Economics: Mexico Case Study: Revolution & Reform

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We consider economic development in a capitalist system. And, we talked about how communist central planning is an alternative. Now we're going to consider another alternative economic system. This one inspired by the story of Mexico. The story begins in 1910, when the peasants agitate starting a revolution against the dictator, Porfirio Diaz, a revolution that continues until 1920. The previous economic system had been one of agricultural feudalism in which there were large land holdings and the peasants belonged to the land and the system had vast inequities. The landholders looked to Diaz to ensure their power. So when the peasants revolted there was a new constitution.
The Revolutionary Constitution of Mexico in 1917 had two important provisions that directed the economy. The first was the concentration of power in the hands of the new president, who had broad powers to actually direct economic development by fiat.
The second important provision of the Constitution was that economic development was to proceed in a way as to minimize the consequences for an equity. That is, development with some kind of fairness. Now, land reform proceeded immediately. That is, the large land holdings were broken up and shared more equitably among the peasants. And in the spirit of this land reform the next step was the nationalization of industry. Mexico then entered a period that we might call revolutionary nationalism. Where the government began to have more direct ownership of the economy. First the oil industry was nationalized in the 1930s. Then telecommunications, railroads, airlines and so forth until the government of Mexico effectively owned most of the important businesses in the country. By the early 1980s Mexico owned two thousand separate businesses, which were run and directed by the state.
Now, in the early days of this program it appeared highly successful. In the 1950s and the 1960s Mexico was directed by an agenda that could be called import substitution. That is, the country was protected from international economic competition by tariffs and quotas so that Mexico could have its own automobile production, its own manufacturers without the fear of being undercut by foreign imports. This was good in some sense because it provided a strong industrial base for Mexico that developed very quickly. The Mexican economy grew during the 1950s and the 1960s at an annual rate of 7.0 percent. So, Mexico's program appears successful
Then cane the 1970s where consequences from the international economy began to bear directly on Mexico. First of all there was the crisis that was occasioned by high oil prices. High oil prices were good for Mexico, but the recession in the rest of the world was not. The state owned businesses became more and more dependent on subsidies, handouts from the government. And, after all of the easy to start businesses that had already been started Mexico's efforts to get new industries involved even heavier subsidies and larger government budget deficits. Meanwhile businesses in Mexico begin borrowing heavily from abroad to support their development efforts, so that the foreign debt of Mexico balloons. In 1977, Mexico owed 30 billion dollars to foreigners. By 1982, Mexico owed more than 100 billion dollars. And this was the dark cloud on the horizon of Mexico's program.
In the early 1980s rapid inflation began to push up interest rates, which raised Mexico's debt service payment. And, this at the same time that oil prices were beginning to fall reducing Mexico's revenues from abroad. These two forces conspired to create a huge debt crisis in 1982 where Mexico declared itself unable to pay its foreign debt.
Enter the international monetary fund with a program for restructuring Mexico's economy. The deal is we'll lend you money to pay your foreign debts, but only if you will get out of the situation that is going to require your future dependence on capital inflows from abroad. And, that is, first of all, get rid of that budget deficit which means cut subsidies to state owned enterprise and increase your tax base. The next thing you need to do says the IMF is privatizing all these state owned businesses so that they can once again be powered by the engine of competition rather than directed by the state.
So, Mexico began to do these things, cut the government budget deficit, increase the sources of tax revenue, cut subsidies to state owned enterprises and begin a massive program of privatization. By the early 1990s only about 200 businesses were still owned by the state of Mexico as opposed to 2,000 only 20 years earlier.
So, Mexico's economy begins to liberalize. Tariffs and quotas are lowered, NAFTA is passed so that Mexico becomes more integrated with the economies of its North American trading partners. And, before you know it Mexico has moved into a period that we might call technocratic neoliberalism. That is, an economy that has liberal trade policies and is directed by very, very, well-educated economists like Miguel de la Madrid and Carlos Salinas, and Ernesto Zedillo the presidents of Mexico during the 1980s and the 1990s.
Today, Mexico's economy looks more and more like a free market. Although they have had an experiment with a kind of revolutionary socialism during most of this century, it seems that the developments that have most helped Mexico's economy in the last 15 years have been those movements away from central planning towards more market direction.
Now, all of those things that happened under central planning probably laid a good foundation for Mexico, and, were certainly important experiments. But, as Mexico's economy liberalizes, prosperity increases.
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Case Study: Revolution and Reform in Mexico Page [2 of 2]