THE MEXICAN MIRACLE: THE MEXICAN ECONOMY, 1940-1970



I. Economic Growth and Development

A. Mexico hailed as non-communist model for L.A.

1. Best growth rates/structural changes in economy

2. Eugene Rostow says Mexico had reached "Take-Off" Point

B. Development

1. Changes in economic structure

a. Transition from predominantly agricultural to predominantly manufacturing

b. Diversification/Shift from ISI to capital goods

2. Better use of natural & human resources

3. Increased capacity to increase future production

C. Economic Indicators

1. Annual growth rate, 1940-70 = 6.5% gross (3%P/C)

2. Annual growth for manufacturing = 8% +

3. Annual growth for agriculture = 2.4%+

4. Agriculture declines from 23% to 16% of GNP/Manufacturing increases from 17.8% to 26% of GNP

D. Performance Relative to Other Latin American Economies

1. Best overall growth rates across three decades

2. Best manufacturing performance: diversification, shift from ISI to capital goods; self-sufficient in petroleum products, steel, many consumer goods

3. Best agricultural: self-sufficiency, providing inputs for manufacturing sector (coffee, sugar, cotton), increase agri-exports, transfers of savings to other sectors (two times as much as other economies/might also be understood as strategy to subsidize development by impoverishing rural sector)

II. PUBLIC POLICY TO PROMOTE ECONOMIC DEVELOPMENT

A. Direct Investment (1947-58-52% of Federal budget to economic development)

1. State Enterprises/Mixed Enterprises (400+ by 1970)

a. PEMEX, FC-NAC, Electricity, steel, fertilizers, banking, aviation, films, mining

b. Relatively Efficient: use 11% of GNP, account for 50% of new investments in industry

c. Provide cheap inputs: (chemicals, oil, fertilizers, etc.) for private sector: disguised subsidy

2. Irrigation: Govt. financed most extensive system in L.A.

3. Transport & Communication: Govt. built most extensive in L.A.

4. Public Finance:

a. Nacional Financiera: national economic development bank

b. Priorities: ISI, bottlenecks: transport, power

c. Pre-1960 channeled domestic savings into industrialization

d. Few private sector resources available in Mexico to finance development (compared to U.S.)

B. Indirect Assistance

1. Protectionism

a. High Tariffs

b. Import Licensing

2. Tax Policy

a. Low taxes on commerce/industry + tax breaks

b. Finance public sector through inflation, not taxation: i.e. reliance upon deficit financing

c. Wages lag far behind price increases: elastic labor supply & CTM support for government; internal controls make it difficult/impossible for workers to resist

d. Emphasis on indirect, not direct taxes: lowest for wealthy; poor pay highest percentage of income as tax, i.e. emphasis on regressive sales taxes, excise taxes, fees, etc.

3. Fiscal Policy

a. Before 1970 optimum mix of inflation/price stability to encourage growth (prices rise faster than wages/no hyperinflation)

b. Policy tools: tight control of money/exchange

C. Other Incentives



1. General policy of favoring capital over labor (labor's share of national income declines sharply after 1940)

2. Promote investor confidence: increase private Mexican investment from LT 9% in 1940 to GT 20% by 1960s in manufacturing

3. Social Peace:

a. Workers & peasants docile

b. Low share of GNP spent on military: 9% for Mexico v. about 12% average for L.A.

4. After 1960 heavy borrowing abroad of Foreign Private Capital to continue financing industrialization/low taxes at home to attract private foreign capital by ensuring high profits

5. Woo foreign private capital: economic nationalism softened-"Mexicanization" requirements watered-down/many firms 100% foreign/restrictions evaded; foreign private investment in Mexican economy increased 500% 1950-1970

D. Unique Factor: Closeness to U.S.

1. Simplifies exports

2. Facilitates flow of technology, capital

3. Tourism:

a. Provides additional foreign exchange income to maintain favorable balance of trade

b. Provided 60% of foreign exchange in pre-1970s era

4. "Dynamic Response"

a. Extraordinary post-WW2 prosperity of U.S. economy: had inevitable reverberations in Mexico

b. Many linkages with U.S. economy: principal market for exports, capital, technology

E. Mexican Economy compared to other L.A. Economies

1. Uniqueness of U.S.-Mexico Relationship

2. Government Expenditure Patterns

a. Mexico

(1) Ratio of taxes to GNP is lowest in L.A.

(2) Public Sector invests 30%-55% of Gross Domestic Investment (Private Domestic Investment remains problematic)

(3) Greater use of Govt. resources for productive investments in economic development (52% of Federal budget in 1947-58)

b. Latin America

(1) Chile/Argentina use most public expenditures to support bureaucracy, social security, subsidies



(2) Argentina govt. encourages production of light consumer goods for ISI rather than for capital goods or to eliminate bottlenecks in power & transport

3. Fiscal Policy

a. Mexico:

(1) Moderate use of deficit financing until after mid-1950s

(2) promoted exports to finance foreign exchange, especially agri-exports, even if domestic consumption was curtailed as result

b. Latin America:

(1) large public deficits/uncontrolled inflatin/hyper-inflation

(2) chronic balance of payments crisis/low levels of foreign exchange/low capacity to export

III. WINNERS AND LOSERS IN THE DEVELOPMENT GAME

A. WHO PAID FOR INDUSTRIALIZATION IN MEXICO?

1. Deferred consumption of the lower classes

2. Mexico has greatest income disparity in L.A.

3. Post-1940s trend:

a. Rapid rise in entrepreneurial income

b. Moderate rise in middle-class income

c. Absolute decline in real wages for working class

d. General trend appeared as slow rise in PC/Wage & Salary earnings disguised increasingly unequal distribution of income (invisible taxation)

e. Poorer 50% of population lose relative share of income after 1940; 1958 upper 5% income = 22X lower 10%; 1980 upper 5% income = 50X lower 10%

4. What accounts for trend?

a. Prices rise faster than wages

b. Regressive tax structure: light taxes/no taxes for wealthy classes

c. Low expenditure for education, welfare, social security (1.4% of GNP)

d. Policies especially penalized rural workers

B. ECONOMIC POLICY IN SUMMARY



1. Mexico gave more incentives than other L.A. Nations to industrial & commercial elites

2. Mexico did least for bottom 25% of population

3. Mexico is the only L.A. nation that supposedly passed through social revolution with promises of social justice/reality of Cardenas reforms/hollow rhetoric of PRI

IV. THE ELUSIVE MIRACLE

A. Apparent that Mexico was not ideal model for L.A. development after late 1960s

1. Growing foreign debt: reached $95 billion by 1985; $135 billion by 1995

2. Persistent BOP deficits

3. Declining economic growth rates/stagnation

4. High inflation/hyperinfation threaten eco/pol stability (GT 100% inflation 1982)

B. What went wrong?

1. Economic Dependency

a. Mexico caught in world-wide downturn in early 1970s

b. Mexico caught in global economic realignment: emergence of Pacific economies

c. US economic policies have immed. Impact/Impossible to insulate Mexico from problems of US economy in 1970s

d. Growing clout of multi-nationals in Mexican Economy

(1) owned half of all manufacturing assets by 1970; 80% of foreign corps were US-owned

(2) controlled half of market share by 1970

2. Inefficient public and private enterprises

a. Graft and corruption

b. Protection & subsidies discourage efficiency

3. Weak Agricultural Sector

a. Promote agri-exports at cost to self-sufficiency in basic foodstuffs

b. Mexico becomes net food importer by late 1960s-costs valuable foreign exchange

4. Natural Slowdown in Industrialization

a. "Take-Off" elusive



b. No L.A. nation has yet made transition from ISI to capital goods production, while also being able to expand domestic consumer market (one precludes other)

5. Mexican private investment insignificant (failure of Mexican bougeoisie); Mexican private investment flowed to non-productive real estate speculation & tourist development

6. Low purchasing power of peasants & workers limited domestic consumption: multi-national industry increasingly catered to limited elite/middle-class market or exported manufactures (but not competitive because protected)

7. Fiscal crisis of state

a. Dependence on inflation-producing deficit financing methods

b. Reluctance to tax wealthy (tax reforms defeated)

c. Unwise dependence upon foreign loans to finance development

8. Continuing state interventionism in economy

a. High cost of regulations/overhead

b. Discourage efficiency, productivity/reward political prowness/historic survival of politicized economies

c. After 1960s Mexico passed thresh-hold: towards more socialist control/direction by state or to free market economy?