOMY of some specific sectors. The State already holds strategic positions in such sectors as oil, in many other inputs of general use and in the banking system, to mention a few. The State will need to define a strategy of growth and use to their utmost those instruments which it has at its disposal. These instruments are numerous and forceful; we only need to think of the control over foreign currency as well as influence in other areas of financial policy.
(b) Strengthening of the autonomous national economic capacity
and
This aspect deals with the manner in which Mexico is integrated into the world economic system, such that in the economic sphere, the margin of the country’s operations should be considerably widened. Leaving aside for a moment problems of a short-term nature or those which are related to trade and international finance, what we are underlining here is a new strategy of economic relations which may be called international alliances. Such a strategy should be based on the country’s objective conditions, i.e. the fact that Mexico is a powerful oil producer, has a semiindustrialized economic base and is an important market for the advanced countries. Furthermore such a strategy ought to take into account the depth of the present world crisis and the consequent search for markets by the industrial powers, the similarity of Mexico’s problems with other Third World countries, and the objective possibility of leading an offensive for a New International Economic Order. With this strategy, Mexico should give priority to its economic ties with Third World countries, with the European Common Market and with the Socialist countries of Eastern Europe, searching for more stable trade agreements on a longterm basis which would allow it to progressively change the composition and size of its trade, technical and investment flows.
(c)A redefinition of priority growth in terms of the requirements of the broad masses of the population (i) Redistribution of income In this regard, w;pe rises should be linked to productivity growth so as to not transfer them into higher prices. Furthermore and more importantly, given that in Mexico the poorest people are not urban wage earners (and also due to the technical and political difficulties of price
control), those measures directed towards lowering unemployment, giving support to production, credit and market organization of the artisans and peasants, are fundamental. Along with this, a fiscal reform is obviously needed to limit luxury spending.
(ii) An industrial transformation This would include the following features: _ productive specialization in basic goods and in the inputs of capital goods needed to produce them; _ correcting of the disproportions which exist today within industry, especially the need to encourage domestic production of capital goods; _ based on such specialization, the raising of the efficiency of the industrial plant; ~ taking into account the above, the search for a new dynamic, modern and autonomous means of entry into the present and foreseeable international division of labour, especially the raising of competitive capacity of manufactured exports; _ to cause this increased efficiency to be based on an increased use of labour, and not capital, per unit of production. That is, to give a privileged position to labour-intensive techniques of production.
(iii) Integration of productive strata A different priority and a new mode of integrating and strengthening the different productive strata: the modern monopolistic, the intermediate and the backward. Specifically, the dynamic of the process should not be the exclusive right of the former. Support should be given to these strata as a function of their productive specialization, thus allowing them to raise their efficiency levels (recognized as being low). Other forms of coordination and economic specialization should be sought within the intermediate strata. The potentialities which exist within the most backward forms of production both in the city (peasants) and in the country (artisans) should be utilized and strengthened.
5. CONCLUSION Naturally such a strategylg as that just outlined needs to have a first phase. Given the present situation, this phase can not be expansionary but more likely would have to be a period of readjustment. What are the main
WORLD DEVELOPMENT
464
guidelines for action in the present situation which would be in keeping with such a strategy? Taking into account that whatever alternative proposed has to recognize the crisis situation (and therefore the ‘maximum objective’ of economic policy cannot be any other than to ‘smooth over’ the situation), we feel that in the economic sphere, the following policy guidelines could be included. (a) To ensure the normal working of the internal economy, maintaining the indispensable control needed to eliminate eventual imbalances. Therefore this would imply the avoidance of a chaotic situation (e.g. lack of supplies, boycotts, black markets and hyperinflation, etc.) by giving guarantees to property owners, keeping up supplies of primary materials to productive firms, controlling prices of basic goods, etc. (b) To guarantee the normal functioning of the external sector, obtaining a sufficient
import capacity to maintain adequate levels of economic activity. Based on this, a renegotiation of the debt which takes into account the objective bargaining power which the country can count on and the possibility of leading a Third World offensive in this respect. All this should be coupled with strict control over imports. (c) To defend the standard of living of the popular classes as a whole (wage earners and non-wage earners), especially those with the lowest incomes. For this, adequate levels of economic activity to guarantee employment would be necessary. A final question arises. Is a nationalist and populist strategic alternative possible in the present social, political and economic setting? Undeniably material conditions do exist to advance in this direction. But are the social and political forces which ought to lead such a strategy strong enough in today’s Mexico?
NOTES 1. For these very reasons it is difficult to agree with the term ‘neo-liberal’ which some Mexican economists have often applied to it.
it cannot be guaranteed that the personal distribution became more concentrated, due to the strong increase in employment during the period.
2. See Jorge Alcocer (1981) for further information on this point.
10. We understand material capacity of accumulation to mean, in general terms, the capacity to produce locally or to obtain, through external exchange, those capital goods and intermediate inputs needed to sustain a process of economic expansion at high rates.
3. As is well known, the expansionary effects of government spending depend on its financial sources. When such an increase is financed by raising workingclass taxes, the expansive effect is annulled as the increase in public spending is compensated for by a decrease in wageearner’s spending. When such spending is financed with a deficit, it is a net addition to private spending as the buying power of the latter is not reduced. 4. See Francisco
Herna’ndez
and Julio Lbpez (1981).
5. Actually, the deflated incomes - deflated by the implicit deflator of GNP (instead of cost of living index) ~ grew at 4.4% (per annum). This is less than employment. See Alejandro Montoya (1981) concerning wage trends and the labour market. 6. Government towards making
scheme of food production aimed Mexico self-sufficient in this field.
7. However recent evidence suggests that capitalist agriculture has participated in this expansion more intensely than peasant agriculture. See E. Caballero and F. Zermeiio (1981). 8. Source:
SEPAFIN.
9. The functional distribution of income between wages and profits was clearly more unequal. However,
11. It is worth pointing out firstly that it cannot be stated categorically that productive capacity was fully utilized in the recent period. Besides, reliable econometric studies indicate that: (a) there is no significant relationship between demand variations and variations in the gross margin of profit; (b) increases in the rate of inflation precede (and do not follow as the monetarists maintain) increases in the quantity of money and public deficit spending. See, for reference to this, I. Ruprah (1981); and G. Aceituno and 1. Ruprah (1982). 12. According to 3. Eatwell and A. Singh (1981), the increase in financial costs derived from the increase in interest rates would be a fundamental cause in the acceleration of inflationary trends. Even though a high statistical correlation exists between the increase in the interest rate and the increase in prices we do not totally share this point of view. We believe that the interest rate operates as a cause of a chain reaction and of diffusion of inflation related to inflationary expectations. This is so because financial costs are a small proportion of total primary costs (not more than 10% according to a provisional estimate). 13. CIDE (1982).
THE MEXICAN
465
ECONOMY
14. Perhaps such a proportion would be higher for the economy as a whole due to the slow growth of some basic sectors.
classes also reduces
import
expenditure.
16. See J. Quijano
(1981).
15. In contrast to what occurred in the previous Presidential period, no attempt at all was made to carry out a fiscal reform programme which would increase levies on the higher income groups. The available information indicated that until 1979 (there are no more recent studies) the proportion of state fiscal income coming from taxes on private companies had fallen significantly. We may also note that even though taxes on the highincome groups do not allow the direct capturing of foreign currency, the reduction of spending by such
17. If one accepts, as we do here, that capitalism has many variations and that it is possible for any one capitalism to have a nationalist and populist course. 18. For example, to link wage increases to productivity increases, to employment and investment. 19. A strategy whose abstract nature is recognized, and whose adoption will obviously depend on the decisions of the new Government.
REFERENCES Aceituno, G. and I. Ruprah, ‘Inflation y deficit piblico en Mexico’. Economia Mexicana. No. 4 (CIDE. 1982). Alcocer, J., ‘El dominio de1 capital financiero: notas de coyuntura’, Economia Petrolizada (Taller de Coyuntura, Facultad de Economia, UNAM, 1981). Caballero, E. and F. Zermeiio, ‘La agricultura mexicana en la coyuntura actual’, Economia Petrolizada (1981). CIDE, ‘Evolution reciente y perspectivas de la economia mexicana’, Economia Mexicana, No. 4 (CIDE, 1982). Eatwell, J. and A. Singh, ‘LEsti sobrecalentada la economia mexicana?‘, Economia Mexicana, No. 3 (CIDE, 1981).
Hernandez y Puente, F., and J. Lopez, ‘Los empresarios y la politica economica’, Economia Petrolizada (1981). Montoya, A., ‘Los trabajadores en 1980’, Economia Petrolizada (1981). Quijano, J., ‘Estado y banca privada en Mexico’, Serie Ensayos, Vol. 3 (CIDE, 1981). Ruprah, I., ‘Notas sobre la relation entre dinero e inflation’, Economia Mexicana, No. 3 (CIDE, 1981). Schatan, C., ‘Efectos de la liberalization de1 comercio exterior de Mexico’. Economia Mexicana. No. 3 (CIDE, 1981).
03055750X/83 $3.00 + 0.00 Pergamon Press Ltd.
The Mexican Economy: Present Situation, Perspectives and Alternatives JULIO L6PEZ
G.*
Universidad National Autbnoma de Mkxico, Mexico City Summary.
economy.
- The paper begins by sketching the build up to the recent crisis of the Mexican Then it examines the strategic alternatives which are open in the future. The author
points out that the present situation is ‘fluid’ and that two extremely different strategic options are shaping up: one which could be called nationalist and with a populist orientation; and the other which would prefer simply to reformulate the previous model of growth. Finally, the short-term economic perspectives are analysed and some factors will be considered which may well be included in an economic strategy of a nationalist and populist orientation. The crisis which the Mexican economyis going through has taken the majority of Mexicans and also the observers of that country’s reality by surprise. Even further amazement was caused by the economic policy decisions announced by Lit. Jose Lopez Portillo in his last Presidential Address in September 1982. The majority, if not all, were expecting an essentially conservative and contractionary solution to face such a crisis. However, what was announced was a series of policy measures which potentially meant a 180 degree change of course, taking into account the previous Government orthodoxy. The complete control over the system of foreign exchange and the nationalization of the banking system are indeed far removed from a conservative economic policy. The economic strategy of the new president Lit. Miguel de la Madrid is not yet known. However, his short-run economic policy can be easily deduced from the measures he took or announced in this field during his very first days in office (December 1982). Neither the nationalization of the banking system has been annulled, nor is there any evidence that the government will reduce its outstanding weight in the economy. But other steps and announcements strongly suggest a return to orthodoxy. The aim of this essay is to reflect upon the present situation with its perspectives and alternatives for the Mexican economy. The following points will be discussed: (1) the framework of the present crisis; (2) alternative strategies for the Mexican economy; (3) short-term economic perspectives; (4) some factors to be included in anationalist 455
economic strategy with a popular orientation. There is a limit to the scope of this paper which must be warned about from the beginning: only the economic dimension of the problem will be examined. The political aspect, equally or more important than the former, will not be touched upon for the moment. 1. THE FRAMEWORK OF THE PRESENT CRISIS (a) The economic strategy After a four-year period of intense growth, the highest registered in the history of the country, the economy crashed downward to a crisis point, also without precedent. The more immediate and explosive manifestations of the crisis were produced on the external front (capital flight and a brutal drop in international reserves) and as regards prices - inflationary tendencies were estimated to be of the order of 100% annually; but also in other aspects, which will be referred to later, the situation was seen to be a difficult one. * Professor in the Post-Graduate School of the Economics Faculty, National University of Mexico. The fist version of this essay, written in September 1982, was discussed in the seminar on The Mexican Economy at the above-mentioned school. 1 am grateful to the participants in this seminar for their comments and observations, especially to F. Herniindez and A. Montoya for their help with the statistical eroundwork; also to E. Gonzalez, J. Valenzuela and Carlos Montes for many fruitful discussions on the topic. This version was completed in January 1983.
456
WORLD DEVELOPMENT
At a very general level which will serve to bring the problem into focus, we may say that the crisis which occurred is not exogenous or external to the national economy, even though it may have been sparked off by recent unfavourable international events, for example the fall in the oil price. It is rather the result of the economic strategy adopted. This option was by no means unilateral and without ambiguities.’ Even so it can be said that its most relevant features were the following. (a) To use oil, and all the possible external resources to be obtained by Mexico as a powerful oil producer, with a semi-industrialized economy of large dimensions, in order to cause income, and even more so investment, to grow at a very fast rate. This was to be carried out in the context of a semi-stagnant international economic situation but with a strong demand and good prices for hydrocarbons. (b) To maintain and reinforce the leading role and the strategic position of the public sector, especially from the point of view of increasing its demand, and the channelling of an enormous amount of resources towards strategic sectors (especially oil). (c) To strengthen, through diverse mechanisms (tax reductions, high profits, facilities for a further centralization and concentration of capital, etc.) the most powerful group of the business community, the financial monopolistic sector, and to make it a co-partner in the leadership of the economic process.’ (d) To limit the normal indirect participation of the State, and to weaken certain state controls that previously existed: for example, the reduction in 1976 of price controls, or partial liberalization of import controls in 1977; the maintaining of a less restrictive free exchange
policy ~ and in this way giving market forces and the private sector the responsibility of being co-leaders in the process and of correcting its eventual maladjustments.
(b) Economic
indicators
The available empirical data, some of which is to be found in Table 1, show us these factors which were behind the recent economic process. The mechanics of the economic process can be presented in the following simplified schema. As regards aggregate demand, the factor of major importance during the first years of the Lopez-Portillo administration was government spending in consumption and, most outstandingly, in investment. For every year of the sixyear Presidential period - with the exception of 1977 - public spending increased at a faster rate than GNP. Furthermore there was a change in the financing of government spending which widened its multiplier effect. Indeed, deficit spending strongly increased, financed with national and foreign loans. Also, taxes or surpluses from the oil sector grew as a proportion of government incomes. To the extent that this way of financing the public sector did not imply a reduction of disposable income for the private sector, net private demand did not fall, thus generating those well-known multiplier effects and raising the levels of economic activity (GNP, employment and income, private profits, etc).3 After the first year (in which it could be said that because of ‘inertia’ previous economic tendencies of stagnation and depression were maintained), the private sector also began to strongly increase its spending above all in investment. The latter, which had fallen slightly
Table 1. Gross Domestic Product and demand* 1977-1980 GDP$ Total Investment a) Government b) Private Private consumption Government consumption Exports Imports Total wages 5 Government deficit * Rates of growth on annual basis. : ssppPp (estimates). § Deflated by the cost of living.
7.4
15.0 18.5 13.1 6.9 6.6 11.1 17.0 5.4 18.6
1980C1981t 8.1 15.1 17.9 13.6 8.1 9.1 5.7 18.5 7.0 n.d.
457
THEMEXICANECONOMY in 1976 and much more strongly in 1977 (a fall of 21.6% for that year according to the Banco de Mexico), revived its dynamism from 1978, growing at a fast rate, even though always less than the public rate. This was due to the ‘new climate of confidence’ which the President sought to establish with the private sector, to the increase of private profits and sales, and to the expectation of a strong growth in demand along with the profits which arose from the latter, and above all to the transformation of the country into a powerful oil producer.4 Private consumption kept behind the rest of the components of aggregate demand. Above all, this was due to the change in the functional distribution of income, against wage earners and to the benefit of the capitalist class. The proportion of wages in value-added, which had been 40.8% in 1976, was reduced to 36.1% for 1980. It is true that total earnings increased in this period. But this was due more to the increase in employment than to the increase in wages per worker. Actually the latter increased slightly between 1976 and 1980 at the average annual rate of 0.5%, far less than the rate of growth of productivity (2.4%).’ Possibly, the lag in the expansion of private consumption in relation to the other components of aggregate demand would have been more marked if an increase in private spending financed with credit (as a proportion of total spending) had not also occurred. Specific figures are not available on this point, but indirect information suggests that the rate of family debt expanded (contributing to a rise in wage-earners’ consumption) at a higher rate than personal income. On the other hand, the already-mentioned lag in the expansion of private consumption would have created realization problems if this had not taken place in the context of a strong growth rate in the other components of aggregate demand. The expansion of private investment and public spending fulfilled the role, in the period studied, of widening such markets. In this sense, the relatively slow growth of consumption, and within this wage-earner’s consumption, was one of the principal, if not the principal source of financing for the recent process of growth. Finally, regarding the balance of the external accounts what stands out is the violent expansion of exports as well as imports. To the extent that the latter grew at a faster rate than the former, national spending could exceed domestic production and in this way, the country could capture a net external saving (which was transformed into a bigger external debt). Thus, in this
period - as in other previous periods - the role of the external sector, globally, was not so much to create markets but to give additional resources to the economy. In other words, from a global point of view, the domestic market continued to be by far the most important for the Mexican economy. (Naturally this point does not take away the vital importance of the external sector as a market for oil and as a provider of foreign currency.) On the other hand, domestic supply showed high elasticity in response to almost all of the productive sectors. Of a total of 46 sectors are differentiated in the National (which Accounts series elaborated by SEPAFIN), 34 showed a higher growth rate in 1977- 198 1 than in 1970-1976. In this context the agricultural sector stands out: its expansion rate, which had hardly been at 0.4% (annual average) for 1970-1976, rose to 5.0% for the 197661981 period. Furthermore, within this sector, those products whose supply grew more intensely were staples destined for the domestic market. In this way (eventually, and thanks to the orientation of the SAM)6 the previous tendency which gave a privileged position to those crops for foreign markets, for industry and for cattle, has been stopped.7 Although it should also be pointed out that the non-oil sectors have shown a slower growth than the oil sector and that manufactured output grew less than GNP in 1980 and 1981, it was still the case that expansion in both cases was quite high. From the point of view of the factors which explain the high elasticity of supply of the productive sectors, the increase in employment was undoubtedly important, as was the increase in productivity. The growth of the latter stemmed largely from the intense investment process, the high rates of which have already been referred to. Naturally in terms of volume the oil sector was the most important. But from the point of view of growth r&es of investment, this was quite intense in almost all sectors, irrespective of their degree of modernity or type of ownership. For example the construction industry reached high rates of investment (growth at an annuaZ average rate of 66.1% for 19766 1980) followed by electric machinery (48.3%), other manufactures (47.4%), textiles and soft fibres (47.3%).
(c) Side effects of economic growth In synthesis, as a result of the above, economic growth of the country in these
the last
4.58
WORLD DEVELOPMENT
years has been outstanding from every point of view. The GNP has expanded at rates above 7%, and public and private investment have risen at rates of 15% (the former at a faster rate), employment has expanded at a greater rate than the working-class population, etc. From this point of view the picture is impressive indeed. However, there are also other factors to be taken into account. On the one hand, income distribution and productive resources became still more concentrated than they were before.’ At the same time, the presence of foreign capital became more decisive as much from the point of view of its amount as its location, mainly in strategic areas. On the other hand, the cost for the country of such growth in terms of the excesses and squandering which went with it, was clearly amazing. What has been most important is not costs in the strict sense of the word, measured for example in terms of the ‘filtrations towards the outside world’ of a large part of the demand for capital goods because of deficiencies in the national productive apparatus; nor the increase of the capital-output ratio due to the lengthening of the period of maturity of investments, as a result of their inadequate handling ~ even though these existed and were of considerable size. The most important factor has been the waste of resources for other reasons. From the figures available in the September 1982 Presidential Address, it can be estimated that capital flight in these last years has been near $30 billion, nearly 20% of the total international currency which entered the country for different reasons in the same period. Lastly - and this is also very important but difficult to assess and to measure precisely and adequately - it is not clear that the intense process of accumulation experienced in these years has led to a better, more solid economic base and a more integrated industrial sector which could contribute to fortifying and making the material capacity of accumulation more endogenous.” It is true that investment grew strongly, particularly in the oil industry, which is the basis for import capacity, and in those sectors which produce capital goods. But the economy as a whole grew too and with it the need for national as well as international means of production. Up to what point can we say that imbalances in the productive apparatus were lessened, from the point of view of its necessities and its capacity to be self-sufficient? The intense growth of the imports of capital goods and intermediate inputs - an expression of the imbalances at an
internal level - permit us to state that it is not possible to give an outright affirmative a priori answer to the question posed.
(d) The monetarist
approach
In any case, this intense growth led to accentuated imbalances, which clashed conspicuously and dramatically at two levels which showed a high interrelation: the external and that of prices. We will examine the functioning of those immediate factors which led to the chain reaction. Before this, however, it is worth mentioning briefly and schematically a different and alternative explanation of the process, which we do not share but which has had a lot of influence and received a lot of prestige. This refers to what is usually called the ‘monetarist approach’ (even though this term is not meant to be strictly scientific). According to this approach, the intense growth of public spending (especially deficit spending) would have caused a brutal expansion both in the quantity of money and in aggregate demand; the latter, pressuring the productive capacity of its limit, would have led to its full utilization. In this way, an imbalance would have been generated between demand and supply capacity, which is the basis for price and import rises (totals and per unit of domestic product). We do not deny that strong pressures on demand resulted in the creation of an unfavourable climate as regards inflation so that it became persistent and constantly on the rise.” We also recognize that a significant component of the external imbalance is to be found in the increase of imports. However the analysis of one factor or the other is more complex than the orthodox economists claim. Indirect proof of the partiality of their approach lies in the lack of success which constrictive and recessionary policies (implemented since the beginning of 1982) have had in the correcting of inflation and the external imbalance.
(e) The inflationary
process
To our mind, the inflationary process (which increased notoriously in 1980) responded to other causes, the most outstanding of which were the following. In the first place, it was a result of certain ‘shocks’ which were added to inflationary tendencies already operating within the economy. Secondly, it responded to increases
THEMEXICANECONOMY in primary (direct) industrial costs, and thirdly, to increases in fixed costs, especially those of a financial nature. Lastly, the generation of inflationary expectations in all of the agents acting in the economy acted as a diffusive factor. The mechanics of the process can be presented as follows: beginning with an inflationary ‘floor’ of the order of 15- 20% for 1978-1979 (whose origin was expectations of inflation at this level), three phenomenon are produced in the recent period which push this ‘floor’ up higher. These were: (1) the introduction of a sales tax (IVA: tax on value-added) at the beginning of 1980; (2) the rise in credit costs, which served as an impulse to firms to raise their gross profit margins (before interest payments) in order to defend their net profit margins; (3) most recently, a rise in primary costs for industry due to the policy of adjustment of the peso’s rate. Still more important, the rise in interest rate caused a rise in inflationary expectations of all economic agents, due to the fact that these rates were the main point of objective reference in the fixing of such expectations.” With the rise in inflationary expectations, business firms increased their ex-ante profit margins (that is in relation to their direct real costs) in order to conserve their ex-post profit margins (the relation between their prices and their costs calculated at a future replacement price). In an economy like the Mexican one which produces commodities by means of commodities, sales prices for some businesses are costs for others, so that a rise in expectations was converted into a rise in costs through the whole productive chain, finally becoming validated and stabilizing at this higher level. Workers pressured for wage increases due to the previous redistribution of income unfavourable to them and in favour of business interests, and also due to those already-mentioned inflationary expectations. Even though fixed minimum wages were reduced in real terms, the better situation in the labour market and the bargaining power of the organized workers movement made possible a reduction in the proportion of workers earning the minimum salary, or less. Due to this, even though the workers cannot be accused of sparking off inflation, its persistent nature is partly a result of the capitalists’ lack of capacity to change, in a more brutal form, the distribution of income through an even larger shift to profits. (f) The external imbalance The
external
imbalance
is due
to
three
459
immediate causes: (1) the increase of imports; (2) the increasing outlay for financial payments, linked to an external debt, also constantly increasing; (3) the speculative capital movements and particularly the exodus of foreign reserves. These factors will now be analysed. Reference will be made to more structural, deeper problems, the root causes of the imbalance. From every angle the growth of imports in the period was impressive. The elasticity of imports in relation to domestic demand (a proportional increase in imports originated from a 1% rise in domestic demand) which had been of the order of 0.67% during 196331970, rose to 3.4% in 1980. With regard to manufacturing, this elasticity rose from 3% in 1978 to 4.6% in 1980.13 The explanation of such a rise is to be found in diverse factors. Firstly, the acceleration of growth in both income and demand. Both Mexican and international experience show that a growth of imports in a certain period depends on the one hand on the rate of growth of income and demand (in a relation that is not constant but increasing), and on the other, on the change in the rate of growth between the period under study and the preceding one. An acceleration of growth in income commonly causes more than proportional growth of imports due to the fact that domestic productive capacities face ‘bottlenecks’ in the expansion of supply levels. This obviously affects the material supply, and/or price competitiveness between national and imported goods. Even so, a recent study on manufacturing (C. Shatan, 1981) shows that for the period 1977-1980, the growth of aggregate demand only accounts for 32% of the total expansion of manufactured imports.14 A further 21% is accounted for by a change in the composition of domestic demand, in favour of goods whose imported input requirements (per unit of production) are above average. Another 47% can be attributed to a greater penetration of imports or de-substitution which is expressed through a rise in the coefficients of imports per unit of domestic demand. Within this last effect, the freeing of import restrictions in 1977 explains the greater penetration by 30% (that is, 14% of the total increase in imports). As regards the effect of financial payments related to the external debt, those linked to the public debt represented in 1980 about 60% of income in the current account; furthermore, if the debt services of the private sector are considered, the share rises to approximately 75%. For 1981 the figures must have been even more
460
WORLD DEVELOPMENT
dramatic, given that public and private debt services reached $8200 million for that year. The exponential growth of the debt service is not so much related to the rise in interest rates on a world scale but especially to both private and public debt policies. The latter is related to the state decision to make the economy grow at high rates without significantly increasing government current incomes - by taxes and other mechanisms ~ from the well-off sectors of the population,” and to bring about no change in the ‘rules of the game’ as regards foreign trade and currency exchange. The growth of the private debt, in turn, also responds to an expansionary policy in this sector, in the framework of a significant differential between national and international rates of interest (which originate above all because of monopoly control over the banks, restrictive monetarist policies and the virtual absence of a selective credit policy) and an increasingly overvalued national currency. Finally, speculative, short-term capital movements are to be considered. In relation to external payments when the country’s external financial position was ‘sound’, given that the domestic interest rates were higher than the international ones, such capital movements produced a positive effect on the balance of payments. However, when this position began to deteriorate, the country suffered an increasingly violent reverse situation.16
(g) Structural factors The external imbalance is due to deeper, more structural causes than the ones just discussed. Although these causes are well known we will mention them briefly at least. Schematically, the roots of this imbalance are to be found in a strategy of rapid growth, in the context of an international recession, while preserving fundamental aspects of a ‘neo-liberal’ framework; and in an economy with a structural tendency for external imbalance. At the risk of repeating things that have already been mentioned, certain phenomena, like the following, stand out. (i) A certain style of growth (in terms of the goods demanded and produced) which in itself is unbalanced and lacks integration, especially because those commodities which show a faster growth rate require a large quantity of imports of inputs and capital goods. Such a difference (in growth rates of the goods in demand, in favour of those which consume more foreign
currency) is usually more marked in boom periods, and notably, it is a feature of the recent boom. (ii) A high level of inefficiency and reduced capacity of supply in essential sectors of the economy. (For example in the cattle, fish, meat and milk industries, and in chemicals and other foodstuffs, growth rates were less than 3% annually. ) (iii) Extreme concentration in the pattern of income distribution (before as much as after taxes and transfers) which did not change and thereby did not help to limit luxury spending, and to capture these resources for more important ends. (iv) An unrestricted liberalism as regards fundamental aspects of the economy like those of prices and foreign currency exchange. (v) Excessive confidence that the private agents (especially the big national groups and the transnationals) would direct their investments spontaneously towards a greater articulation and integration of the industrial plant, and in this way would also develop their export capacity. (vi) Finally, in the present context the structural problems of the Mexican industrial sector should be mentioned. From the point of view of their effects, these problems are related to the tendency for a permanent industrial external imbalance. In the first place, this is due to the difficulties which arise in making its growth process more endogenous ~ and consequently to strengthen its internal impact and reduce its external requirements. In other words, we refer to the difficulties in achieving and maintaining high growth rates without causing external imbalances which largely exceed the long-run external capabilities of the country. In the second place, they are the consequence of Mexico’s lack of international competitiveness -~- so that its industrial sector is incapable of contributing with its own exports to the payment of such import volume as is required for its normal functioning. From the point of view of their causes, these structural problems arise out of the following features of the sector. In the first place, a main causal factor is its deficient vertical (internal) and horizontal (with other sectors) integration. In the second place, is its lack of specialization ~~ from which economies of scale and specialization might be achieved ~ both at the overall sectoral and at the firm level. Finally, one should mention the absence of an endogenous nucleus of Research and Development, which might take advantage of the technical progress originating mainly in the advanced countries, adapting
461
THEMEXICANECONOMY it to the requirements economy such as Mexico.
of
a semi-industrial
ing of the economy will be examined; and then we shall explore the possible courses which one could expect the imbalances to follow owing to the new policy measures.
2. ALTERNATIVE ECONOMIC STRATEGIES FOR THE MEXICAN ECONOMY The Mexican economy is presently under the strain of a very serious crisis. Therefore, structural measures will have to be undertaken in order to correct its causes, control its immediate effects and lay down the basis of the future process of growth. Now, in general terms it can be said that two extreme alternative strategies exist for the future (obviously with a number of intermediate combinations). (a) A strategy which, while preserving the basic capitalist socio-economic structure, may be labellet nationalist and with a populist whose central features could be orientation the following ones: (i) a strengthening of the direct and indirect leadership of the State; (ii) a strengthening of national autonomous capacity, redefining the international position of the country; (iii) a redefinition of priority growth areas in terms of the requirements of the broad masses of the population. (b) A strategy, which would be essentially a continuation of the previous one in as much as it would only seek to sort out the crisis, and when that is achieved, to perpetuate the old style of economic growth. In short, it would contract public sector deficit levels, restrict public and private spending and forcefully undercut real wages in an attempt to reduce the external imbalance and inflationary pressures. In any case, it is self-evident that the alternative to be adopted depends to a very large extent upon the long-run economic strategy of the new President de la Madrid. Such a strategy has not been precisely defined as yet ~~ at least at the public level. However, the short-run economic policy measures adopted so far are clear enough in their immediate content and even in their message. They suggest that in the near future what can be expected is not a policy leading to (what we have labelled) a nationalist and populist strategy, but rather an attempt to reassume the old style of development. In any case, the final definition will depend in no small degree on how the present situation develops in the short run (let us say in a year) both at the economic and political levels. Therefore, what follows will be an analysis of the economic perspectives. First the global function-
3. SHORT-TERM ECONOMIC PERSPECTIVES The present economic situation is a difficult one. Alongside the former difficulties and imbalances we must now add new ones generated by the new policy measures. As regards the general functioning of the economy, especially the levels of employment and economic activity, the previous tendencies were leading to a very low or even zero growth rate for 1982, with a rise in unemployment (which began to grow in June-July of 1982). This was basically linked to the fall (in levels or rates of growth) in effective demand, for the following reasons: (a) a reduction of public spending, especially deficit spending; (b) a reduction (perhaps not very strong due to the existence of projects already under way) in private investment as a result of lower expectations of profit rates and the rise in interest rates; (c) a reduction in wage earner’s demand and private consumption owing to the fall in the purchasing power of the broad masses of the population and the credit restrictions introduced since the beginning of 1982. In so far as the imbalances are concerned, we already mentioned that the most important ones were the external one and inflation. The expected rate of inflation must have been around 80. lOO%, similar to the previous rate (on an annual basis). Also the foreign deficit was becoming more acute every day, due to speculative capital flights which grew exponentially. It is true that the policy measures adopted by the Central Bank in September may have reduced the cumulative character of these imbalances, but these measures were rapidly abandoned by the new administration. Obviously, the new economic policy measures (already taken or announced by the new Government during their first two weeks in office) must be taken into consideration when attempting to evaluate the future perspectives of the country. The most important among these measures are the following. (a) A 40% rise in the preferential rate of exchange (rate of exchange for intermediate inputs and essential final goods). Partial control over the foreign exchange market
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has been maintained - although a free market for foreign currency coexists now with the controlled one - but there have been indications that suggest that the preferential rate will be raised gradually until both markets are unified. (b) Reduction in the public sector deficit (from 16.5 to 8% of GDP), as a result of the contraction of government expenditure and the increase in both taxes and the prices of goods and services produced by state enterprises. (c) Partial liberalization of price controls, due to the reduction in the number of goods and services subject to these controls. The orthodox flavour of the new short-run economic policy is evident enough. Were it to be actually implemented, its probable results can be foreseen with quite a degree of certainty. Unfortunately, in Latin America we already have a certain historical experience with these orthodox economic policies. Their effects may be summarized as follows. (a) A contraction in the level of economic activity (GDP, employment, etc.) due to the fall in final demand (both public and private). The most probable result, in the Mexican case, will be an absolute fall in GDP in 1983 (as compared to 1982). This is an experience the Mexican economy has not had to face in several decades. (b) A process of income redistribution adverse to the popular classes and in favour of the richest strata of the population. This would be the logical result of the rise in the levels of unemployment, on the one hand, and the fall in the proportion of wages in value added in most of the sectors of the economy, on the other. (c) A further increase in inflationary tendencies, since these tendencies are dependent upon the evolution of prime costs, profit margins and expectations, and not upon an excess of demand over productive capacities. (d) A reduction in the foreign deficit. This reduction, however, will be above all the result of the fall in the level of effective demand and domestic production. Exports will probably not grow very much (if they actually grow), due to the large share of oil in total exports, and also to the low priceelasticity of demand for other Mexican exports - this is particularly so in the context of the present world slump. Furthermore the reduction in the foreign deficit will not be very large, owing to the high share of financial payments in total foreign payments. The economists of the present government
would probably agree in that the level of economic activity will contract owing to the measures they have taken to face the present crisis. But they would also argue that this treatment is absolutely necessary in order to resume growth in the future. The reasoning that lies behind their thought seems to be that the new economic policy is the precondition for stimulating a new wave of private investment, at least in the mediu.m and long run. Now, it is not clear at all why this should be actually the case. Indeed, those firms which during the boom period embarked upon a rapid process of expansion, either for the domestic or for the foreign market, faced problems of effective demand already in 1982. They will confront an even more difficult situation during the present year: their markets will become even narrower, precisely when their financial position has worsened considerably (owing to their external outstanding debt and the internal credit restriction). It is not likely, accordingly, that private national investment will expand - rather, one should expect it to contract. As to foreign investment - which is in any case a small proportion of total investment ~ it is a well-known fact that it enters mainly in order to produce for the domestic market. Indeed, it is estimated that only about 5% of the total sales of Mexico’s foreign-owned firms are from exports. In the present context, one could hardly expect foreign investment to greatly increase its rate of expansion.
4. SOME FEATURES OF A NATIONALIST STRATEGY WITH A POPULIST ORIENTATION As has already been pointed out a strategy of this nature is based on three premises: state leadership; strengthening of the autonomous and national economic capacity; and the satisfaction of the needs of the broad masses of the population as a first priority.
(a) State leadership This point is related to the strengthening of the State’s capacity to direct the economic process as a whole. The capitalist nature of the system (or if the term is preferred ~ the mixed economy), would be maintained. Therefore, state leadership would not have to be interpreted as an increase in the State’s direct participation in the sphere of production, with the exception
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THEMEXICANECONOMY of some specific sectors. The State already holds strategic positions in such sectors as oil, in many other inputs of general use and in the banking system, to mention a few. The State will need to define a strategy of growth and use to their utmost those instruments which it has at its disposal. These instruments are numerous and forceful; we only need to think of the control over foreign currency as well as influence in other areas of financial policy.
(b) Strengthening of the autonomous national economic capacity
and
This aspect deals with the manner in which Mexico is integrated into the world economic system, such that in the economic sphere, the margin of the country’s operations should be considerably widened. Leaving aside for a moment problems of a short-term nature or those which are related to trade and international finance, what we are underlining here is a new strategy of economic relations which may be called international alliances. Such a strategy should be based on the country’s objective conditions, i.e. the fact that Mexico is a powerful oil producer, has a semiindustrialized economic base and is an important market for the advanced countries. Furthermore such a strategy ought to take into account the depth of the present world crisis and the consequent search for markets by the industrial powers, the similarity of Mexico’s problems with other Third World countries, and the objective possibility of leading an offensive for a New International Economic Order. With this strategy, Mexico should give priority to its economic ties with Third World countries, with the European Common Market and with the Socialist countries of Eastern Europe, searching for more stable trade agreements on a longterm basis which would allow it to progressively change the composition and size of its trade, technical and investment flows.
(c)A redefinition of priority growth in terms of the requirements of the broad masses of the population (i) Redistribution of income In this regard, w;pe rises should be linked to productivity growth so as to not transfer them into higher prices. Furthermore and more importantly, given that in Mexico the poorest people are not urban wage earners (and also due to the technical and political difficulties of price
control), those measures directed towards lowering unemployment, giving support to production, credit and market organization of the artisans and peasants, are fundamental. Along with this, a fiscal reform is obviously needed to limit luxury spending.
(ii) An industrial transformation This would include the following features: _ productive specialization in basic goods and in the inputs of capital goods needed to produce them; _ correcting of the disproportions which exist today within industry, especially the need to encourage domestic production of capital goods; _ based on such specialization, the raising of the efficiency of the industrial plant; ~ taking into account the above, the search for a new dynamic, modern and autonomous means of entry into the present and foreseeable international division of labour, especially the raising of competitive capacity of manufactured exports; _ to cause this increased efficiency to be based on an increased use of labour, and not capital, per unit of production. That is, to give a privileged position to labour-intensive techniques of production.
(iii) Integration of productive strata A different priority and a new mode of integrating and strengthening the different productive strata: the modern monopolistic, the intermediate and the backward. Specifically, the dynamic of the process should not be the exclusive right of the former. Support should be given to these strata as a function of their productive specialization, thus allowing them to raise their efficiency levels (recognized as being low). Other forms of coordination and economic specialization should be sought within the intermediate strata. The potentialities which exist within the most backward forms of production both in the city (peasants) and in the country (artisans) should be utilized and strengthened.
5. CONCLUSION Naturally such a strategylg as that just outlined needs to have a first phase. Given the present situation, this phase can not be expansionary but more likely would have to be a period of readjustment. What are the main
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guidelines for action in the present situation which would be in keeping with such a strategy? Taking into account that whatever alternative proposed has to recognize the crisis situation (and therefore the ‘maximum objective’ of economic policy cannot be any other than to ‘smooth over’ the situation), we feel that in the economic sphere, the following policy guidelines could be included. (a) To ensure the normal working of the internal economy, maintaining the indispensable control needed to eliminate eventual imbalances. Therefore this would imply the avoidance of a chaotic situation (e.g. lack of supplies, boycotts, black markets and hyperinflation, etc.) by giving guarantees to property owners, keeping up supplies of primary materials to productive firms, controlling prices of basic goods, etc. (b) To guarantee the normal functioning of the external sector, obtaining a sufficient
import capacity to maintain adequate levels of economic activity. Based on this, a renegotiation of the debt which takes into account the objective bargaining power which the country can count on and the possibility of leading a Third World offensive in this respect. All this should be coupled with strict control over imports. (c) To defend the standard of living of the popular classes as a whole (wage earners and non-wage earners), especially those with the lowest incomes. For this, adequate levels of economic activity to guarantee employment would be necessary. A final question arises. Is a nationalist and populist strategic alternative possible in the present social, political and economic setting? Undeniably material conditions do exist to advance in this direction. But are the social and political forces which ought to lead such a strategy strong enough in today’s Mexico?
NOTES 1. For these very reasons it is difficult to agree with the term ‘neo-liberal’ which some Mexican economists have often applied to it.
it cannot be guaranteed that the personal distribution became more concentrated, due to the strong increase in employment during the period.
2. See Jorge Alcocer (1981) for further information on this point.
10. We understand material capacity of accumulation to mean, in general terms, the capacity to produce locally or to obtain, through external exchange, those capital goods and intermediate inputs needed to sustain a process of economic expansion at high rates.
3. As is well known, the expansionary effects of government spending depend on its financial sources. When such an increase is financed by raising workingclass taxes, the expansive effect is annulled as the increase in public spending is compensated for by a decrease in wageearner’s spending. When such spending is financed with a deficit, it is a net addition to private spending as the buying power of the latter is not reduced. 4. See Francisco
Herna’ndez
and Julio Lbpez (1981).
5. Actually, the deflated incomes - deflated by the implicit deflator of GNP (instead of cost of living index) ~ grew at 4.4% (per annum). This is less than employment. See Alejandro Montoya (1981) concerning wage trends and the labour market. 6. Government towards making
scheme of food production aimed Mexico self-sufficient in this field.
7. However recent evidence suggests that capitalist agriculture has participated in this expansion more intensely than peasant agriculture. See E. Caballero and F. Zermeiio (1981). 8. Source:
SEPAFIN.
9. The functional distribution of income between wages and profits was clearly more unequal. However,
11. It is worth pointing out firstly that it cannot be stated categorically that productive capacity was fully utilized in the recent period. Besides, reliable econometric studies indicate that: (a) there is no significant relationship between demand variations and variations in the gross margin of profit; (b) increases in the rate of inflation precede (and do not follow as the monetarists maintain) increases in the quantity of money and public deficit spending. See, for reference to this, I. Ruprah (1981); and G. Aceituno and 1. Ruprah (1982). 12. According to 3. Eatwell and A. Singh (1981), the increase in financial costs derived from the increase in interest rates would be a fundamental cause in the acceleration of inflationary trends. Even though a high statistical correlation exists between the increase in the interest rate and the increase in prices we do not totally share this point of view. We believe that the interest rate operates as a cause of a chain reaction and of diffusion of inflation related to inflationary expectations. This is so because financial costs are a small proportion of total primary costs (not more than 10% according to a provisional estimate). 13. CIDE (1982).
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14. Perhaps such a proportion would be higher for the economy as a whole due to the slow growth of some basic sectors.
classes also reduces
import
expenditure.
16. See J. Quijano
(1981).
15. In contrast to what occurred in the previous Presidential period, no attempt at all was made to carry out a fiscal reform programme which would increase levies on the higher income groups. The available information indicated that until 1979 (there are no more recent studies) the proportion of state fiscal income coming from taxes on private companies had fallen significantly. We may also note that even though taxes on the highincome groups do not allow the direct capturing of foreign currency, the reduction of spending by such
17. If one accepts, as we do here, that capitalism has many variations and that it is possible for any one capitalism to have a nationalist and populist course. 18. For example, to link wage increases to productivity increases, to employment and investment. 19. A strategy whose abstract nature is recognized, and whose adoption will obviously depend on the decisions of the new Government.
REFERENCES Aceituno, G. and I. Ruprah, ‘Inflation y deficit piblico en Mexico’. Economia Mexicana. No. 4 (CIDE. 1982). Alcocer, J., ‘El dominio de1 capital financiero: notas de coyuntura’, Economia Petrolizada (Taller de Coyuntura, Facultad de Economia, UNAM, 1981). Caballero, E. and F. Zermeiio, ‘La agricultura mexicana en la coyuntura actual’, Economia Petrolizada (1981). CIDE, ‘Evolution reciente y perspectivas de la economia mexicana’, Economia Mexicana, No. 4 (CIDE, 1982). Eatwell, J. and A. Singh, ‘LEsti sobrecalentada la economia mexicana?‘, Economia Mexicana, No. 3 (CIDE, 1981).
Hernandez y Puente, F., and J. Lopez, ‘Los empresarios y la politica economica’, Economia Petrolizada (1981). Montoya, A., ‘Los trabajadores en 1980’, Economia Petrolizada (1981). Quijano, J., ‘Estado y banca privada en Mexico’, Serie Ensayos, Vol. 3 (CIDE, 1981). Ruprah, I., ‘Notas sobre la relation entre dinero e inflation’, Economia Mexicana, No. 3 (CIDE, 1981). Schatan, C., ‘Efectos de la liberalization de1 comercio exterior de Mexico’. Economia Mexicana. No. 3 (CIDE, 1981).